Defences in Equity

Paul S Davies, Simon Douglas, James Goudkamp, Paul S Davies, Simon Douglas, James Goudkamp

• Publisher: Hart Publishing
• Year: 2018
• ISBN:
  9781509921027
• Edition: 1
• Topic: Jura
• Subtopic: Nachlass- & Treuhandrecht

This book is the fourth in a series of essay collections on defences in private law. It addresses defences to liability arising in equity. The essays range from those adopting a mainly doctrinal perspective to others that explore the law from a more philosophical perspective. Some essays concentrate on specific defences, while others are concerned with the links between defences, or with how defences relate to the structure of the law of equity generally. One aim of the book is to shed light on equitable doctrines by analysing them through the lens of defences. The essays offer original contributions to this complex, important but neglected field of scholarly investigation. The contributors – judges, practitioners and academics – are all distinguished jurists. The essays are addressed to all of the major common law jurisdictions.

1

Introduction

PAUL S DAVIES, SIMON DOUGLAS AND JAMES GOUDKAMP

I.DEFENCES IN EQUITY

THIS VOLUME IS the fourth in a series that addresses defences in private law. Like those that preceded it,¹ it is animated by a belief that defences comprise an important but under-theorised part of private law. The present volume’s concern is with defences in equity. It is obvious that the law of equity is not usually understood through the lens of defences (by which we mean that defences are not used as a major organisational device). Indeed, defences do not usually feature prominently in tables of contents of textbooks in the field, if they feature at all.

For at least two related reasons, it is slightly puzzling that the concept of a defence has not received systematic treatment in the law of equity. The first concerns the relationship between equity and the rest of private law. A dominant theme in many recent attempts to classify private law is that there is no meaningful conceptual (as opposed to historical) distinction between equity and the common law. Peter Birks, a leading figure in articulating and promoting this viewpoint, contended, for example, that liability in equity is no different, ultimately, from liability arising in respect of common law wrongs.² The clear implication to be drawn from Birks’s pioneering work is that liability for equitable wrongs ought to be controlled by the same rules as liability arising at common law. Andrew Burrows derives precisely this message from Birks’s work. Burrows argues, writing in relation to restrictions on the award of compensatory damages and equitable compensation, ‘there is no good reason for equity going its own separate way’.³ Similarly, he contends ‘that it is simply false to imagine that there are irreconcilable differences between common law and equitable defences’.⁴ In another contribution, Burrows contends, ‘I make no apology for reiterating that, in my opinion, there are common law counterparts to the famous equitable defences’.⁵ If there is no conceptual difference between common law and equitable wrongs, the strong presumption would be that just as there are many defences to liability arising in common law wrongs, the law of equity does (or should) readily recognise defences too. In these circumstances, one would expect defences to have occupied as prominent a part in the thinking of equity scholars as they have in relation to certain other major branches of private law.

The second reason why it is arguably somewhat odd that equity lawyers have tended not to organise their thinking in terms of defences is that equity recognises many rules that are widely understood as defences in other departments of the law of obligations. Illegality, limitation and consent, for instance, are regularly regarded as defences in other parts of private law. Equity also provides for a wide array of rules that are specific to the law of equity but to which the term defence could readily be (and sometimes is) applied. A good example is the rule in section 61 of the Trustee Act 1925 (UK), which provides that where a trustee has committed a breach of trust ‘but has acted honestly and reasonably’ the court may ‘relieve him either wholly or partly from personal liability’ if the court considers that he ‘ought fairly to be excused for the breach of trust and for omitting to obtain the directions of the court in the matter in which he committed such breach’.⁶ In his chapter in this volume, Robert Stevens singles out several rules that he considers are ‘archetypal defences’, including equitable set-off, laches, acquiescence and release.⁷ In short, equity contains many rules that are regularly recognised as defences in other fields or which otherwise have a strong claim to having the label of defence applied to them.

