CHAPTER 8

Equitable Remedies

What Is Equity?

In the twelfth century the crown (or royal) courts were not in a fixed place and the King travelled the length and breadth of the country accompanied by his Lord Chancellor who was usually a highly educated ­ecclesiastic man, hearing cases in the different regions. This was known as “the ­Circuit” and some common law countries still use this method. In Ireland for example, the country is divided into six circuits. Two of these are permanent courts but the other four are not and judges will travel to that region and preside over cases. They will arrive in the area every two to four months and stay from one day to three weeks depending on the case load.

Historically, smaller cases were heard by local courts headed by the feudal lords.1 Over time the system of law began to solidify. The King would, through the Chancellor, issue legal writs which were directions on how particular cases should be decided. This was the beginning of the common law system as we know it today. By the early fourteenth century the form of the writ and the common law had become well established and particularly rigid. As far back as The Provisions of Oxford 1258 it was confirmed that no new writs could be issued without the King’s prior and express approval, meaning that should you want to bring a case, your claim had to fall within a recognized and established writ. In other words your case or issue must be one that the King has already given direction on. If your case was new or involved a novel issue you could not proceed through the existing system and would need permission from the King. Thus, petitions to the King requesting that a case be heard or a remedy granted became a regular occurrence and the King delegated to the Lord Chancellor the power to grant such remedies and exercise mercy. The Lord Chancellor then established the Courts of Chancery which had the sole function of hearing cases that could not be heard in the common law courts due to its rigid rules.

The Court of Chancery was founded on medieval thought and ideology; the King was accountable to God and the Chancellor as keeper of the King’s conscience would act to ameliorate the harshness of the common law, thereby ensuring that the King’s conscience was clear.2 Petitions to the Court of Chancery increased as the court was empowered to act by virtue of conscience and did not adhere to strict rules of law. The new body of rules coming from the Courts of Chancery were known as equitable principles or remedies. The court would not allow a person to insist on a his legal rights where to do so would cause an injustice, and where damages (compensation) was the only remedy available in common law courts, equity fashioned new remedies such as the injunction to ensure that justice would be served. Equity was all about the fair and just outcome of the case, the morality rather than the legality, thus ensuring that the King’s conscience before God was clear.

The position of having two separate systems, one based on rigid legal principles and one based purely on discretion, resulted in inevitable conflict between the two. This came to a head in The Earl of Oxford’s Case.3 Here judgment had been awarded against the defendant in the Common Law Courts who then applied to the Court of Chancery for an injunction preventing the enforcement of that judgment on the grounds that it had been obtained through fraud. The head of the Common Law Courts indicted the defendant with the Lord Chancellor granting the injunction, leaving the two courts at an impasse. This dispute was finally referred to the King who decided that where there was a conflict between the two, equity should prevail.

With its status affirmed, equity began to develop a consistent body of law, never seeking to disregard or diminish the common law, but rather intervening when the common law was particularly harsh and unjust or where damages were not an adequate remedy. The courts though became increasingly unable to deal with the sheer level of cases arriving at its door. As time went on, the Courts of Chancery began to fill with lawyers rather than ecclesiastical judges, bringing with them their common law training the rules of equity equally started to become systematized. In Re Telescriptor Syndicate Ltd it was declared that “this Court is not a Court of Conscience”4 and Re National Funds Assurance Co that it “is not, as I have often said, a Court of Conscience, but a Court of Law.”5 While the rules of equity became clearer, its relationship with the common law did not. The intricacies of the relationship was illuminated by Charles ­Dickens novel Bleak House that “Equity sends questions to Law, Law sends questions back to Equity. Law finds it can’t to this, Equity finds it can’t to that; neither can so much as say it can’t do anything, without this solicitor instructing and this counsel appearing.”6 The need to strike a balance was clear and in the 18th century legislative measures were introduced to reform the system. Some minor changes were initially introduced until the Judicature Acts 1873-5 overhauled the entire system. This legislation established a court system empowered to hear both common law and equitable claims together. It has been argued that this was nothing more than procedural fusion, a fusion of administration and not of rules.7 It essentially allowed a claimant to bring any case, whether founded in the common law or equity and whether the remedy was damages or an equitable one, to one court who could consider both the common law and equity.

