The Content and Rationale of Equitable Fraud - Research Paper Example

Discuss the content and rationale of this species of equitable fraud, its relationship to other forms of equitable fraud and its potential application today. Abstract Equitable fraud is invoked in equity jurisdictions which common law does not cover. While common law covers actual fraud which should be proved with evidence, equitable fraud fraught with unconscionability and unconscientious acts can be inferred from the surrounding circumstances and the relationship between parties. Thus, by virtue of their dominant position the wrong doers indulge in seemingly valid transactions which can only be prevented by the incisive equity jurisdiction to deal with various instances of equitable frauds classifiable into the following overlapping categories. They are exploiting the vulnerable or weaker, abusing the relationship of trust and confidence, insisting on rights in certain circumstances making it harsh or oppressive, denying obligations, and retaining property unjustly. The sub-categories of equitable fraud classified by Lord Hardwicke in the Chancery decision of Chesterfield v Janssen (1750)1 are the following. Actual fraud arsing from the facts and circumstances of the case; fraud which is apparent from the intrinsic nature and subject of the bargain; fraud which may be presumed from the circumstances and condition of contractual arrangement; fraud which is inferred from the nature and circumstances of a transaction and which involves deceit towards third parties who are not actually a party to the contractual arrangement.2 Lord Haldane exemplified the ambit of equitable fraud jurisdiction while deciding in Noctun v Lord Ashburton(1914) in which the appellant solicitor was charged with negligence by his client Lord Ashburton. The solicitor had advised his client to have a second mortgage on his land to facilitate building development on it. Later Lord Ashburton found his security interest reduced on the land because of the second mortgage and wanted to recover loss from the solicitor for negligence in advice. Though the court of first instance rejected Lord Ashburton’s claim, appeal court held that actual fraud existed. On the matter coming before the House of Lords, the appeal court’s decision was reversed but held that though actual fraud did not exist, there was equitable fraud since as a fiduciary the solicitor’s advise for second mortgage resulted in conflict of interest which amounted to breach of equitable fraud and hence he was liable to indemnify his client for loss arising from defective advice. In this judgement, the House of Lords re-examined the equitable fraud jurisdiction. Lord Haldane clarified that equitable fraud did not involve moral fraud but was a breach of obligation that could be enforced by a court as it regarded itself as a court of conscience. Equitable fraud therefore is more far reaching than common law fraud and not with a lesser impact 3 what Meagher, Gummow and Lehane called ‘unblushing and red-blooded deceit’ which equitable fraud could be used to detect.4 Equitable fraud steps in where common law fraud fails as deficient or non-existent. The equity jurisdiction is invoked so as to prevent fraudulent actions against notion of good conscience. Specific equitable doctrines are fiduciary obligations, constructive trusts, the doctrine of undue influence, proprietary estoppel, misrepresentation in certain circumstances. The so called ‘rediscovery of conscience’ is actually revival of traditional equitable fraud which modern courts call as unconscionable or unconscientious actions 5 Mason and Deane JJ in Legione v Hately (1983) laid down the principle of equity as even though a party has a legal right, he/she will not be permitted to exercise it in such a way that would amount to being an unconscionable act. Unconscionability can be found in certain scenarios traditionally covered by fraud. They are exploitation of vulnerability or weakness, abuse of position of trust and confidence, insistence of rights in circumstances which make it harsh or oppressive and inequitable deniable legal obligations.6 This is however not a final meaning of unconscionability as explained by Mahoney JA in Antonovic v Volker (1986) as unconscionability is “better described than defined”.7 Looking back at the decision in Earl of Chesterfield v Janssen ,8 equitable fraud involved unconscionability on part of a money lender (Sir Abraham Janssen) who sought to recover from the deceased borrower John Spencer’s executors (Earl of Chesterfield & others)the money lent plus 100% penalty which the lower court had allowed. The money lender had taken a bond from the borrower John Spencer providing for 100 percent penalty apparently with an eye the latter’s grand mother’s property he was to inherit after her death. On appeal by the late borrower’s executors for injunction on the execution on the judgement, the House of Lords characterised the money lender’s conduct as that equitable fraud which in effect gave him “a surreptitious advantage of the weakness or necessity of another: which knowingly to do so is equally against the consequence as to take advantage of his ignorance: a person is equally unable to judge for himself in one as the other”9 In the long drawn litigation in The Bell Group Ltd (in Liquidation) v Westpac Banking Corporation and Ors [2008] 10, liquidators sought to hold bankers to the company liable for equitable fraud as if they knowingly perfected their security taking a trust property while the company was in insipient insolvency. They sought to draw a parallel to Earl of Chesterfield v Janssen in that there also it involved third party’s property. Out of 15 questions raised by court in The Bell Group case, Qn 7, 8, 9 related to the Banks’ liability. The Qn no 9 directly related to examine whether banks were liable under any of the four heads of