If the law of equity can fairly be regarded as being populated by a wide network of defences, several important issues arise. One key question is what is meant by the term ‘defence’. One message that the previous books in this series sought to communicate is that there is no uniform understanding of the concept of a defence. The term is used in a wide variety of ways. Sometimes it is used in contradistinction to the idea of a ‘denial’. A denial is typically understood as an argument that attacks the existence of something that forms part of the claimant’s cause of action. When contrasted with a denial, a defence is a rule that allows the defendant to escape or reduce his liability even if what the claimant alleges is true. A second way in which the notion of a defence is often understood is in terms of onuses of proof. On this view, defences are rules that the defendant must establish by proving certain facts. A third way of defining the concept of a defence is suggested by Stevens. He argues that ‘Whether or not something constitutes a defence is, in private law, a purely formal question. Is it something that the defendant asserts in his pleadings, that is not merely a denial, in order for a claim to fail?’⁸ This way of understanding is similar to but not the same as the second definition given above, since a defendant might be required to plead a certain rule but not prove the existence of facts that engage it (such as is the case in relation to limitation bars, where the claimant must show that the action was brought in time once the question of limitation has been pleaded by the defendant). All three of these ways of comprehending the concept of a defence are subtly but importantly distinct from each other. They do not exhaust the range of ways in which that notion can and has been understood.

Another important question that is of general significance concerns classification. If the concept of a defence is employed in a given field of law, one issue that arises is whether defences in the field concerned can be organised in any particular way. The classification of defences has been one of the largest research projects ever undertaken in the criminal law, for instance. It has been either the sole or main concern of several books⁹ and the subject of countless articles in law reviews. It is widely thought that these endeavours have significantly advanced understanding of the criminal law. In light of this experience, it is surprising that similarly sustained efforts have not been undertaken in relation to all of the various parts of private law. It is true that efforts systematically to arrange tort defences can be traced at least as far back as Wigmore,¹⁰ and scholars have regularly offered a variety of ways of arranging defences to liability in tort since Wigmore’s time.¹¹ However, the situation is different in relation to private law’s other departments, where scholars have not embarked on the same project. If a more complete understanding of private law is to be obtained, the question of classification also needs to be asked in relation to the law of contract, unjust enrichment and equity.

Before proceeding, we should mention one radical challenge to the entire enterprise that this book represents. We drew attention, above, to the Birksian understanding that equitable wrongs do not differ in any material way from common law wrongs and that it is thus an error to see equitable wrongs as pertaining to a separate category within private law.¹² If this view is pursued to its logical conclusion, equity is not a separate branch of private law with the result that it makes no sense to look at defences in equity as an independent category. Instead, equitable defences that affect rights to redress that would otherwise arise in contract, tort or unjust enrichment should properly be considered alongside common law defences in each of those branches of the law. Whether or not there is anything distinctive about equitable defences is considered by Henry Smith in his essay (chapter two).

II.THE NATURE OF EQUITABLE DEFENCES

Smith asks whether the jurisdictional origin of equitable defences, such as laches, equitable estoppel and unclean hands, helps us to understand these doctrines. For Smith, an important characteristic of the equitable jurisdiction is its ‘second order’ status. Equitable rules are ‘second order’ because they refer to common law rules and, hence, depend upon them for their existence.¹³ In other words, they are rules about rules. Equitable rules are needed, Smith explains, to root out forms of opportunism, where individuals identify and then seek to exploit weaknesses in the apparatus of the common law. Individuals exploiting loopholes in the tax system is one example identified by Smith. Another is the case of an estoppel, where an individual acts unconscionably, but stops short of making any legally binding promise. A secondary system, Smith explains, is one that takes aim at those who opportunistically avoid the effects the general legal rules.

