THE MAXIMS OF EQUITY

The maxims of equity are an attempt to formulate in short pithy phrases the key principles which underlie the exercise of the equitable jurisdiction. They are not binding rules, nor do they provide guidance for every situation in which equity operates. Nevertheless, they provide useful illustrations of some of the principal recurrent themes which can be identified within the corpus of the rules of equity.

(1) Equity will not suffer a wrong to be without a remedy

This maxim provides the philosophical foundation of equity, namely that wrongs should be redressed by the courts if possible. Equity developed as a response to defects of the common law to provide relief where none was available. For example, equity intervened to allow a person to escape from a contract which they had entered having been misled by a mistake of fact, even though the contract was enforceable at common law (see e.g. Cooper v Joel (1859) 1 De G F & J 240; Torrance v Bolton (1872) 8 Ch App 118). Similarly, through a trust equity enabled a beneficiary to enforce an obligation to use property in a particular way where there was no remedy at common law.

(2) Equity follows the law

The Court of Chancery did not override the Courts of Common Law except to remedy an injustice, and could not depart from statute. Equity does not unnecessarily depart from legal principles (Burgess v Wheate (1759) 1 Eden 177 at 195, per Clarke MR; Sinclair v Brougham [1914] AC 398 at 414-415, per Lord Haldane L.C)

(3) Where the equities are equal the law prevails

This maxim means that where there are two persons with competing rights to the same item of property, one with a legal right and the other an equitable right, the legal right will take priority over the equitable right even if the equitable right had pre-existed it. In Worlet v Birkenhead ((1754) 2 Ves Sen 571 at 574) Lord Hardwicke LC explained that this was “by reason of that force [the Court of Chancery] necessarily and rightly gives to the legal title” (Compare also Marsh v Lee (1670) 2 Vent 337; E Pfeiffer Weinkellerei-Weineinkauf GmbH & Co v Arbothnot Factors Ltd [1988] 1 WLR 150). In the context of land, issues of priority between competing rights, whether legal or equitable, are governed by statutory rules which have displaced the operation of this maxim and the next.

(4) Where the equities are equal the first in time prevails

This maxim means that if two parties have competing equitable rights in the same item of property, and neither has the legal estate, the right which was created first enjoys priority (Willoughby v Willoughby (1756) 1 Term Rep 763; Brace v Duchess of Marlborough (1728) 2 P Wms 491; Rice v Rice (1854) 2 Drew 73; Phillips v Phillips (1861) 4 De GF & J 208). This maxim mirrors the common law rule as to priority between competing legal rights.

(5) He who seeks equity must do equity

This maxim looks to a plaintiff”s future conduct. If a plaintiff seeks equitable relief he must be prepared to act fairly toward the person against whom it is sought (see e.g. Lodge v National Union Investment Co Ltd [1907] 1 Ch 300; Solle v Butcher [1950] 1 KB 671; Chappell v Times Newspapers Ltd [1975] 1 WLR 482). For example, if a purchase is set aside in equity the purchase money must be repaid with interest (Peacock v Evans (1809-10) 16 Ves 512).

(6) He who comes to equity must come with clean hands

In contrast, this maxim looks to the past conduct of the plaintiff. If the plaintiff”s conduct is tainted by illegal or inequitable conduct he may be denied the relief to which he would otherwise by entitled. For example, a tenant will not be granted specific performance of an agreement for a lease if he is in breach of the covenants it contains (Coatsworth v Johnson (1885) 54 LT 520). The maxim does not apply to conduct in general, but only that which has “an immediate and necessary relation to the equity sued for” (Dering v Earl of Winchelsea (1787) 2 White & Tud LC 488 at 489). Therefore in Argyll (Duchess) v Argyll (Duke) ([1967] Ch 302) the plaintiff”s adultery, which caused a divorce, was no bar to her claim for an injunction to restrain the defendant from publishing confidential material. The rationale for this maxim, as for the parallel common law rule against illegality, it to deter persons from entering transactions which involve a dimension of illegality. However, since these rules may in practice allow one person who was party to an illegal purpose to arbitrarily retain the entire benefit of property transferred to him, because another equally guilty party is prevented from asserting any entitlement to it, the courts have systematically ameliorated their strictness through exceptions.

