This is a twenty page report detailing the financial collapse of Carillion plc in 2018, and while this independent report explains much of the background leading up to their downfall, it also includes judicial insight into the rights of those left out of pocket when the hammer finally fell (simply click here to read it).
The essence of fiduciary duties run counter to the arms-length relationships navigated by contracting parties, and so on this occasion, the relinquishing of trustee duties by a regulated bank proved a reversal of fortune for an innocent employee.
While operating his construction company, the sole owner established a Profit Sharing 401(k) Plan for the benefit of his numerous employees. Almost six years later, the company filed for bankruptcy under Ch. 7 of the Bankruptcy Code, after which one of its employees requested payment for the money he had invested during the life of the plan.
With an estimated $14,000 owed, the employer agreed to settle the matter with a payment of $21,000 to cover court fees incurred while pursuing the debt on grounds of a fiduciary breach. Unfortunately, the employer paid only $18,500, after which he escaped jurisdiction and was never seen again. This left the employee with no option other than to claim the remaining $3,000 from the now appellant bank, who in accordance with the terms of the plan, was an acting trustee under the Employee Retirement Income Security Act of 1974 (ERISA).
At the point of litigation, it became clear that while serving as a trustee, the bank was under duty to inform where possible, all plan beneficiaries of its decision to rescind its appointment, as expressed under art. 15.6 of the plan, which allowed the bank to resign by written notice, after which any outstanding funds would be transferred to a successor trustee; however should one not be available, the administrator of the plan would automatically occupy that position.
Unbeknown to the employee, the bank had been struggling to communicate with the employer for a number of months, and after resigning as trustees with the knowledge that the trustee-administrator relationship had broken down, and that the company was now also in financial trouble, the bank had handed $53,000 of plan funds to the employer without notifying the beneficiaries of their decision. It was at this point that the employer converted the assets for his own personal use, sometime before part-settling with the employee and disappearing.
When heard in the district court, the judge awarded in favour of the claimant employee, whereupon the bank appealed to the court of appeals, who investigated further, the nature of the plan and associated case precedents. Here it was agreed that under § 106 of the Restatement (Second) of Trusts, a trustee was able to resign in accordance with a trust with express permission of the beneficiaries or consent of the court, yet at no point had the bank alerted the employee(s) of either the decision to resign, or the uncertain future of the employer.
It was also noted that under s. 11.4 of the plan, that the bank could be could liable:
“[T]o the extent it is judicially determined that the Trustee/Custodian has failed to exercise the care, skill, prudence and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character with like aims.”
While the bank argued that under such circumstances, legal remedy would be sustainable only as a class action involving all the beneficiaries, the court held that in Varity Corp. v. Howe, individual remedy was viable under ERISA § 502(a)(3), which provides that equitable relief is granted to individuals in order to “redress any act or practice which violates any provision of this title”. The court also noted that § 173 of the Restatement (Second) of Trusts provides that:
“[The Trustee] is under a duty to communicate to the beneficiary material facts affecting the interest of the beneficiary which he knows the beneficiary does not know and which the beneficiary needs to know for his protection in dealing with a third person.”
It was for these salient reasons that the appeal court supported the district court ruling and awarded in favour of the employee for the remaining balance of the plan monies, while adding that had the bank been in a position to hand over money of its own to the employer, things may have taken quite a different turn, especially when considering the vulnerability of the beneficiaries.
There are within the discipline of equity, a number of maxims reverted to when settling many common law matters. The aim of this article is to present them in as exhaustive a manner as possible, while including notable cases that explain their application.
Equity follows the Law (Aequitas sequitur legem)
The nature of equity is one that supports, rather than overrules the balance of justice, however it must also be stressed that where the moment calls, equity will go against those principles in pursuit of a fair outcome that common law fails to provide. A suitable case example for this isStack v Dowden, in which an unmarried couple shared a home for over twenty years while raising their children, until the time came for separation. Upon parting, the father argued that as the two parties enjoyed joint legal title, beneficial interest was automatically deemed equal, unless robustly proven otherwise.
