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Module 1 · Equity and conscience

Equity and conscience. Equity is based upon the notion of unconscionability, which means that the court will intervene where an act or omission is considered to be against the conscience. This module covers what equity is, where its appeal to conscience came from, and the doctrines that carry conscience when a court sets a transaction aside or refuses to impose a fiduciary duty. The critical question is whether conscience constrains a decision or only labels its result.

Cases at a glance

What equity is

The nature of equity. Equity is based upon the notion of unconscionability: the court will intervene where an act or omission is considered to be against the conscience. Parkinson has noted roughly five categories of such matters, and the categories are not fixed or closed.

1. the exploitation of vulnerability or weakness
2. the abuse of positions of confidence
3. the insistence on rights in circumstances which are harsh or oppressive
4. the inequitable denial of obligations
5. the unjust retention of property

Inequality alone. French J in the Federal Court in Australian Competition and Consumer Commission v CG Berbatis Holdings Pty Ltd [No 2] (2000) 96 FCR 491 at 502 noted that circumstances of inequality do not of themselves necessarily call for the intervention of equity, and that it is the concept of unfair advantage being taken of serious inequality that is central to the notion of unconscionable conduct.

Chancery and the chancellor's foot. Equity refers to those principles that were initially created in the English High Court of Chancery in response to the rigid technical procedures of the common law. Petitions to the Crown were referred to the Chancellor, there was no binding precedent, and where the application of the common law would be harsh or unjust the Chancellor might according to his conscience provide relief in equity. In the Earl of Oxford's Case (1615) 1 Ch Rep 1; 21 ER 485 the plaintiff had prevented the defendant's witness from attending court yet obtained a favourable judgment at common law; the defendant petitioned the Chancellor, Lord Ellesmere awarded an injunction, and the matter was resolved when James I issued a decree stating that where a party had a good argument in equity they would not be left to languish at common law. Selden's remark that equity is according to the conscience of the chancellor, as uncertain as if the standard measure were a chancellor's foot, is a comment about the development of equity being ad hoc and highly discretionary. The judicature system, adopted first in South Australia in 1853 and last in New South Wales in 1970, provided one court to administer both common law and equitable principles, with equity prevailing where the two conflict. The prevailing view in Australia is that the Judicature Act fused procedure and not substantive law, and a decision that awards common law damages for a purely equitable wrong is called a fusion fallacy.

Application. Take a lender holding a valid mortgage who moves to enforce it against a borrower who is poorer, less educated and a worse negotiator. Those facts show inequality between the parties and nothing more. Equity asks whether the lender took unfair advantage of a serious inequality, so the analysis turns to what the lender knew and how it used the position, not to the gap between the parties.

The inequality error. The common error is to treat inequality between the parties as itself a ground for relief. It fails because inequality does not of itself call for equity's intervention; the answer must show unfair advantage taken of that inequality, which is French J's point in Berbatis.

Conscience as the organising concept

Conscience through doctrine. Equitable remedies are both flexible and discretionary, and attention is focused on the relationship between the parties. Two doctrines give conscience its content in this module: unconscionable conduct, which focuses on the action of the stronger party, and undue influence, which focuses on the nature and quality of consent.

Special disadvantage. Several factors may contribute to a special disadvantage, such as age, infirmity or the level of education, but more is needed than inequality of bargaining power. Mason J in Amadio explained that the adjective 'special' is used to emphasise that the disadvantage is not a mere difference in bargaining power but requires an inability for a person to make a judgment as to his or her own best interests. In Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447 the parents of Mr Amadio were elderly migrants who spoke very little English and executed a mortgage on their property so that their son could raise finance for his business, their son having told them that their liability was limited to $50,000 for the next six months and that his business was very successful. The bank manager did not check whether they had received independent advice when the documents were executed in front of him, and when the son's business went into liquidation in 1977 the bank sought to seize the property. The trial judge held for the bank, but on appeal the High Court set the mortgage aside: Mason, Wilson and Deane JJ held that the bank had actual knowledge of the couple's language difficulties and limited knowledge of financial affairs and was put on notice of their disadvantage.

Knowledge. The stronger party must have knowledge of the special disadvantage, and it may be actual knowledge, constructive knowledge (in that they ought to have known) or imputed knowledge (bound by an agent). In Kakavas v Crown Melbourne Ltd (2013) 87 ALJR 708 a 'high roller' gambler sought to recover $20 million he had lost at the casino, submitting that the casino had taken advantage of his gambling affliction by permitting him to continue to use the facility; the High Court held that Crown Casino lacked the requisite degree of knowledge and unconscionable conduct was not established.

The knowledge error. The common error is to find unconscionable conduct on proof of a disadvantage and a bad bargain without proving what the stronger party knew. It fails because knowledge is a separate element: in Kakavas v Crown Melbourne Ltd the gambler submitted that the casino had exploited his gambling affliction, yet the claim failed because Crown Casino lacked the requisite degree of knowledge.