Equity initially developed on an ad hoc basis, intervening where the justice of the case so desired it. Over time it became more solidified and merged with the common law however its impact on all areas of law can be keenly felt. One of the areas of law where it has had a considerable impact is in the realm of contract law.

Contract law being built on the foundations of the freedom to bargain and equality of bargaining power resulted in many being held to bargains that were ultimately unfair or unjust. The common law did allow for the contract to be set aside (as we seen in Chapter 5) but the threshold required could sometimes be unattainably high. Here equity intervened. Equity found that even where the common law threshold had not been met, equity could rescind the contract on the grounds of justice and fairness, in addition to creating new grounds not established previously. Also, the only remedy available in the common law courts was damages, which were not appropriate in all cases. Equity created new remedies and of particular importance to contract law are the remedies of rectification and specific performance.

Because the integration of the King’s Bench and the Chancery Court occurred after several American states had integrated the common law and English court system through specific acts, by provisions in their constitutions, or other means,8 the separation between courts of equity and courts of law is still preserved in a select few,9 together with the separate jurisdictions of law and equity. An example of this is the Delaware Court of Chancery, in which jurisdiction is vested to hear all matters arising in equity.10 This court has been highly influential in the law of companies and commercial matters, because of the large number of corporate and commercial entities that are incorporated in the state. The jurisdiction of the court is often sought by individuals due to the range of equitable relief it can order to enjoin companies from engaging in certain commercial transactions. An example of the continuing influence of equity in the Delaware Court of Chancery concerns the interpretation by the court of the fiduciary duties, which directors owe to the corporations that they oversee. In Graham v. Allis-Chalmers Manufacturing Co.11 the Court stated: “Directors of a corporation in managing corporate affairs are bound to use that amount of care which ordinarily careful and prudent men [emphasis added] would use in similar circumstances.” This echoes the language used by English courts to describe the fiduciary duties of a trustee, in Re Whitley Lindley LJ stated: “the duty of a trustee is not to take such care as an ordinary prudent man [emphasis added] would take if he had only himself to consider; the duty rather is to take such care as an ordinary prudent man would take if he were minded to make an investment for the benefit of people for whom he felt morally bound to provide.”12 The standard articulated by the Delaware Court of ­Chancery closely mirrors the description of the fiduciary duties of trustee in the Re Whitely case. As demonstrated earlier, equitable jurisdiction of ­American courts is one aspect of the legacy of English law. Where most states have, as England did, merged the courts of law and equity, the example of ­Delaware casts in stark relief the abiding influence of equitable doctrines in the American systems.

Equitable remedies are distinct from damages, which were discussed in the previous chapter. In contrast, equitable remedies are generally nonmonetary in nature and arise where parties seek to either deprive an unfair or mistaken agreement of its effect, either in part or in whole, or to hold the other side to perform its end of the bargain. Equitable concepts can also provide remedy in the case of a defective contract, or where a contract does not exist at all between the parties, to provide a remedy where the interests of a party have been prejudiced by the illegitimate action of another. The reader should note that although equivalent concepts are found within the civilian and common law traditions, they are deployed differently in either tradition. For example, broadly speaking, the awarding of damages is the preferred remedy for breach of contract in the common law tradition, whereas specific performance favored in the civilian tradition. Overall, courts proceeding in equity conceive of justice as fairness, and seek both to protect innocent parties and punish those who have acted in bad faith.

Equitable Remedies in England

Rescission

In addition to the common law grounds set out in Chapter 5, equity provided further ways in which a contract could be set aside. Under common law it was said that the contract was voided, whereas in equity it was rescinded. Regardless of whether the contract was set aside in common law or equity the outcome was the same, it was as if the contract never existed and the party restored to their former position. However, equity was more flexible on the grounds for which the contract could be rescinded. The four grounds are considered in the following paragraphs.

Mistake

Mistake alone tends not to be sufficient grounds to have a contract rescinded unless it has been tainted by some fraud or misrepresentation. Historically, courts struggled to determine equity’s role in rescinding contracts that could be valid at common law and this continued until the case of Great Peace Shipping Ltd v. Tsavliris Salvage (International) Ltd.13 Here, the court found that there was no basis to extend the role of equity beyond that of the common law. This case therefore realigned the two systems in terms of setting aside the contract for mistake; the test is the same regardless of whether it is under common law or equity.

