Equity’s Not So Clean Hands

Introduction

Historically equity does not punish, and further more it is not a punitive jurisdiction. [1] Punitive damages are ones which punish and not compensate. Heydon JA accentuates the point perfectly that “in short, equity does not bear the same relationship to the instinct for revenge as the institution of marriage does the sexual appetite.” [2] Throughout this essay it will be shown that equity and its’ measures, are not merely prophylactic; the effect of remedies exhibit facets which inadvertently punish the defendants who are dishonest and attempts to deter others from following suit. In doing so this essay will focus on the application and effect of the following three remedies;

Account of profits;

Equitable compensation / damages;

And to show equity’s non punitive side, specific performance.

Equitable remedies and punitive damages

Equitable remedies are available exclusively for a breach of equitable and some common law principles. [3] Somers J in the New Zealand Court of Appeal case of Aquaculture Corporation v New Zealand Green Mussel Co Ltd [1990] 3 NZLR 299 at 302 affirmed that the underlying principle of equitable remedies is that ‘equity and penalty are strangers’, thus they are not punitive in nature nor intent. This statement has been cited with approval, in obiter, in Bailey v Namol Pty Ltd [1994] FCA 1401

The rationale for punitive or exemplary damages is to ‘teach the defendant that “tort does not pay” by demonstrating what consequences the law inflicts’, [4] in addition, as the High Court affirmed in Lamb v Cotogno (1987) 164 CLR 1 that the role of punitive damages is to punish and deter the defendant and to vindicate the plaintiff. What is important to note is that punitive remedies do not seek to compensate. This would prima facie be directly inconsistant with the rationale of equitable remedies, that is, to compensate the plaintiff to the extent of that breach. The orthodox position in Australia [5] is that the Courts of Equity cannot, and will not, allow exemplary damages, this is envisaged by the comments of Sir James LJ in Vyse v Foster (1872) LR 8 Ch App 309 that;

“[t]his Court is not a Court of penal jurisdiction. It compels restitution of property unconscientiously withheld; it gives full compensation for any loss or damage through failure of some equitable duty; but it has no power of punishing any one.”

In addition, Spigelman CJ at 306 in Harris v Digital Pulse Pty Ltd (2003) 56 NSWLR 298 states that “equitable remedies, including equitable compensation have elements that may be seen to be more punitive or deterrent than common law remedies available in similar factual situations.” But, Morgan [6] states “those equitable doctrines which could be classified as involving an element of punishment are in fact properly justified in other ways.” [7]

Equitable remedies function on the basis of restitutio in integrum. But Mason J puts forth an extremely persuasive argument about some of the application and effects of equitable remedies, he states:

“Equity reveals itself readier to select a more stringent remedy if the fiduciary’s default is deserving of punishment, for example because it was deliberate and/or motivated by greed. To invoke the notion of estoppel against such a miscreant, or to withhold an “exceptional” allowance in respect of skill, expertise or expenses may mask the punitive choice, but cannot disguise it completely. When it strips a miscreant fiduciary of profits, a fortiori when it chooses a harsher alternative remedy, equity readily trumpets its punitive/deterrent intent.” [8]

Account of Profits

Account of profits is one of equity’s exclusive and inherent remedies. An account of profits is essentially restitutio in integrum, by allowing the Court to disgorge all profits made by the defendant. Windeyer J in Colbeam Palmer Ltd v Stock Affiliates Pty Ltd; clarifies the position that“[t]he infringer is required to give up all ill gotten gains to the part whose rights he has infringed”. The High Court in Dart Industries Inc v Decor Corp Pty Ltd (1993) 179 CLR 101 held that ‘the purpose of an account of profits is not to punish the defendant but to prevent its unjust enrichment’.

Punitive damages are applied in extreme circumstance to punish and deter the defendant; there is also an element of vindication for the plaintiff. Thus breach of an equitable principle could then be deduced to being of strict liability. In other words, where a defendant, in breach of his fiduciary duty, makes a profit, he must account for the profit. If equity and penalty are strangers, then a part of the penalty being deterrence, inadvertently the rationale of the remedy is deter fiduciaries from breaching their duties, but Heydon in Harris indicates that the defendant does not account for more than what he has received. [9] Furthermore, where the defendant has acted without dishonesty in the making of profit, the defendant may deduct equitable allowances for his “work and skill”. [10]

Heydon purports that a trustee or fiduciary for that matter is entitled to allowance for their work or skill in applying the misappropriated funds to make that profit. It was also put forward that there is a punitive intent upon the Court where they would allow a bona fide fiduciary to claim a majority of these allowance, and thus the courts are quite liberal in that aspect. But where the defendant is mala fide the courts are less inclined to account the amount liberally. [11] This is a clear method in which the courts are attempted to inadvertantly punish a dishonesty breach of equitable principle. But as stated earlier, where the remedy giving purports to be punishing the defendant, there is usually another valid reason which makes it appear not to be, thus it could be noted that the courts do not calculate it as liberally to make sure the defendant does not receive an amount which they are not entitled to, [12] Morgan then states:

“It is a manifestation of the rule that someone ‘who seeks equity must do equity’. However, equity cannot encourage wrongdoing and so will award a smaller sum, or indeed no sum, to a trustee who is not innocent.” [13]

Furthermore, Meagher, Gummow and Lehane [14] in quoting Bailey v Namol in which it was held; “it is true that in some circumstances the degree of dishonesty on the part of the erring fiduciary will be of importance in assessing a pecuniary remedy… an allowance for … work and skill may be made in favour of a fiduciary … the degree of liberality will be reduced to reflect any element of dishonesty”

The point arises that if a dishonest fiduciary misappropriates fund, into an area of his expertise, where significant profit was made, but also donated a significant amount of time to the venture, there is the possibility that this time which he had given will not be compensated by the court due to his dishonest intention. This is an example of equity as it “trumpets its punitive/deterrent intent.” [15]

This applies similarly to equitable compensation.