Thorne v Kennedy. In Thorne v Kennedy [2017] HCA 49 the parties met online on a website for potential brides; Ms Thorne, an Eastern European woman aged 36 with no substantial assets, came to Australia to marry Mr Kennedy, a 67 year old property developer with assets worth between $18 million and $24 million. Around 19 September 2007, with the wedding set for 30 September, Mr Kennedy told her that if she did not sign the agreement the wedding would not go ahead; an independent solicitor advised her not to sign it, and she signed the pre-nuptial agreement on 26 September 2007, four days before her wedding, and a substantially identical post-nuptial agreement on 5 November 2007. The primary judge set out six matters which in combination led her to conclude that Ms Thorne had no choice or was powerless: (i) her lack of financial equality with Mr Kennedy; (ii) her lack of permanent status in Australia at the time; (iii) her reliance on Mr Kennedy for all things; (iv) her emotional connectedness to their relationship and the prospect of motherhood; (v) her emotional preparation for marriage; and (vi) the publicness of her upcoming marriage. The plurality (Kiefel CJ, Bell, Gageler, Keane and Edelman JJ) held that the primary judge's findings should not have been disturbed and that the agreements were voidable due to both undue influence and unconscionable conduct: on undue influence, Ms Thorne's choices about entering the agreements on Mr Kennedy's terms were subordinated to the will of Mr Kennedy, so the primary judge's conclusion, though labelled duress, was more aptly described as undue influence. On unconscionable conduct, the findings that she was powerless pointed inevitably to a special disadvantage, which was known to Mr Kennedy and had in part been created by him, and he took advantage of her vulnerability to obtain agreements which, on Ms Harrison's uncontested assessment, were entirely inappropriate and wholly inadequate. Ms Thorne also submitted that the relationship of fiancé and fiancée should be recognised as one to which the presumption of undue influence (a presumption that a transaction was the result of a lack of free will) attaches; the plurality rejected the submission, holding that common experience today of the wide variety of circumstances in which two people can become engaged negates any presumption that either substantially subordinates his or her free will to the other.

Application. Take a partner handed a financial agreement days before a wedding, told the wedding will not go ahead unless it is signed, and advised by an independent solicitor not to sign. The undue influence question is whether the pressure and the surrounding circumstances left the signing party unable to bring a free choice to the decision. The unconscionable conduct question is different: whether those circumstances amount to a special disadvantage, whether the other party knew of it, and whether the other party took advantage of it. Each doctrine is proved on its own elements, though the same facts may satisfy both.

The one-label error. The common error is to run undue influence and unconscionable conduct as one label, so that proof of pressure is treated as proof of both. It fails because the doctrines have distinct spheres of operation: undue influence asks whether the innocent party's will was overborne, unconscionable conduct asks whether the stronger party exploited a special disadvantage, and many circumstances that amount to a special disadvantage would not establish undue influence, as the plurality said in Thorne v Kennedy.

The critical thread

The Crown and Indigenous Australians. Fiduciary obligations arise from the position of the parties, and they require the fiduciary to avoid any conflict of interest. New emerging categories of fiduciary obligations are constantly being identified, and they include Indigenous Australians and the Australian Government. Toohey J in the High Court in Mabo v Queensland (No 2) (1992) 175 CLR 1 at 199-205 held that the Crown has fiduciary obligations to Indigenous Australians, but he was alone in holding that such obligations existed, and he noted that they did not preclude the Crown from legislating to extinguish native title rights. Brennan CJ in the High Court in Wik Peoples v Queensland (1996) 187 CLR 1 at 83-4 commented that the Crown's power to legislate with respect to Indigenous people does not of itself give rise to fiduciary obligations, and that where such a power exists it must only be used for their benefit, and Dawson J and McHugh J agreed. The idea of fiduciary obligations existing between Indigenous Australians and the Crown has received very little judicial attention.

Application. Applied to a claim that the Crown owes a fiduciary duty to an Aboriginal claimant, the argument cannot rest on the Crown's power over the claimant. The power to legislate does not of itself create the duty. The claim must identify a position of the parties that attracts the obligation, and it must meet the point that in Mabo v Queensland (No 2) Toohey J was alone in holding that such obligations existed.

The facts of Trevorrow. Bruce Trevorrow was born on 20 November 1956 in Adelaide to Aboriginal parents, Joseph Trevorrow and Thora Karpany, who lived at Meningie. On Christmas day 1957, aged 13 months, he was driven to the Adelaide Children's Hospital, probably at the request of his father, who thought he was suffering stomach pains, and on 6 January 1958 he was discharged into the care of Mr and Mrs Davies, who wanted to adopt or foster a child. Mrs Angas, a welfare officer of the Aborigines Department, arranged the placement on behalf of the Aborigines Protection Board, a statutory body corporate constituted by the Aborigines Act 1934 (SA). The trial judge found that neither parent knew about or consented to the placement, and for a number of years they were not told where he was; his mother's letter of July 1958 asking when she could have him home drew the reply that the doctor did not consider him fit to go home, which the trial judge found misleading. He began to live with his natural mother in 1967. The trial judge found that the APB acted without power in placing him, held him entitled to damages for misfeasance in public office, wrongful imprisonment, breach of a fiduciary duty (not separately assessed) and breach of a duty of care, and awarded substantial damages; the State appealed the findings on the causes of action but not causation or damages.