Misrepresentation

Where a contract was entered into on the basis of a fraudulent misrepresentation, that contract could be set aside both in equity and common law. However, only equity provided relief where the misrepresentation was innocent. Equity’s jurisdiction here depended on the impact of the representation on the claimant, and not the state of mind of the person making the statement. The claimant merely had to prove that they relied on a statement which was untrue.14 Prior to the Misrepresentation Act 1967 the claimant here could only rescind the contract but could not obtain damages. Since the implementation of this Act equity’s remedy to rescind on the grounds of misrepresentation forms one of the plethora of claims available to claimants.

Undue Influence

Equity can set aside a contract where that contract has been entered into by virtue of one person exercising dominance over the other. As such that person has not freely entered into the obligation, their judgment has been clouded, and they have been influenced in a particular way. Undue influence may be seen as a watered-down version of duress. Duress operates where a person or property is threatened with actual violence thereby inducing them to enter into a contract not of their own volition, but to prevent violence to their person or another, or destruction of their property. A contract can be avoided at common law and equity where it is entered into under duress. Undue influence is more subtle, it relates to the control of the weaker party’s mind. A detailed account of undue influence is given in The Bank of Credit and Commerce International v. Aboody case which classified different categories of undue influence.15 One is where there is actual undue influence present based on the facts of the case. Another creates a rebuttable presumption of such influence premised on the imbalance of power or inequality between the parties on the face of the relationship. This is where objectively one party is in a dominant position and benefits from the transaction. The final category pertains to relationships that prima facie are of equal power, but where the facts of the particular relationship evidence an imbalance.

Unconscionable Transaction

Equity has the power to intervene to set aside contracts which are unfair and made with “poor and ignorant” persons.16 These types of transactions are where one person is taken advantage of by reason of their poor or ­ignorant state, and that the other party acted unconscionably in brokering the deal. It must be something more than a bad or unreasonable bargain and as set down in Singla v. Bashir

The bargain has to be more than hard, unreasonable or foolish; it must be proved to be unconscionable in the sense that one of the parties has imposed the bargain in a morally reprehensible ­manner. His behavior must be characterized by some moral ­culpability or impropriety.17

Three elements must be established for a contract to be rescinded on this ground. First, one party must be at a serious disadvantage by reason of poverty, ignorance, or otherwise; second, the transaction was at an undervalue and third, there was no independent legal advice.18

This principle has been mostly superseded by legislative provisions such as the Unfair Contract Terms Act 1977 and the Consumer Rights Act 2015 and the courts are conscious of extending the doctrine further without legislative basis.

Rectification

This is a discretionary equitable remedy which seeks to rectify a legal instrument where that instrument fails to correctly record the actual agreement made between the parties. The remedy does not rectify the agreement itself, rather the record of that agreement. Say for example that we are entering into a contract for the sale of land. You are selling the property that you own at 23 Duke Avenue and I agree to buy that property. I have inspected the house, I know that I am buying 23 Duke ­Avenue. The subsequent agreement to sell and conveyance incorrectly records this (and we do not realize before signing). These reflect the property as being 32 Duke Avenue. You do not own this property and cannot sell it, and it is not the property that I have agreed to buy. In these circumstances the court can rectify the conveyance to reflect our true agreement.

In Pitt v. Holt the remedy was described as being “a closely guarded remedy, strictly limited to some clearly established disparity between the words of a legal document and the intention of the parties to it.”19

The general rule for a claim for rectification to be successful is that the mistake must be common to both parties; as established in Frederick E Rose (London) Ltd v William H Pim Junior & Co Ltd.20 Here the parties had agreed to buy and sell horse beans and the written contract referred to horse beans. However, both parties believed that these were the same as feveroles which they were not. The parties here were both operating under a misapprehension and rectification was not possible as the contract actually reflected their agreement.

