Learning Outcomes
This article explains the nature of equitable remedies, focusing on injunctions, specific performance, and equitable compensation. It also outlines the process of equitable tracing. For the SQE1 assessments, you will need to understand the discretionary nature of these remedies, the circumstances in which they are granted, and the key principles governing tracing. Your understanding will enable you to identify appropriate remedies or tracing actions in factual scenarios presented in SQE1-style single best answer MCQs.
SQE1 Syllabus
For SQE1, you are required to understand the principles governing key equitable remedies and the process of tracing. It is likely that you will need to differentiate these from common law remedies and apply the rules to specific situations to determine the likely outcome or appropriate legal response.
As you work through this article, remember to pay particular attention in your revision to:
- the discretionary nature of equitable remedies and the factors courts consider
- the requirements and application of injunctions (prohibitory, mandatory, interim)
- the conditions under which specific performance may be ordered, particularly regarding contracts for unique subject matter like land
- the principles of equitable compensation, especially its differences from common law damages (causation, foreseeability)
- the concept of equitable tracing, its requirements (fiduciary relationship), and its application in following assets into different forms or mixed funds
- defences relevant to equitable remedies, such as laches and clean hands
- the position of bona fide purchasers for value without notice in tracing claims.
Test Your Knowledge
Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.
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Which of the following remedies is generally only available when damages are considered inadequate?
- Damages
- Specific Performance
- Restitution
- Account of Profits
-
A court order preventing a party from performing a specific act is known as:
- A mandatory injunction
- A prohibitory injunction
- Specific performance
- Equitable compensation
-
Which principle states that a claimant seeking an equitable remedy must not themselves be guilty of related improper conduct?
- Laches
- Estoppel
- Clean Hands
- Balance of Convenience
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Equitable tracing primarily requires the existence of which relationship?
- Contractual relationship
- Fiduciary relationship
- Statutory relationship
- Neighbourly relationship
Introduction
Equity developed alongside the common law to provide remedies and achieve outcomes considered fair where the strict application of common law rules might lead to injustice. Unlike common law damages, which are available as of right upon proof of a wrong, equitable remedies are discretionary. This means the court considers all circumstances before deciding whether to grant such a remedy. Key equitable remedies include injunctions and specific performance, primarily used in contract and tort law. Equitable compensation addresses losses from breaches of equitable duties, like those owed by trustees. Tracing is an equitable process, not a remedy itself, used to identify and follow property that has been misappropriated or misapplied.
Equitable Remedies: Principles
Equitable remedies are distinguished by their flexibility and the court's discretion in awarding them. Several core principles guide the court:
- Discretionary Nature: The court is never obliged to grant an equitable remedy. It considers factors like the conduct of the parties, potential hardship, and overall fairness.
- Inadequacy of Damages: Equity typically intervenes only where the common law remedy of damages would be insufficient to do justice. This is often the case where the subject matter is unique (e.g., land) or where the wrong involves ongoing harm.
- Acting in personam: Equitable orders are directed at the person (the defendant), compelling them to act or refrain from acting. Failure to comply can lead to contempt of court proceedings.
- Equitable Maxims: Principles like 'he who comes to equity must come with clean hands' and 'delay defeats equity' (laches) influence the court's decision. A claimant's own misconduct or undue delay can bar relief.
Key Term: Clean Hands
An equitable maxim meaning that a claimant seeking an equitable remedy must not have engaged in improper conduct related to the matter in dispute.Key Term: Laches
An equitable defence based on the claimant's unreasonable delay in bringing the claim, such that granting relief would be unfair to the defendant.
Injunctions
An injunction is a court order commanding or preventing an action.
Key Term: Injunction
A court order requiring a party to do a specific act (mandatory injunction) or refrain from doing a specific act (prohibitory injunction).
- Prohibitory Injunction: Restrains a party from committing a wrongful act (e.g., trespassing, breaching a restrictive covenant).
- Mandatory Injunction: Compels a party to undo the effects of a wrongful act (e.g., demolish a structure built in breach of rights). Courts grant these more cautiously than prohibitory injunctions.
- Interim (or Interlocutory) Injunction: Granted before the full trial to preserve the status quo. The court applies guidelines (often referencing American Cyanamid Co v Ethicon Ltd [1975] AC 396), considering if there is a serious question to be tried, the adequacy of damages for both parties, and the balance of convenience.
- Final (or Perpetual) Injunction: Granted after a full trial on the merits, providing a permanent resolution.
Worked Example 1.1
Z Ltd is about to launch a product using confidential information unlawfully obtained from its competitor, Y Ltd. Y Ltd discovers this just before the launch. What remedy should Y Ltd seek immediately?
Answer: Y Ltd should immediately apply for an interim prohibitory injunction to prevent Z Ltd from launching the product and using the confidential information pending a full trial. Damages might not adequately compensate Y Ltd for the loss of confidentiality and market advantage.
Specific Performance
Specific performance is an order compelling a party to perform their obligations under a contract. It is granted where damages are inadequate, typically involving contracts for unique items like land or rare chattels.
Key Term: Specific Performance
An equitable remedy ordering a party to perform their specific obligations under a contract.
Key requirements include:
- A valid and enforceable contract.
- Damages being an inadequate remedy.