equitable fraud. The court found that they were not, under the four heads of equitable fraud. Court also found that banks were not liable as assisting the directors in their breach of fiduciary duties under the second limb of Barnes v Addy 11 as per Qn 8 and also not liable under the 1st limb of Barnes v Addy amounting to receiving a trust property that would be in the breach of directors’ fiduciary duties as per Qn 7. This is in spite of finding that directors did commit breach of their fiduciary duties owed to their company though there was “no breach of duty to avoid conflict of interest”12 on their part. Incidentally, Barnes case involved question of liability of solicitors in acting in furtherance of their clients’ interests in fraudulent breach of trust. The court found that solicitors did not assist their clients.13 The above cases of have all involved equitable fraud affecting the interest of third parties to contracts. The other forms of equitable fraud are actual fraud, fraud which is apparent from the intrinsic nature and subject of the bargain and fraud which may be presumed from the circumstances and conditions of contractual arrangement. The frauds that cannot be tried in common law attract equitable intervention. Invoking the conscience of court, equitable fraud is broader in its scope than in common law. A defendant could be held liable in spite of there being no intention to cheat or recklessness in making a statement. In common law on the other hand, the intention of deceit or recklessness must be proved as held in Derry v Peck (1889).14 In this case, the defendants who were directors of tramways company were sued for making a false statement in the prospectus for issue of shares that steam power would be used though later, permission to use steam power was refused by the authorities but plaintiffs had purchased the shares based on the statement in the prospectus. House of Lords held that as there was no evidence to show that defendants had believed their statement to be untrue, they could not be held liable for deceit in tort.15 Thus equitable fraud can overlap with common law since equity will also find something fraudulent as in common law. However, equitable fraud will come to one’s rescue even if there is no law or available law is not adequate to try a seemingly fraudulent action. The already mentioned other species of equitable frauds would manifest in fiduciary obligations, constructive trusts, undue influence, proprietary estoppel and misrepresentation. Apart from these specific doctrines, equitable frauds can manifest in the following situations. Where plaintiff’s losses have not crystallized at the time suit is filed or losses may be hard to qualify, the equity court can specify terms to both parties to an action for deceit as held in Demetrios v Gikas Dry Cleaning Industries (1991). 16 Further, a suit is possible in equity to set aside a judgement obtained fraudulently as held in Wentworth v Rogers (No5) (1986) 17though the judgement need not relate to an equitable matter. Thirdly, a statute will not be allowed to cloak a fraud. For example a requirement of something to be in writing will not be allowed to defeat the other party’s proprietary interest expectations as held in Last v Rosenfield (1972) 18 In other words the statute of fraud cannot be used to shield a fraud. Equitable intervention is possible in cases of misrepresentation of an existing fact or law on the part of the plaintiff, by permitting refusal of specific performance. Similarly a contract can be rescinded if defendant has made a misrepresentation. A misrepresentation by a fiduciary to his beneficiary in purchasing a property from the latter, can lead to rescission of the contract if beneficiary suffers loss as a result and also equitable compensation. A misrepresentation can also create an estoppel as per principles enunciated in Waltons Stores (Interstate) Ltd v Maher (1988)19 In this, Waltons proposed to take Maher’s land on lease and also urged Maher to demolish the existing building and construct a new one. Waltons’ attorneys informed Maher that all his proposed amendments to the agreement were agreed to by Waltons. Mahers while proceeding with the construction of the building after demolition, received a letter from Waltons expressing they were no longer interested in entering into the lease agreement. On suit filed by Maher for specific performance or damages in the alternative from Waltons, it was held that Waltons was estopped from avoiding his implied promise. Although the right not to enter into contract was not unconscionable, the urgency with which he pursued with Mahers and the impression he had made that exchange of contracts documents was a mere formality as he already conveyed through his lawyers his acceptance though verbally, made him committed to Mahers. An innocent misrepresentation made without any intention or made with reckless indifference can be part of equitable fraud and relief is available only in equity. In Redgrave v Hurd (1881)20, plaintiff who made an innocent representation to the defendant that his legal practice fetched him £ 300 a year in exchange of which, defendant agreed to purchase plaintiff’s house. Later on, when the papers showed that practice income was only £ 200, defendant refused to buy the house. Plaintiff’s suit for specific performance was not allowed for the reason defendant counterclaimed to have rescinded the contract even though there was no fraud alleged on the part of the plaintiff. This is an instance for rescission of contract in equity for innocent misrepresentation. This was quoted in Marks V GIO Australia Holdings Ltd (1998).21 Equitable remedies in misrepresentation have since been reduced by the passing of legislation Trade Practices Act, section 52 of which prohibits misleading an deceptive statement or conduct by corporations in their business transactions. Section 87 permits rescissions of contracts for issues uncovered by equity. Undue influence has been described in Union Bank of Australia v Whitelaw (1906)22 as an improper exercise of dominant position by oneself over another for benefit of the dominant person or some one else. It is called impaired consent or wicked exploitation. In the above case, it was held by the court that the Bank had no relationship of any influence much less undue influence with the defendants so that it could not be said that guarantees were obtained using undue influence. 