Traditionally, rectification was not available where only one party was mistaken as in these circumstances it could not be said that there was a meeting of the minds, a true agreement between the parties where one is mistaken. This position was changed in the case of A Roberts and Co Ltd v. Leicestershire CC where the court found that rectification could be awarded in such circumstances where it could be shown that:

• One party, A, mistakenly believed that the document ­contained (or did not contain) a certain provision;
• That the other party, B was aware of that mistake;
• That B failed to draw this mistake to the attention to A, and
• That mistake is one that benefits B or detriments A.21

Specific Performance

Generally, English courts favor damages in the event a contract is breached. It is only where damages are inadequate as a remedy that the court may order the party in breach to perform their side of the contract. Specific performance is a discretionary equitable remedy whereby the court exercises its jurisdiction in personam or “in the person” to compel a party to specifically perform his or her duties under the contract. It is effectively an injunction compelling the performance of contractual obligations. Unlike general injunctions, specific performance is only applicable to contractual obligations and not those imposed by, for example, tort or public law. The likelihood of a successful claim for specific performance can depend on the type of contract and the type of obligation.

Certain types of contract are excluded from orders for specific performance due to the nature of the contract. Contracts of sale for personal property are generally resolved by the award for damages, except where the property is of rare or unique distinction such that monetary damages would not be adequate to compensate the loss.22 The practicality of the remedy of specific performance may also be weighed, and general obligations or imprecise will not be enforced in this manner, such as to keep a building in good repair.23 By contrast, precise and continuing obligations, such as to pay a monthly sum,24 can be monitored by the court with greater ease and therefore may be the subject of an order for specific performance. Accordingly, the availability of specific performance where the court would have to supervise compliance is less sure.

Finally, contracts for personal services will not normally be specifically enforceable. Where the contract is a contract of employment, there is a specific prohibition on the application of this remedy. Section 236 of the Labour Relations (Consolidation) Act 1992 provides that the court ­cannot ­“compel an employee to do any work or to attend any place for the doing of any work.” Where the relationship is not defined as employer/employee it is not covered under this Act; however, the courts generally tend not to enforce the obligation as it would require ongoing supervision and be practically impossible to enforce. Further, it is arguably against public policy to compel personal service and as the cautioned that specific performance may not be appropriate in these cases “lest they should turn contracts of service into contracts of slavery.”25

The availability of specific performance is further tapered by other considerations, such as where there is an imbalance in the performance that could be required of either party,26 where a mistake or a misrepresentation has occurred,27 where the conduct of the party seeking ­performance has acted in bad faith or exploits the other party,28 where the delay occasioned by the breach renders specific performance of dubious value,29 or where an order for specific performance might cause the party undue hardship.30

Equitable Remedies in the American System

Specific Performance

As in English law, courts favor monetary damages in place of specific performance, unless damages are inadequate to compensate the breach.31 Specific performance is equally a discretionary remedy, and will not be enforced in all circumstances, even where the parties to the contract have specified it as a remedy.32 Parties may also seek injunctive relief to prevent the other party from acting in a certain way. This is best illustrated by an employment contract: a party cannot seek specific performance of an employment contract,33 but may be able to enjoin (prevent) a former employee from violating a non-compete clause, by preventing them from working with a firm in direct competition with their former one.34 Thus, the determination of whether specific performance is the proper remedy depends upon the nature of the obligation which the party seeks to enforce, and the availability of damages in lieu.

As mentioned, the remedy of specific performance is expressly excluded where damages would be adequate under the Restatement; thus where the alternative exists, the courts should opt for damages.35 The rationale underlying this stance is that breach of contract evidences that for one party it is no longer desirable or feasible to render performance, and accordingly courts should opt for a clean break between the parties, rather than forcing one party to perform despite itself. The Restatement as well specifies which factors affect the adequacy of damages,36 these are: the difficulty of ascertaining damages,37 the difficulty of finding another party to perform suitably the contract,38 and the likelihood that damages would actually be extractable from the breaching party.39 The UCC displays a more permissive stance, stating that specific performance may be awarded where the goods are unique, or in “other proper circumstances.”40 As well, the UCC states that a seller is entitled to enforce payment for goods already accepted by the buyer.41 Accordingly, the UCC is more disposed to specific performance than the Restatement; this could be due to the commercial nature of the former set of rules, which favors ­stability of contract, in order that parties can rely on the stability of their transactions.