- The court being able to supervise performance (less likely for contracts requiring ongoing duties or personal services).
- No undue hardship caused to the defendant.
- The claimant having acted equitably ('clean hands').
Worked Example 1.2
Ahmed agrees to sell a rare vintage car to Bella. Before the car is delivered, Ahmed receives a higher offer from Chris and refuses to complete the sale to Bella. Can Bella compel Ahmed to sell her the car?
Answer: Bella may be able to obtain an order for specific performance. As the car is rare and vintage, damages may be inadequate because Bella cannot easily purchase an identical substitute elsewhere. The court will consider if the contract is valid and enforceable and whether any defences apply.
Equitable Compensation
Equitable compensation is awarded for losses resulting from a breach of an equitable obligation, most commonly a breach of trust or fiduciary duty. Its aim is restitutionary – to restore the claimant (e.g., the trust fund or beneficiary) to the position they would have been in but for the breach.
Key Term: Equitable Compensation
A monetary remedy awarded in equity for losses caused by a breach of equitable duty (e.g., breach of trust), aiming to restore the claimant to their original position.
Key distinctions from common law damages:
- Causation: A direct causal link ('but for' test) between the breach and the loss is required, but common law rules of remoteness and foreseeability do not apply strictly. The trustee/fiduciary is generally liable for all losses flowing directly from the breach.
- Assessment: The assessment is made with the benefit of hindsight at the date of judgment.
- Mitigation/Contributory Negligence: These common law concepts generally do not apply to reduce equitable compensation for breach of trust/fiduciary duty.
Worked Example 1.3
A trustee improperly invests £50,000 of trust funds in a highly speculative venture, contrary to the trust deed and their duty of care. The investment becomes worthless. What remedy can the beneficiaries seek?
Answer: The beneficiaries can seek equitable compensation from the trustee for the £50,000 lost. The compensation aims to restore the trust fund to the value it would have had if the breach had not occurred. The trustee's liability is generally for the full loss directly resulting from the unauthorised investment.
Equitable Tracing
Tracing is not a remedy itself, but a process enabling a claimant to identify their property (or its value) when it has been taken, misapplied, or mixed with other property. Equitable tracing is more flexible than its common law counterpart.
Key Term: Tracing
A process used to identify property or its value as it changes hands or form. Equitable tracing allows following property into mixed funds or substituted assets.
Requirements for Equitable Tracing
- Fiduciary Relationship: Traditionally, a fiduciary relationship (e.g., trustee-beneficiary, agent-principal) must exist between the claimant and the party who misapplied the property. However, the exact scope is debated.
- Equitable Proprietary Interest: The claimant must have had an equitable interest in the original property.
- Identifiable Property: The property or its substitute must still exist and be identifiable, even if mixed or converted into another form. Tracing is not possible if the property has been dissipated (e.g., spent on general living expenses or destroyed).
Tracing Rules
- Clean Substitution: If trust property is sold and the proceeds are used to buy another specific asset, the beneficiary can trace into the new asset.
- Mixed Funds:
- Trustee Mixes with Own Funds: If a trustee mixes trust money with their own in an account, equity presumes the trustee spends their own money first (Re Hallett's Estate). If the trustee purchases an asset with mixed funds, the beneficiary can claim either a proportionate share of the asset or an equitable charge/lien over it for the amount of trust money used (Foskett v McKeown). The "lowest intermediate balance" rule may limit the claim against a bank account.
- Mixing Funds of Two Trusts (or Trust and Innocent Volunteer): The traditional rule is "first in, first out" (Clayton's Case), but courts may apply a proportionate sharing approach (Barlow Clowes v Vaughan) if FIFO is impractical or unjust.
- Bona Fide Purchaser Defence: Tracing stops if the property passes to a bona fide purchaser for value without notice of the claimant's equitable interest.
Key Term: Bona Fide Purchaser for Value Without Notice
An innocent third party who buys property for value (not as a gift) without any knowledge (actual, constructive, or imputed) of any pre-existing equitable claims against it. They take the property free from such claims.
Exam Warning
Remember that tracing is a process to identify property, not a remedy. Once property is identified via tracing, the claimant must then seek an appropriate remedy, such as imposing a constructive trust, an equitable charge, or claiming equitable compensation.
Key Point Checklist
This article has covered the following key knowledge points:
- Equitable remedies (injunctions, specific performance, equitable compensation) are discretionary and granted where common law damages are inadequate.
- Injunctions are court orders to do (mandatory) or refrain from doing (prohibitory) an act; interim injunctions preserve the status quo.
- Specific performance compels performance of contractual obligations, typically for unique subject matter like land.
- Equitable compensation aims to restore the claimant to their pre-breach position following a breach of equitable duty, assessed with hindsight and less constrained by foreseeability rules.
- Equitable tracing requires a fiduciary relationship and allows following property into mixed funds or substitute assets.
- Specific tracing rules apply depending on whether funds are mixed with the wrongdoer's own money or with funds from other innocent parties.
- The bona fide purchaser for value without notice defence halts the tracing process.
- Equitable defences like 'clean hands' and 'laches' can bar relief.
Key Terms and Concepts
- Clean Hands
- Laches
- Injunction
- Specific Performance
- Equitable Compensation
- Tracing
- Bona Fide Purchaser for Value Without Notice