The Trevorrow limit. As guardian the APB might in certain circumstances owe a fiduciary duty to Bruce Trevorrow, but only if the particular situation attracted one of the recognised fiduciary duties, and if the imposition of the duty is not inconsistent with the provisions of the 1934 Act. It does not follow that all circumstances arising from the relationship of guardian are to be resolved in terms of a fiduciary duty. The trial judge imposed wide ranging and generalised fiduciary duties, which cannot be supported, and the breach of any recognised fiduciary duty does not arise in the situation. If the APB acted wrongly, its wrong was in acting without statutory power, and not in failing to observe a fiduciary relationship. The Editors' summary of the fiduciary finding is at (2010) 14(1) Australian Indigenous Law Review 100.

Application. Applied to an essay on conscience, the limit is this: guardianship attracts fiduciary analysis, but the analysis asks whether the particular situation matches a recognised fiduciary duty and whether the statute permits it, not whether the guardian behaved badly. Conduct that was wrong because it lacked statutory power is answered by the statute and not by a fiduciary relationship, and that is the limit South Australia v Lampard-Trevorrow (2010) 106 SASR 331 marks.

The maxims

Maxims are not rules. The maxims of equity are not rules. Mason CJ and McHugh J in the High Court in Corin v Patton (1990) 169 CLR 540 described them as 'a summary statement of a broad theme which underlies equitable concepts and principles' whose 'precise scope is necessarily ill-defined and somewhat uncertain'. Maxims are an indication as to how equity has developed and are useful in applying equitable principles; they can overlap with one another, they are discretionary and the use of individual maxims can change over time.

1. Whoever seeks equity must practice it: a plaintiff cannot seek equitable relief if they have not already fulfilled their own obligations in both law and equity.
2. Whoever comes to equity must have clean hands: any improper conduct by the plaintiff that is connected to the particular circumstances will deny equitable relief.
3. Equity looks to intent, rather than form: equity will focus on substantive matters rather than the technicalities of procedural requirements.
4. Equity considers that which ought to be done, as done: equity may act on the conscience of the party to give effect to those obligations that will later arise.

Application. A maxim frames a theme and doctrine gives it content. Open the point with the maxim, then move to the case that decides it, so that clean hands is followed by the conduct that would deny relief and intent over form is followed by the transaction the maxim describes.

The maxim-as-rule error. The common error is to deploy a maxim as if it were a rule that decides the case. It fails because the maxims are not rules and their precise scope is necessarily ill-defined and somewhat uncertain, as Mason CJ and McHugh J said in Corin v Patton (1990) 169 CLR 540.

Two readings of conscience

The essay turns on a contest between two accounts of what conscience is. Set them side by side and then commit to a view.

The constraint reading says conscience is disciplined. In Amadio and in Thorne v Kennedy relief for unconscionable conduct ran on defined elements: a special disadvantage, the other party's awareness of it, and unconscionable benefit from it. The critique reading says the discipline is only as fair as the people who apply it and only as wide as the categories the courts admit. The idea of fiduciary obligations existing between Indigenous Australians and the Crown has received very little judicial attention, and in South Australia v Lampard-Trevorrow the Full Court held that the wide ranging and generalised fiduciary duties imposed by the trial judge could not be supported. Dianne Otto's article 'A Barren Future? Equity's Conscience and Women's Inequality' (1992) 18 Melbourne University Law Review 808 is the prescribed critique on gender: her argument is that equity's conscience has been set by those who hold power and has historically underserved women, and it enters an essay as her argument, attributed to her, not as a rule. This material is argument for the essay; it is never converted into hypothetical drill facts. A strong essay uses the doctrinal cases to test the critique and the critique to test the doctrine, then commits to whether conscience constrains a decision or labels its result.

How the examiners test this

Where the essay asks whether equity's flexibility and good conscience are a real constraint on decision or a label for its result, a Pass answer defines unconscionability and stops. A top answer sets Amadio and Thorne v Kennedy against the Trevorrow limit and the Crown and Indigenous Australians fiduciary question, brings in Otto's critique as attributed argument, and commits to a position on whether conscience is a real constraint or a label for conclusions reached on other grounds.

Take it to the practice bank

The doctrines in this module run through the problems in the Equity and Trusts practice bank rather than through a bank of their own. Every problem there carries a realistic Pass answer, an H1 model answer, and an examiner's comment explaining the decisive fact and where the marks are lost.