Like English law, American jurisprudence on this matter has developed further factors to limit the availability of specific performance, such as where it would require continued monitoring by the court,42 or would be unduly burdensome for the breaching party to perform. In addition, it may be risky for a party to rely on specific performance as a remedy where a party has breached their contract. In Weathersby v. Gore,43 Gore contracted with Weathersby to buy all cotton produced from 500 acres of land at a certain price. Weathersby later informed Gore that he would not honor the contract, as Gore had failed to provide a required payment bond. Gore did not take action to seek out alternative suppliers, and later sued for specific performance on the contract with Weathersby. The court held that specific performance was not justified as a remedy in this instance as damages would be adequate. Gore did not try to source alternative suppliers and thereby diminish his losses, his damages were limited to the difference in the market price of the cotton and the value of the contract at the time when the breach occurred. Thus, relying on courts to order a counterparty to perform is a risky proposition, and could result in damages reduced to the extent that a party has not taken steps to cover their losses.

Reformation or Rescission of the Contract

Reformation of a contract is analogous to rectification in English law, and allows the court to essentially rewrite the contract to reflect the original intent of the parties. Generally, both parties must be mistaken as to the contents and reformation of the contract must not unduly burden third-parties.44 More common is the rescission of the contract, where parties have made out a claim for the avoidance of a contract for mistake, fraud, duress, and illegality, as explored in Chapter 5. In addition, a contract can be rescinded in equity for unconscionability.

Unconscionability can refer to the terms of a contract itself and to the circumstances of negotiation in which the bargain was reached. There is no definition of an unconscionable bargain or term, but the terms of the bargain may be grossly and disproportionately favorable to one party in themselves and the acquiescence by the other party to the unfavorable terms may raise doubt as to whether they comprehended the inequitable terms at the time the bargain was struck. Terms may be unconscionable where their acceptance demonstrates an imbalance in the bargaining power of the parties involved as well. In Williams v. Walker-Thomas ­Furniture Co.,45 a furniture company extended credit to Williams to purchase furniture over roughly five years. By its terms, the contract for the furniture stated that the company, should Williams default on any payment, was allowed to repossess all the furniture that Williams had bought from the company as the contract did not allow repayment of items one-by-one but required that payments made went toward the totality of the money Williams owed. The terms of the contract increased Williams’s chances of defaulting on the items as a whole (by pooling his debt) and also made the consequences more severe (repossession of all items ever sold). Evidence was also adduced that Williams was an unsophisticated buyer, who might not have realized the terms to which he was agreeing. The court held that the terms of the contract along with the negotiation history between the parties made the terms of the bargain unconscionable. In such cases, the contract is rescinded, and the consequences are thereby avoided. Finally, a contract may be rescinded by one party where the breach is sufficiently grave to discharge the obligation of performance by the other party. Where a contract is rescinded, either party may make a claim for restitution, where they have conferred a benefit on the other party in relying on or partly performing the contract.

Undue Influence

Undue influence conceptually covers those situations in which an individual in a position of dominance over another improperly exploits this position in order to gain an advantage. As in English law, these situations may arise where individuals are in a relationship of dependency—that is to say, the person over whom undue influence is exerted is in a position of vulnerability vis-à-vis the other party to the contract such that they are susceptible to their persuasion by virtue of this relationship of dependency and out of fear for their own well-being. Such contracts, under the Restatement, are voidable by the party over whom undue influence is exerted;46 however, where the undue influence is exerted by a third-party (a stranger to the contract at issue), that transaction with another acting in good faith without knowledge of the undue influence will not be voidable,47 even if the undue influence was the reason for which the transaction was made.

Equitable Remedies in Civil Law

By contrast, the civil tradition allows parties to require specific performance as a remedy for breach; it is not seen as a residual remedy where damages would be inadequate. The French code requires that a non-­performing party be placed in default (mis en demure) and given a reasonable time to render performance. The party seeking enforcement of the obligation can proceed either to seek specific performance of the contractual duty or seek damages for the expense incurred for arranging alternative performance. The German code as well states that a party must be placed in default (see Chapter 7). The necessity of accepting delayed performance is removed where the party to which it is owed could no longer reasonably be expected to accept it.48