The operation of the equitable maxim was considered by the House of Lords in Tinsley v Milligan ([1994] 1 AC 340) where a house was purchased jointly by a lesbian couple. Only one of them was registered as the legal proprietor to enable the other to dishonestly claim social security benefits by appearing to be a mere lodger. After the breakdown of the relationship, the partner who did not enjoy a share of the legal title claimed that she was entitled to a half-share of the house in equity arising by way of a resulting trust implied from her contribution to the purchase price. The registered proprietor argued that she was prevented from asserting her equitable right because she was tainted by their illegal purpose, so that she did not come to equity with “clean hands”. The House of Lords held by a bare majority that she was entitled to succeed in her claim. The essential disagreement between the majority and minority was not as to the existence of the maxim “he who comes to equity must come with clean hands”, but how it should be applied in circumstances where a plaintiff”s claim is not itself founded on the alleged illegality. Lord Goff, who dissented (with whom Lord Keith concurred), took the view that the maxim should apply in its full force, since it was well established by authority and there was no justification for introducing a change (Curtis v Perry (1802) 6 Ves 739; Groves v Groves (1828) 3 Y & J 163; Childers v Childers (1857) 3 K & J 310; Tinker v Tinker [1970] P 136; Cantor v Cox (1976) 239 Estates Gazette 121), even though it produced an admittedly harsh result for the plaintiff (which Lord Goff recognised: [1993] 3 All ER 65 at 80). Lord Browne-Wilkinson, with whom Lord Jauncey and Lord Kowry concurred, held that the maxim should prevent a plaintiff asserting equitable title to property only if he had to rely on his illegal conduct to establish the entitlement, thus ensuring uniformity with the common law rule against illegality as interpreted in Bowmakes Ltd v Barnet Instruments Ltd ([1945] KB 65). He concluded that:

“… although there is no case for overruling the wide principle…as the law has developed the equitable principle has become elided into the common law rule. In my judgement the time has come to decide clearly that the rule is the same whether a plaintiff founds himself on a legal or equitable title: he is entitled to recover if he is not forced to plead or rely on the illegality, even if it emerges that the title on which he relied was acquired in the course of carrying through an illegal transaction” ([1945] KB 65 at 91).

With the operation of the maxim circumscribed in this way, the plaintiff was held entitled to succeed, since she could establish her entitlement to an equitable interest by way of a resulting trust merely by showing that she had contributed to the purchase price of the property. She did not need to rely on her illegal conduct because the underlying purpose of the purchase was irrelevant to her claim against the registered proprietor. Despite the differing approaches adopted the House of Lords rejected any wholesale change to a general “public conscience” test as had been proposed by the Court of Appeal ([1992] 2 All ER 391), as this would have required the court to weigh the adverse consequences of granting relief against those of refusing relief.

The application of the maxim was further weakened in Tribe v Tribe ([1996] Ch 107. [1995] 4 All ER 236), where the Court of Appeal held a father entitled to assert an equitable entitlement to shares, the legal title to which he had transferred to his son as part of a scheme to defraud his creditors. Because the shares had been transferred by a father to his son there was a presumption that the father had intended to make a gift (technically, their relationship gave rise to a presumption of advancement), thereby disposing of his entire interest in them. He could only demonstrate that he had retained the equitable ownership of the shares through a resulting trust if this presumption of gift was rebutted. They underlying purpose of the transaction was clearly sufficient to rebut the presumption because there was no intention that the son should own the shares for himself, but to so rebut it would require the father to rely on the illegal purpose behind the transfer. The equitable maxim would therefore apply, preventing him from claiming any equitable entitlement. In the event, however, the feared creditors never materialised to be defrauded and the father demanded the re-transfer of the shares. The Court of Appeal surprisingly held that the father was not prevented from asserting a resulting trust of the shares, on the ground that the illegal purpose had not been carried out. This was a somewhat generous finding, since as Nourse LJ stated, this exception to the full rigour of the maxim only applied if “the illegal purpose has not been carried into effect in any way”, and the central act required to defraud the creditors, namely transferring the legal title of the shares to the son, had undeniably occurred. The conclusion that the illegal purpose had not been carried into effect was therefore artificial. It was merely fortuitous for the father that the perceived threat against which he had taken pre-emptive action was illusory.

