General Statements of Basic Equitable Principles

Equity is basically a body of law as introduced by the Court of England and since been invested with equitable jurisdiction elsewhere also, including Australia. [1] In basic terms, equity is equality, which looks upon for an equal distribution of proportionate losses and gains. [2] The operation of equitable jurisdiction’s underlying principle is recognised as the jurisdiction to relieve against unconscionable conduct in the fields of estoppels, [3] relief against forfeiture [4] , and constructive trusts. [5] There will be no intervention of equity in case of simple unconscionable conduct.

Although the terminologies – unconscionability and equitable fraud may appear to be different in meaning, it is not so under a court acting through equity for which, unconscionable, inequitable and equitable fraud, all three denote objectionable conduct in issues. [6] However, despite the close relationship between unconscionability and fraud, courts do not use these interchangeably but the two are used in separate contexts and have thus been developed under separate doctrines. [7]

This paper is aimed at elucidating the discussion on “Fraud in equity is a much broader concept than fraud at common law, since it covers conduct which, pursuant to common law principles, is not at all fraudulent.” In order to understand the above statement, it is imperative to first understand the underlying principles of equity and how it is different and much broader than common law.

This paper describes the above in a phased manner by first stating the various nuances of equity (known as maxims of equity which are general statements of basic equitable principles which encapsulate the doctrines of equity) and equitable remedies and then the application of the same in terms of fraud which is discussed with reference to several case laws which aptly have been guided by these principles. Equitable remedies arise where there is a “significant possibility of conflict” between the fiduciary duty to act in the best interests of the company and the personal interests of the director. Also, discussed simultaneously is the existence of common law which highlights the avenues where equity differs from common law sense.

The fundamental principle guiding equity states that a person who is considering availing himself or herself of an equitable remedy is eligible to do so only if he or she himself or herself fulfils their corresponding legal and equitable obligations arising as a matter of the dispute being considered. [8] This in simple terms would mean that a party expecting the performance of a contract by another party must himself be willing and ready to perform his part of the contract. [9] Also, the petitioner would be examined of his conduct with regard to the case and any decree sought may be refused if the party is found guilty of any impropriety in the legal sense. [10]

One of the very historical groundwork’s of the maxims of equity also stated that equity acted in personam. At common law, a person who holds legal title to a property has rights in relation to that property against the entire world – thus, it is said that the common law acts in rem. In equity, however, equitable rights are only enforceable against a particular person. Thus it is said that equity acts in personam. Although this maxim is no longer applicable in modern times, it shows how the common law and equity are connected since past.

Equity and law, especially the administration of law have had a fusion and have thus affected their enforcement, [11] although not the substantive rights. The equitable principles govern the rights derived from equity. The fusion therefore has not brought in the negligence principles as per common law, also not brought in the remedy of damages under equitable rules. [12] Also, the difference still remains in terms of fraud whose rules require it to be proved if there is a requirement for recovery of damages. [13]

Unlike in common law, fraud in equity is a broad concept which is quite unconnected to ‘intention to cheat’. Intentional dishonesty or misappropriation of funds as understood in common law sense (mens rea) is completely surpassed by fraud as seen in case of equity. [14] It definitely also includes in wider sense, a breach of an obligation as acknowledged in equity. [15] In courts which can administer both law and equity, equity has coexistent jurisdiction in law of deceit. [16] Equity in such cases where law only grants a remedy in form of damages goes beyond to provide proprietary remedy also. [17]

Court of equity has the authority to bring upon a judgement against all kinds of frauds which may also be extended to novel situations, [18] and is also different from the meaning accorded to it as per the tort of deceit. [19] Fraud in equity can be established even without proving a real reason or intention to cheat. In equity, not a moral fraud as seen in an ordinary case, but a breach of an obligation is enforced as a court of conscience; [20] even though the dealings have been ‘open and fair, and without any objections’. [21]

As for example in cases where a mere constructive or equitable fraud upon power [22] or another class of fraudulent misrepresentation [23] while assessing power of mortgage’s sale, [24] is discussed. Here, there is an intentional misuse of power through a process of planned cheating of the mortgagor by a designed sale at undervalued price, inadequately advertised and inappropriately arranged auction. Also, if a first mortgagee claims property in respect of some additional advances made with notice of an intervening equity, [25] it is equitable fraud.

The rule of equity which insists on those, who by use of a fiduciary position make a profit, being liable to account for that profit, in no way depends on fraud, or absence of bona fides; or upon such questions or considerations as whether the profit would or should otherwise have gone to the plaintiff, or whether the profiteer was under a duty to obtain the source of the profit plaintiff, or whether the plaintiff has in fact been damaged or benefited by his (her) action. The liability arises from the mere fact of profit having, in the stated circumstances, been made. The profiteer, however honest and well-intentioned, cannot escape the risk of being called upon to account.

Certain situations where decisions or verdicts are forcefully induced from one party by another through threat or unlawful coercion so as to obtain signatures on document or so as to forcibly enter into a transaction, it may be revocable and can be set aside owing to having been brought about through unlawful pressure. [26]

However, it would not constitute equitable fraud if the pressure is merely irresistible but not illegitimate. Relief is provided by Equity in circumstances where the doctrine of duress at common law is not available. [27] In such a case where the transaction which came into effect by way of illegitimate force can be stopped from being revoked only if expressly or by way of implication, the pressure ceases to operate in the mind of the plaintiff. [28]

Also, the right to relief will not be forgone due to the fact that the victim chooses to succumb to the demand or the force rather than take an alternative course of action. [29] Similarly, when judgements in a proceeding are obtained through fraud or where it can be proved that the proceedings were not properly conducted, the wrongfully obtained judgement can be set aside as it comes under the purview of action underlying equity. [30] It is very appropriate her to put forth that a statute will never be allowed to be used as an instrument of fraud in equity. [31] The ‘corporate veil’ may be pierced by the equity so as to prevent the use of corporate form to cover up a fraud. [32]

In conclusion, as equitable remedies are more flexible, they may be granted subject to the conditions, [33] and also may be refused subject to conditions. [34] The nature of relief sought determines which of the two distinct bodies of principle, common law and equity would be applied. However, in cases where equity provides a much wider or more complete relief, equitable principles are to be applied. [35] We have seen above that there are synonymous terms like unconscionability and equitable fraud which are treated differently under different circumstances which also illustrates how the equity principles differ from that of common law.

The paper has well illustrated that conscious dishonesty is required as a proof in Common law fraud. This means that there must be an aspect of mens rea. Therefore, a party alleging “fraud” must show that some false representation has been made in the knowledge that it was untrue (or at least with irresponsible apathy towards its accuracy or falsehood. [36]

This aspect of “deliberate dishonesty” limited common law implications for deceit to a narrow field and a lot of responsibility was placed on a plaintiff seeking to avoid the contract for “fraud” at common law. Equitable fraud, however, includes not only unconscionable transactions, but also any behaviour which is unjust, unfair or which breaches equitable principles.

As is seen throughout the discussion in the paper, equity has always recognised the legal and lawful rights, titles and interests and its own doctrines have been developed through a close equivalence with those of the common law. [37] Also established above is another maxim that wherever equities are equal, law prevails.

However, equity does not follow the common law in all things as many of its remedies are designed to correct defects in the law. [38] Equity recognizes common law rights, interests and titles, and will apply them where necessary. Nevertheless, equity will not allow the holder of such common law rights or interests to exercise or enforce such rights in an unconscionable manner.