Specific Performance

In German contract law, a party is entitled to demand performance of a contractual obligation. Similarly, under French law, a party is entitled to the performance for which they have contracted. The entitlement to performance is not absolute and will not apply where performance is impossible or if there exists a manifest disproportion between the interest of the party in performance and the cost to the nonperforming party.49 Parties may also seek substitute performance and demand the cost from the nonperforming party.50

Resolution

Under French law, a party may seek resolution (rescission) of a contract where the nonperformance is “sufficiently grave.”51 Resolution can occur where the party notifies the nonperforming party, or it can obtain a declaration of a court to this effect. The latter route is the safer for the party seeking resolution, as the code warns that a party that option for the nonjudicial resolution does so at its “risks and perils.”52 This means that where a party unilaterally regards its contract as resolved a judge could later equally find that the contract was still valid and find that the party who notified the nonperforming party was, in fact, still bound by the contract and due to make performance under it. If resolution is properly effected, the party will be entitled to restitution and to be placed in the position it would have been in had the contract not occurred. Similarly, under German law, a party to a contract may repudiate the contract in the case of nonperformance or inadequate performance,53 or in anticipation of same.54 A notice period is usually required, unless the nature or terms of the contract is such that immediate repudiation is justified.55 The party will be entitled to normal headings of damages.

Specific Performance and “Efficient Breach”

As we have already seen, the civilian tradition prefers parties to perform their obligations under a contract rather than award damages; a ­non-performing can generally be compelled to perform. In the ­Anglo-American tradition, damages may be preferred remedy where they are “adequate” to protect the interest of the parties. Indeed, for certain situations, an economic analysis of contracts draws into question the wisdom of the solicitude that civilian courts display for specific performance and provides a point of divergence between the Anglo-American and civilian tradition. To illustrate this point: due to a fluctuation in market conditions, Party A considers that it would likely cost them more to perform their contract (e.g., fulfill a purchase) than they would pay in expectation damages to Party B. In such circumstances, its breach of its contractual duty is “efficient”56 in the sense that, if we take the ­expectation damages to be the value in the contract for Party B, Party A can place Party B in the position it would have been, had the contract been performed. Party A would also have remaining difference (anticipated cost of performance-actual damages) in funds that would have otherwise been locked into the undesirable contract and thus this yields a net gain for Party A and no detriment to Party B. To some extent, the French code, in its most recent formulation has provided for this in §1222, which states that a party may not seek specific performance where there is a “manifest disproportion” between the cost to the nonperforming party and the interest of the other party in receiving performance. Section 275(2) of the German code as well states that performance will not be due where the performance requires expense and effort that is “grossly disproportionate” to the interest of the other party in performance. Yet, these are however, more constrictive, requiring a considerable disproportion in the values before obtaining such a remedy in a case. However, the civilian preference for specific performance persists in most cases. The PECL as §9:102(2)(b) states that a party has a right to seek specific performance except where it would cause the nonperforming party “unreasonable effort or expense.” Accordingly, the right to demand performance remains generally available in the continental, civil traditions and is evident in the PECL as well.

Undue Influence

Historically, concept of undue influence did not have a direct equivalency in the civilian tradition. However, such relationships of dependency are now dealt with in the French Civil Code by article 1143, added under the latest revision, under the heading of duress (violence). This article similarly covers such relationships of dependency. It states that duress (violence) also encompasses those situations where “one party, taking advantage of the state of dependency in which his counterparty finds himself, obtains from him a commitment to which the other party would not have agreed in the absence of such a constraint, and thereby gains an undue advantage.”57 Here, the particular attention to a state of dependency is redolent of the Anglo-American formulations of undue influence. Equally, it results that where this subgenre of duress (violence) is present, the agreement may be considered void. By contrast, the German code makes no specific provision for such situations, however, §138(2) covers such situations where one party to a transaction seeks to exploit the “predicament, inexperience, lack of sound judgment or considerable weakness of will of another” for a “disproportionate” advantage. The German code also cognizes duress (Drohung)58 as a factor that vitiates consent. Thus, by virtue of recent revisions to the French code, the civilian tradition seems to have acquired provisions which stipulate that, where the dependency of a weaker party is exploited in a contractual setting, this will constitute a specific ground for nullity, as evidenced by the new art 1143 in the French Civil Code.