It is within this conception of equity as a whole that Smith attempts to place equitable defences. They are different, he argues, from defences recognised at common law because they are of a ‘second order’ nature. They modify the result that would otherwise obtain by the application of standard rules. This, Smith argues, explains certain features of equitable defences, particularly the fact that they tend to be discretionary. An individual who exploits a tax loophole, or encourages another to act to his detriment, might be acting in a way that is permissible pursuant to common law principles. As such, the only way to assess their behaviour is against some form of moral code. This might explain why unconscionability features so heavily in equitable defences. Given the distinct function and features of equitable defences, the project of fusion with common law defences is, Smith argues, a difficult one, and it might be preferable to recognise equitable defences as a distinct category.

Stevens is concerned in his chapter (chapter three) with the defence of equitable set-off. He begins his treatment by distinguishing equitable set-off from other species of set-off that do not have equitable underpinnings, including what he refers to as ‘contractual set-off’, ‘insolvency set-off’ and ‘procedural set-off’. The defence of equitable set-off, unlike the other species of set-off, does not involve netting out claims. Rather, Stevens argues, it entails the defendant bringing a counterclaim on the basis of equitable rules, which counterclaim, if successful, would result in the failure of the claim that has been asserted against him. A defendant raises the defence of equitable set-off whenever he counterclaims, relying on equitable doctrines, on the basis that the ‘claimant’s conduct has caused a claim against him to arise’ with the result that the claimant ‘may not assert a claim which is causally related to the same conduct’.¹⁴ Lord Cawdor v Lewis¹⁵ supplies an excellent illustration of what Stevens has in mind, which case Stevens cites. The claimant landowner sued the defendant for mesne profits and the defendant successfully counterclaimed for an injunction restraining the bringing of the claimant’s action on the basis that the claimant had stood by while the defendant had, to the claimant’s knowledge, made improvements to the land.

The defence of equitable set-off, as described by Stevens, means that it has little, if anything, in common with other types of set-off, and should not, in fact, even be labelled a type of set-off in so far as the idea of set-off necessarily involves the netting out of claims. Rather, Stevens argues, the defence of equitable set-off is much more closely allied with other equitable rules generally. Equitable rules, Stevens reminds us, are rules about other rules and, as such, lack any independent vitality. They presuppose, and are only intelligible against, the backdrop of the common law’s rules. The defence of equitable set-off, consistent with its equitable nature, involves the assertion of a counterclaim that the defendant would be unable to pursue absent a claim against him. It is a counterclaim that has no independent existence.

III.BONA FIDE PURCHASE FOR VALUE WITHOUT NOTICE

The bona fide purchase for value without notice plea has been described, as David Fox notes in the introduction to his chapter (chapter four), as the ‘polar star’ of equity. Although its origins lie in trusts (or uses) of land, it has developed into a general plea, available to any recipient of legal rights as a possible defence to pre-exiting equitable interests. The plea is available not only in the context of equitable interests arising under trusts, but to all forms of equitable interest. The features of the modern defence have been clearly articulated by the courts and are generally well understood. Where difficulty lies in the modern law is in the relationship between this defence and forms of personal liability in equity, particularly the action of knowing receipt.

Fox considers the basis and scope of the modern defence through the prism of its historical development. His approach yields surprising conclusions. In short, he argues that the modern defence has been largely uncoupled from its original purpose and scope. Fox explains that the enforceability of the early beneficial interests, or uses, depended on notions of privity and consideration. Where a trustee (the feoffor), held land for the benefit (or use) of a cestui que use, that use could endure against a transferee (the feoffee) of the land, in much in the same way that a modern equitable interest in land can bind a successor in title. If the feoffee had provided consideration for the transfer (ie, a sale), then one would say that the feoffee had intended to acquire the title to his own use. However, if consideration was absent, and the feoffee was aware of the cestui que use’s interest, he was said to have acquired the title to the use of the cestui que use. Notions of privity and consideration, therefore, lie at the heart of the emergence of the trust, and explain how equitable interests ceased to be merely personal obligations and acquired a proprietary status.

The origin of the bona fide purchaser without notice plea, ...