23 It is important that undue influence must be viewed within the context quality of consent rather than unconscionable conduct of the stronger party as held in Commercial Bank of Australia v Amadio (1983)24 Doctrine of undue influence in equity was developed as remedy at common law was inadequate. Until 18th it was limited to personal duress. It has been expanded to cover economic duress also for remedy under equity and statutory remedies. Recently, the doctrine of undue influence has been shown to occur in different circumstances as laid down in Barclays Bank v O’Brien (1994).25 Actual undue influence arises by acquiring benefit using actual pressure using violence and threats of violence and it can be set aside both in common law and in equity. Thus in Farriers’ Co-operative Executor and Trustees Ltd (1989), husband forced his wife to transfer her share of property to him through use of force i.e violence and threats of violence. He later murdered her. The transfer was set aside under actual undue influence. Second is “presumed undue influence”. Equity presumes by nature of relationship. Where there is trust and confidence between parties, it could be presumed that wrongdoer abused the relationship. It can be presumed between parent and child, guardian and ward, religious adviser and disciple, solicitor and client and doctor and patient. This is not exhaustive. However relationship between husband and wife, trustee and beneficiary are not presumed to have undue influence although in the case of husband and wife, it can depend upon nature of relationship with proven influence.26 However, settled law in Australia could be found in Yerkey v Jones (1939).27 In this case Dixon J gave ‘The Yerkey Principle’ which states that if a married woman’s consent is obtained by her husband as a surety for his debts which his creditor accepts without directly dealing with her, she is entitled to have the surety set aside for reasons of undue influence. In the above discussion of various instances of equitable fraud, one common thread connecting the different categories enunciated in Earl of Chesterfield v Janssen, is unconscionability on the part of the wrongdoer. In this case itself, the money lender unconscionably obtained bond from the borrower Spencer since diseased providing for 100 percent penalty with an eye on his grand mother’s property he was likely to inherit. In Westpac case, the liquidators tried to implicate bankers as if they knowingly perfected their security when the borrowing group companies were in the process of becoming insolvent. However court found there was no evidence to show that they have any knowledge of their insipient insolvency. Had they known, it would have been an unconscionable conduct of taking a trust property as their collateral securities to secure the debts owed to them. Both the above involved third parties. Apart from third party involvement, there are instances of equitable frauds seen above having a commonality of unconscionable conduct on the part of wrong doers. Equity jurisdiction is necessary in modern times since most often common law fraud is found to be inadequate. The equitable fraud is growing in its potential of being applied under variety of circumstances in the wake of fast paced life and growing informal means of communications for carrying out business as well as personal monetary transactions especially since common law can not be made exhaustive to cover all possible types of equitable frauds. As deliberated by Justice E.W. Thomas 28 in his lecture on conscience of law, equity’s intention is to protect the weaker and most vulnerable people by the so called unconscionable conduct of the stronger persons. Bibliography Books Meagher R P, Gummow W M C, Lehane J R F , (1992) Equity, Doctrines and Remedies, Butterworths Giles Peter (1988) Concise contract law, Federation Press, p 187 Hepburn J.Samantha (2001) Principles of Equity and Trusts, 2nd ed, Routledge. Ong K.S. Denis, Trust Laws in Australia, 3rd Edn, Federation Press Parkinson (2001) The Notion of Unconscionability in P Clarke & P Parkinson (eds), Laws of Australia, Lawbook Co: Sydney (1993).3. Cases Barclays Bank v O’Brien (1994) 1 AC 180 Barnes v Addy (1874) LR 9 Ch App 244 Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447 Demetrios v Gikas Dry Cleaning Industries Pty Ltd (1991) 22 NSWLR 561, 576 Derry v. Peek. (1889) 14 App Cas 337, [1886-90] All ER Rep 1 Earl of Chesterfield v Janssen (1750) 2 Ves Sen 125 [28 ER 82] Last v. Rosenfeld [1972] 2 NSWLR 923, 7.4 Marks & Ors v GIO Australia Holdings Limited & Ors (1998) 196 CLR 494 Redgrave v Hurd (1881). (1881-82) LR 20 ChD 1. The Bell Group Ltd (in Liquidation) v Westpac Banking Corporation and Ors [2008] WASC (November 2008) Union Bank of Australia Limited v Whitelaw [1906] VLR 711, 720 Waltons Stores (Interstate) Pty. Ltd. v. Maher (1988), 62 A.L.J.R. 110 (H.C.) Wentworth v Rogers (no5) (1986) 6 NSWLR 534 Yerkey v Jones (1939) 63 CLR. 649 Others A Guide to the reasons for decision, The Bell Group Ltd (IN LIQ)-v- Westpac Banking Corporation [No 9] [2008] WASC 239, CIV 1464 0f 2000, Retrieved April 1 2009 P 18 Derry v Peek, Summary, retrieved April 1, 2009 from < http://ourworld.compuserve.com/homepages/pntodd/cases/cases_d/derry_p.htm> The Harkness Henry Lecture, The conscience of the law retrieved April 1, 2009 from Read More