This sentiment was echoed in the above maxim, and until this case had been presented, it remained common law that equal beneficial interest was assumed to mirror that of legal title; however, the evidence presented by the respondent was overwhelming to the point that for the first time, the percentages were divided heavily in favour of the mother, while this reexamination of beneficial assumption was instigated by Baroness Hale of Richmond, who urged:
“The issue as it has been framed before us is whether a conveyance into joint names indicates only that each party is intended to have some beneficial interest but says nothing about the nature and extent of that beneficial interest, or whether a conveyance into joint names establishes a prima facie case of joint and equal beneficial interests until the contrary is shown.”
Where the equities are equal, the law will prevail
Frequently tied to property dealings, this maxim relates to two parties seeking title to a property without awareness of each others rights. An example of this might be a beneficiary to an estate who is unaware that a third party has since acquired legal title by means of a purchase (as sometime happens when wills are not updated nor properly constructed). The courts will view both potential owners as equal, however where the legal owner can prove ownership free of fraud, the latter will succeed. This position was underlined in Pilcher v Rawlins, where it was clarified by James LJ that:
“[S]uch a purchaser’s plea of a purchase for valuable consideration without notice is an absolute, unqualified, unanswerable defence, and an unanswerable plea to the jurisdiction of this court. Such a purchaser, when he has once put in a plea, may be interrogated and tested to any extent as to the valuable consideration which he given in order to show bona fide or male fides of his purchase, and also the presence of the absence of notice; but when once he has gone through that ordeal, and has satisfied the terms of the plea of purchase for valuable consideration without notice, then…this Court has no jurisdiction whatever to do anything more then allow him to depart in possession of that legal estate.”
Equity looks to the substance rather than the form
This is a fairly descriptive maxim that serves to keep focus on legal proceedings in such a way that holds the principle of fairness above that of policy or written codes of conduct. This is not to say that where statute dictates a course of action, equity will seek to ignore that; in fact, under those terms, the black letter of legislation will always win the day.
Instead, equity looks at the form of the subject matter, rather than allowing the intention to dissolve in favour of caveats that work against common law, and obstruct a proper outcome. This was demonstrated through the words of Lord Romily Mr in Parkin v Thorold, who remarked that an agreement between a vendor and purchaser did not rest upon the limitations of time, and that when charges brought against the vendor for specific performance altered the essence of the contract, it was equity that referred the parties to the form of the arrangement:
“[T]ime was originally not of essence of the contract…although express notice will make time of the essence of the contract, where a reasonable time is specified…the notice of the 21st October did not specify a reasonable time for this purpose.”
Equity will not permit statute to be used as a cloak for fraud
While perhaps limited in scope, the effects of this maxim can be appreciated within property law matters, as it is a legal requirement under section 53(1)(b) of the Law of Property Act 1924 that any contracts for sale or occupancy must be written. And so in Bannister v Bannister, the owner of a property conveyed a party rent free occupancy of the home for life, after which they tried to evict them. It was then argued by the defendant that an oral contract existed which thus defeated the act of statute when the respondent went back on their promise.
Equity imputes an intention to fulfil an obligation
Relating to ambition and intention, the aim here is to hold to account the statements or actions by a party that are later required to be enforced, regardless of any reasonable changes in circumstance, and when the court finds that no such fulfilment has occurred, the obligation to do so will be levied through equity.
An example of this is Lechmere v Lady Lechmere, in which a Lord bound himself to purchase land for an agreed sum, that would then pass through death to his wife. Upon his passing, it was discovered that he had failed to uphold his requirement during the lifetime of their marriage, by purchasing other lands that now fell within the residue of his estate, and required a successor in title other than his son. Through the application of this maxim, the court allowed the transfer to his wife for the amount agreed, and thus his obligations were deemed satisfied, as was expressed within the judgment which read:
“[W]herever a thing is to be done either upon a condition, or within a time certain, yet if a recompence can be made which agrees in substance, though perhaps not in every formal circumstance, such a recompence shall be good, and shall go in satisfaction of the thing covenanted to be done.”
Equity regards as done that which ought to be done
There are times in law where the misdeeds of others wind up obscuring the natural order of events, and so it is that the equitable maxim above is crucial to redressing the imbalance, and putting matters where equity can reign. A fitting case example would beAttorney-General for Hong Kong v Reid, where a senior crown prosecutor received bribes to obstruct the course of justice, while employed in a manner that bestowed fiduciary duties.