(7) Delay defeats equity

Equity will not assist the plaintiff who has failed to assert his rights within a reasonable time. As Lord Camden LC said in Smith v Clay:

“… [equity] has always refused its aid to stale demands, where a party has slept upon his right and acquiesced for a great length of time. Nothing can call forth this court into activity, but conscience, good faith, and reasonable diligence; where these are wanting, the Court is passive and does nothing” ((1767) 3 Bro CC 639n at 640). This is the foundation of the equitable defence of laches, which was recently applied in Nelson v Rye ([1996] 2 All ER 186; [1997] Conv 225 (J Stevens), where it was held that a musician could not claim an account of earnings wrongfully retained by his manager in breach of fiduciary duty because he had waited for more than six years before commencing an action. The operation of this defence must today be considered in conjunction with the statutory rules concerning limitation of actions under the Limitation Act 1980.

(8) Equality is equity

Where persons enjoy concurrent entitlement to identical interests in property, and there is no express provision, agreement or other basis as to how it should be divided amongst them, equity prescribes that equal division should occur, so that each receive an equal share in the property (Petit v Smith (1695) 1 P Wms 7; Re Dickens [1935] Ch 267; re Bradberry [1943] Ch 35; Hampton & Sons v Garrard Smith (Estate Agents) Ltd [1985] 1 EGLR 23; see also McPhail v Doulton [1971] AC 424). This maxim is reflected in the preference of equity for a tenancy in common, which will sometime be implied in equity even where the common law holds that there is a joint tenancy (See Stevens and Pearce, Land Law (3rd edn 2005), p 319), namely (See Malayan Credit Ltd v Jack Chia-MPH Ltd [1986] AC 549) where joint purchasers contribute to the purchase in equal shares and there I no express allocation of the equitable interest; where persons have jointly lent money on mortgage (Morley v Bird (1798) 3 Ves 628. This applied only to where there are joint lenders, not to the more common situation of joint borrowers); and where property is acquired as part of a joint business venture (Lake v Craddock (1732) 2 White & Tud LC 876).

(9) Equity looks to the intent rather than the form

The principle behind this maxim was well stated by Romilly MR in Parkin v Thorold:

“Courts of equity make a distinction between that which is matter of substance and that which is matter of form; and if it finds that by insisting on the form, the substance will be defeated, it holds it to be inequitable to allow a person to insist on such form, and thereby defeat the substance ((1852) 16 Beav 59 at 66)

More recently, in Foskett v McKeown Sir Richard Scott V-C stated that:

“The availability of equitable remedies ought…to depend upon the substance of the transaction in question.” ([1997] 3 All ER 392 at 399.)

Therefore, equity categorises a covenant affecting freehold land as “restrictive”, even though worded in a positive way, if in substance it is negative (Tulk v Moxhay (1848) 18 LJ Ch 83; Rhone v Stephens [194] 2 AC 310). Similarly, equity will not grant an injunction to enforce a negative covenant entered by an employee agreeing not to work for others if in substance this would amount to an order of specific performance of their contract of employment (Page One Records Ltd v Britton [1967] 3 All ER 822), since equity will not enforce contracts of personal service (Lumley v Wagner (1852) 1 De GM & G 604). It is not necessary to use the precise word “trust” to create a trust, provided that in substance the settlor intended to subject the legal owner of the property to a mandatory obligation regarding its use (Re Kayford Ltd [1975] 1 WLR 279). Similarly, equity will look to the substance, and not the wording used, to determine if a clause in a contract providing for the payment of a specific sum in the event of breach is a penalty or a genuine pre-estimate of damages (Kembel v Farren (1829) 6 Bing 141; Pye v British Automobile Commercial Syndicate [1906] 1 KB 425; Diestal v Stevenson [1906] 2 KB 345; Cellulose Acetate Silk Co Ltd v Widnes Foundry (1925) Ltd [1933] AC 20; Robert Stewart & Sons Ltd v Carapanayoti & Co Ltd [1962] 1 WLR 34).

(10) Equity regards as done that which ought to be done

Where a contract is specifically enforceable, equity regards the promisor as having already done what he has promised to do, because he can be compelled to do it. Therefore, in Walsh v Lonsdale ((1882) 21 Ch D 9), a contract to grant a lease is treated as creating an equitable lease on the same terms. Similarly, because of the availability of specific performance, a contract for the purchase of land (Lloyds Bank plc v Carrick [1996] 4 All ER 630), or of unique personal property (e.g. in Oughtred v IRC [1960] AC 206, where there was a contract for the purchase of a beneficiary”s equitable interest in shares in a private company), will give rise to an immediate constructive trust vesting the equitable ownership in the purchaser by way of a constructive trust at the very moment that the contract is entered. The maxim also underlies the general doctrine of conversion, and the rule in Howe v Earl Dartmouth ((1802) 7 Vs 137) which requires that a trustee convert unauthorised investments into authorised investments. In A-G for Hong Kong v Reid ([1994] 1 AC 324) the maxim has been held to have the implication that a fiduciary who receives an unauthorised profit in breach of his duty of loyalty will hold the profit on constructive trust for his principal because he is subject to an equitable duty to account for the profit he received.