Equitable Compensation.

Equitable compensation – as stated by Street J in Re Dawson (1966) 84 WN NSW 399 at 404;

“[C]onsiderations of causation, foreseeability and remoteness do not readily enter into the matter… the principles involved in this approach do not appear to involve any inquiry as to whether the loss was caused by or flowed from the breach. Rather the inquiry in each instance would appear to be whether the loss would have happened if there had been no breach”.

Street J also at 404 states that where there is a trustee’s breach and the trust property increases in value over the period of breach, he must compensate for that increase in value, the value to be paid is based on the “date of restoration, not the date of deprivation”.

In other words, essentially equitable compensation does not come under the common law elements for damages like causation, remoteness and foreseeability, nor does the principle of novus actus internenus. Thus a breach of a equitable principle will give rise to a strict liability on the part of the defendant to reimburse the plaintiff with compensation. If this does not raise questions of a punitive intent, then pursuant to s 68 of the Supreme Court Act (NSW) 1970, the Court has the discretion to apply damages in addition to an injunction/specific performance or they can give damages instead of the aforementioned.

Specific Performance

Specific performance is a remedy which follows the law, insofar as it recognises legal rights and obligations. This remedies prima facie effect is that it compels parties to do that which they have already contracted to do. As explained by Dixon J at 297 in J C Williamson Ltd v Lukey & Mulholland (1931) 45 CLR 282:

“Specific performance in the proper sense is a remedy to compel the execution in specie of a contract which requires some definite thing to be done before the transaction is complete, and the parties’ rights are settled and defined in the manner intended. Moreover, the remedy is not available unless complete relief can be given, and the contract carried into full and final execution, so that the parties are put in the relation contemplated by their agreement.”

It is a remedy provided for by the courts of equity where there is no adequate common law remedy, [16] and furthermore “[e]quity will grant specific performance when damages are inadequate to meet the justice of the case”. [17] In other words, if the contract is for the sale of a rare property which cannot be readily acquired, damages will not be adequate, rather the courts will compel the defendant to execute the contract and transfer the rare property to the other party, or where there is a sale of land, the courts will usually allow for specific performance. [18]

This is a clear indication of equity’s non punitive intent, as equity regards done that which ought to have been done

Interest Payable

In addition to this, the Courts of Equity allow for interest to be included in the final amount awarded to the plaintiff. The interest is based on two rates, the Supreme Court rate, being at 3%, and the commercial rate, being at 5%. Interest on the amount begins from the starting time of the litigation. It has been argued by the learned authorities Meagher, Gummow and Lehane that ‘[I]n cases involving a trustee’s misappropriation of trust funds for his own benefit, higher rates (up to 5%) [are] allowed… the higher rate is not awarded in poenam, by way of penalty”. [19] If it is not awarded as a penalty for dishonest conduct, what other explanation could there be?

Furthermore, clear that in doing so the court has inadvertently punished the defendant for his ill discipline by applying the higher rate. Heydon JA also found that the rule that a higher rate of interest will be charged on a dishonest fiduciary is not intended to “punish but rather to ensure that the defendant retains no profit from their wrongdoing and to estop the defendant from denying receiving interest at a higher rate than they ought to have received.” Furthermore W Ashburner [20] indicates that a higher interest rate will be allowed in cases of gross misapplication of trust funds, and takes a similar stance to Heydon insofar as it not being labelled a penalty.

In other words where a fiduciary has acted bona fide in breaching their duty the court will apply the Supreme Court rate being at 3%. But on the flip side, where the fiduciary is mala fide, the court would not be so liberal and arguably may apply the commercial interest rate on the defendant for his dishonest intent. I respectfully agree with David Hughes [21] in rejecting Heydon’s Argument, he states:

“the amounts awarded are discrete – good fiduciaries pay 3 per cent; bad fiduciaries pay more. In substance, if not in form, this constitutes an additional remedy that a maltreated beneficiary can seek… Such an outcome is inconsistent with balancing only the equity’s of the two parties – the scales are tipped by retribution and deterrence.” [22]

This would indicate that the court, with the use and application of the interest rate, is inadvertently punishing in odium spoliatoris. It would not be wrong in assuming that the courts are doing so to deter fiduciaries. This could also necessarily denote that the defendant will do more than restore the party to its earlier position if the breach had not occurred, but rather may be paying more due to this higher rate of interest, in addition to the courts not being liberal in deducting the amounts for work and skill.

Exemplary damages and its inability to act in personam

Equity acts in personam, thus question is, can this form of damages operate in personam, as exemplary damages are generally a right to the public at large, and no a singular person.

“It is not possible to bring private law and exemplary damages together into a single legal structure and pretend that that structure makes sense. Exemplary damages in private law are on ‘foreign soil’. [23]

Expanding on this point, a breach of an equitable principle creates an action for the plaintiff against the defendant in personam and I respectfully agree with Dr Allan Beever’s following passage:

“[W]hile, as a matter of practice, exemplary damages are awarded when the defendant has breached a duty to the [plaintiff], it is not correct to regard the duty to pay exemplary damages as a duty owed to that [plaintiff]. Instead, the duty is owed to society at large. Perhaps it is owed when defendants seriously breach duties owed to [plaintiffs], but it is not owed for those duties. Liability for exemplary damages, then, is not a ‘term of relation’ between the parties; it results from ‘a wrong to the public at large’. Exemplary damages do not operate in personam.” [24]

Thus it is highly arguable that exemplary damages cannot act in personam and thus cannot and should not be given in a Court of Equity.

Conclusion