When it was discovered that those illegal payments had been invested in a number of properties, it was agreed that those homes were held on trust by the appellant for the benefit of the Crown; and while the rules of equity prevent a debtor to the injured party being a trustee for the monies received, the Court of Appeal allowed that conflict to stand in order for the outcome to find form, and for natural remedy to occur. This decision was supported by Lord Templeman, who commented:
“It is unconscionable for a fiduciary to obtain and retain a benefit from a breach of duty. The provider of a bribe cannot recover it because he committed a criminal offence when he paid the bribe. The false fiduciary who received the bribe in breach of duty must pay and account for the bribe to the person to whom that duty was owed.”
Equity acts in personam
Because some matters involve effects belonging to individuals that may have since moved abroad, the principle that equity acts against the person provides domestic courts with an ability to extend their reach without interruption of foreign laws. This may come into play when a property owner or business person has entered into a contract that binds them within the United Kingdom, but whose absence may permit avoidance of liability for remedy. There are of course limitations to this maxim, and where the laws of the country occupied prevent such imposition, the party accused may yet evade its grasp. This was explained by Lord Cottenham in ex parte Pollard, when he outlined:
“[C]ontracts respecting lands in countries not within the jurisdiction of these courts…can only be enforced by proceedings in personam which courts of equity are constantly in the habit of doing; not thereby in any respect interfering with the lex loci res sitae.”
Equity will not suffer a wrong to be without a remedy (ubi jus ibi remediam)
Much like the founding principle of equity itself, there are times when common law can inadvertently create unjust reward for those who deserve no such fortune. And so it is that when defective legal rulings are left wanting, the maxim ‘no misdeed should go unpunished’ can be applied to restore equality, while in many respects mirroring the maxim ‘equity regards as done that which ought to be done’.
An example of this is Ashby v White, in which a member of the public community was denied the right to vote by local policemen, who wrongly acted on the damning advice of parish members, claiming he was unfit to cast opinion. When taken to court, the claimant was awarded damages, after which the ruling was later overturned in favour of the policemen.
This compelled the man to issue a writ of error against Parliament on grounds that such a verdict allowed any member of a local authority to choose who could vote, when such powers were conferred upon central government. When it was appreciated that a legal process had allowed this kind of miscarriage, the initial judgment was upheld and damages paid, while the court expressed that:
“[A]s all parliamentary causes are to be determined in parliament, it was conceived that this matter was properly determinable in the House of Commons only; and that the courts of Westminster-Hall not being authorized by any act of parliament, had no cognisance of it.”
He who seeks equity must do equity
‘Do unto others as you would have them do to you’, might be another phrase better known to some, and so again equity commands the same from those seeking remedy. It is after all, the bedrock of law that fairness and equability must at all times remain in view should the rule of law justify its own existence; so when one party brings action against another, it must act accordingly should it wish those accused to do the same. An excellent example of this is Chappell v Times Newspapers, where Megarry J explained:
“If the plaintiff asks for an injunction to restrain a breach of contract to which he is a party, and he is seeking to uphold that contract in all its parts, he is, in relation to that contract, ready to do equity. If on the other hand he seeks the injunction but in the same breath is constrained to say that he is ready and willing himself to commit grave breaches of the contract…then it seems to me that the plaintiff cannot very well contend that in relation to that contract he is ready to do equity.”
He who comes to equity must come with clean hands
Once again we look to integrity and depth of character when assessing claims of inequitable conduct, except those claiming must themselves prove their argument does not rest upon misdeeds of their own within the parameters of the matter. An example of this isHasham v Zenab or Barrett v Barrett, where two brothers worked together to avoid the loss of a property during business liquidation.
When the party losing their business asks the other to purchase the home (held by the assigned trustee) before refurbishing it and selling it for a substantial profit, the buyer later refuses to pass the sale proceeds back to his sibling. The brother retaliates by taking action against him, but unfortunately during the hearing it emerges that the former owner acted in collusion so as to avoid surrendering the property as payment to his creditors, therefore his request for equitable remedy was built upon deception and avoidance of duties owed. This lapse of moral fibre was explained by Richards J, who noted:
“He has in effect pleaded the unlawful purpose in paragraph 15(1)(a) of his particulars of claim : the purpose of purchasing the property in the name of John was “to avoid its being repossessed by the Trustee in Bankruptcy”. Without that purpose, the agreement or arrangement has no rational explanation. Thomas needs to allege and prove it in order to establish the agreement, but in doing so he relies on his own illegal purpose and thereby renders his interest unenforceable.”