(11) Equity imputes an intention to fulfil an obligation

Equity places the most favourable construction on a man”s acts, so that if he does something which could be construed as fulfilling an obligation he owes, equity will regard it as having this effect. For example, if a debtor leaves a legacy to his creditor, this is presumed to be a repayment of the debt (Thynne v Glengall (1848) 2 HL Cas 131; Chichester v Coventry (1867) LR 2 HL 71; Re Horlock [1895] 1 Ch 516). The doctrines of performance and satisfaction are founded on this maxim.

(12) Equity acts in personam

The maxim refers to the fact that, equity enforces its decisions by means of a personal order against the defendant, for example by an order to perform a contract, observe a trust or refrain from some behaviour by means of an injunction. If the defendant breaches the order he will be in contempt of court (see Co-operative Insurance v Argyll Stores [1997] 3 All ER 297 at 302-303). The court may exercise jurisdiction over any person within the power of the court (i.e. someone who is within the jurisdiction or on whom the court order can served outside of it), even though the order may relate to property which is situated abroad (Penn v Lord Baltimore (1750) 1 Ves Sen 444; Ewing v Orr Ewing (1883) 9 App Cas 34, HL; Richard West & Partners (Inverness) Ltd v Dick [1969] 1 All ER 289; affd [1969] 2 Ch 424, CA). The potential extraterritoriality of the equity jurisdiction has been recognised by the Court of Justice of the European Community. In Webb v Webb ([1994] QB 696) a father bought a flat in Antibes in his son”s name, intending to retain the ownership. The European Court held that even though the usual rule was that matters of title to immovable property, such as buildings, had to be settled in accordance with the law of the country in which it was situated, the father was entitled to pursue his claim to a share in the property under a resulting trust through the English courts because it was a personal claim. It therefore upheld the decision, on the merits, of the English High Court ([1992] 1 All ER 17) that the son held the flat on a resulting trust for his father. In Re Hayward ([1997] 1 All ER 32) it was said that it was significant that the plaintiff in Webb v Webb was not making any claim based on legal ownership of the property concerned. In Re Hayward a trustee in bankruptcy claimed to be entitled to a half share in a villa in Spain which had belonged to the bankrupt and his wife in indivisible halves (the Spanish equivalent of a legal tenancy in common) but which had subsequently been transferred to the defendant by the bankrupt”s widow, who claimed to be entitled to do so in her own right and as intestate successor to her husband”s share. The property had then been registered in the name of the defendant in the property register in Minorca. The basis of the trustee in bankruptcy”s claim was that the bankrupt”s rights had vested in him so that there was nothing which should have passed to the bankrupt”s wife and thence to the defendant. The trustee in bankruptcy was therefore seeking to have the Minorcan property register rectified to show him as half owner. Rattee J held that, under Article 16 of the 1968 Convention on Jurisdiction and the Enforcement of Judgments in Civil and Commercial Matters (adopted as law by the Civil Jurisdiction and Judgments Act 1982), the Spanish courts had exclusive jurisdiction over the matter since the proceedings had as their object “rights in rem in immovable property”. Rattee J rejected the argument that a claim for an order to reverse the registration could be treated as a claim in personam. In his view, although English law did not recognise as sharply as some other jurisdictions the distinction between rights in rem and rights in personam, “it is difficult to contemplate any right more clearly a right in rem than a right to legal ownership such as is claimed by the trustee [in bankruptcy] in the present case” ([1997] 1 All ER 32 at 43). The relationship of this case with Webb v Webb raises interesting questions. Since one of the rights of the beneficiaries under a trust is a right to call for a vesting in them of the legal estate, it is difficult to see why the claim of a beneficiary under a resulting or constructive trust (as in Webb v Webb) should not be seen as a right in rem, just like the claim in Re Hayward. On the other hand, the two cases differed in the way in which they were pleaded, and it may be that this is a sufficient (although unsatisfactory) distinction between them.