Delay defeats equity
Fettered through the confines of the Limitation Act 1980 and the estoppel doctrine of laches, this maxim underlines that when seeking legal remedy, it is imperative that the claimant moves to argue with haste, as the passage of time will ultimately work against any reasons to the contrary. That aside, there are particular beneficiary rights exempt from delay, and those include breach of fiduciary duty, undue influence or recession of contract; while s.36 of the 1980 Act refuses to prevent claims on grounds of acquiescence, as this in itself can stand as evidence of that restraint. An excellent case for the examination of this maxim is Erlanger v New Sombrero Phosphate Co, in which Lord Jackson cited the comments in Lindsay Petroleum Co v Hurd:
“The doctrine of laches in courts of equity is not an arbitrary or a technical doctrine. Where it would be practically unjust to give a remedy, either because the party has, by his conduct done that which might fairly be regarded as equivalent to a waiver of it, or where, by his conduct and neglect he has, though perhaps not waiving that remedy, yet put the other party in a situation in which it would not be reasonable to place him if the remedy were afterwards to be asserted, in either of these cases lapse of time and delay are most material. But in every case if an argument against relief which otherwise would be just, is founded upon mere delay, that delay of course not amounting to a bar by any statute of limitations, the validity of that defence must be tried upon principles substantially equitable. Two circumstances always important in such cases are the length of the delay and the nature of the acts done during the interval, which might affect either party and cause a balance of justice or injustice in taking the one course or the other, so far as relates to the remedy.”
Equity will not allow a trust to fail for want of a trustee
As clearly explained within the title, this maxim states that in the event that a trust has been constructed in the absence of a trustee, or that through time those appointed have since passed, the courts will take the necessary steps to ensure the trust is honoured, and a suitable trustee will stand in receipt. This power is conferred to the courts under the Trustee Act 1925 and requires no reliance upon common law to succeed.
Equality is equity (aequalitus est quasi equitas)
Often applied to manage the distribution of assets between beneficiaries, this maxim will allow the court to distribute equal shares between any number of parties where no prior agreement has been found. While used primarily with trusts, this is also found in divorce proceedings, where evidence aside, the husband and wife cannot fully establish the exact proportions of the monies remaining after the fact. An example of this is Burrough v Philcox where Lord Chancellor Cottenham remarked:
“I think myself justified in giving effect to the intention, which appears to me to be sufficiently apparent upon the will, of giving the property to the nephews and nieces, and their children, subject to the selection and distribution of the survivor of the son and daughter; and that they all constitute the class to take all the property as to which no such selection and distribution has been made.”
Equity will not assist a volunteer
In its most simplest of forms, this maxim provides that equity will not, by virtue of their proximity, assist a party indirectly involved in a matter of grant, whether by marriage or by trust (as is most often applied). In the latter instance, a lack of consideration for the benefits of such a trust automatically renders the claimant void of support when seeking remedy, and further renders them incapable of instructing a trustee to the same end. A volunteer can however, sue for breach of duty or agreement where they are so associated, and can attain that those in trust are there for the benefit of the volunteer and hold only for their needs (where applicable).
Equity will not perfect an imperfect gift
The willingness to give freely of something must extend beyond words and take effect through action, or equity cannot enforce the gesture within the courts. This would apply to anything under common law, but is typically found in property and trust matters where a party alleged to have been conferred that of a physical form are left wanting, and so in search of remedy through the principle above. An excellent case example for this denial is Curtis v Pulbrook, in which a company director made efforts to pass on a number of shares to his daughter while in the process of liquidation, but who did so without formalising the transfer within the requirements required under company law. In concluding the error, it was remarked by Justice Briggs that:
“…without his assistance in making available the duly completed stock transfer forms, neither his wife nor his daughter could perfect the intended gifts without further assistance from Mr. Pulbrook…it follows that there was not an effective gift of Mr Pulbrook’s beneficial interest either in the 14 or in the 300 shares which he attempted to give respectively to his daughter and to his wife so that, in the result, there is nothing to prevent the charging order being made final in relation to all of them.”