Modern Equity. Emily Sherwin * justice which, were it not for the operation of the Judicature Acts, would be administered by

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1 Modern Equity Emily Sherwin * Maitland defined equity as that body of laws administered by our English courts of justice which, were it not for the operation of the Judicature Acts, would be administered by courts that would be known as Courts of Equity. 1 The implication is that nothing unifies the various principles, doctrines, and remedies associated with equity other than their procedural origin. This is strictly true, and yet it raises the question why the concept of legal equity has not simply disappeared as procedural merger has become the norm. The answer may be that courts have administered the equitable principles, doctrines, and remedies in ways that are distinct from their administration of ordinary rules of law. The special roles that courts have assigned to equity continue to be important in our modern legal system. One distinguishing feature of equity is that courts have used it to correct unsatisfactory outcomes that sometimes result from the application of general, determinate rules.2 * Frank B. Ingersoll Professor of Law, Cornell Law School. 1 F.W. Maitland, Equity and Also the Forms of Action at Common Law (J.H. Chaytor & J. Whittaker, eds.) (Cambridge: Cambridge University Press 1929), 1. 2 This is equity in the Aristotelian sense. See Aristotle, Nicomachean Ethics 1138b25 (Hackett Pub., Terence Irwin, ed. & trans., 1985) ( And this is the nature of what is decent - rectification of law in so far as the universality of law makes it deficient. ). Although Maitland argued that equity did not follow a set of specifically equitable principles, he did view equity as a supplement or gloss on the common law, which softened the operation of common law rules. 1

2 Determinate rules serve a number of important legal and social purposes, the foremost of which is to enable individuals to coordinate their actions with the actions of others. Yet determinacy builds unacceptable outcomes into the administration of law. Strictly applied, a determinate rule may invite opportunism or it may impose undeserved hardship on a party. Traditionally, another distinguishing feature of equity has been its subordinate position in the system of law. Courts have treated equity as a branch of law that comes into play only when the resolutions offered by legal rules and remedies are objectionable in one way or another. Douglas Laycock has argued at length that courts no longer adhere in practice to traditional standards giving priority to legal remedies.3 Laycock admits, however, that whatever courts may do in fact, they still tend to speak of equity as a secondary component of the legal system. Another traditional feature of equity, both before and after procedural merger, is that equity has operated relatively obscurely within the system. Rules are comparatively easy to grasp, and courts tend to refer first to rules before turning to equitable exceptions. Further, corrective equity often takes the form of defenses that apply only to historically equitable forms See Maitland, Equity, ( if the legislature had passed a short act saying Equity is hereby abolished, we might still have got on fairly well, in some respects our law would have been barbarous, unjust, absurd, but still the great elementary rights... would have been decently protected. Id., See Douglas Laycock, The Death of the Irreparable Injury Rule 3-23 (New York: Oxford University Press 1991) 3-23 (arguing that although courts continue to cite the rule that equitable relief is not available if the plaintiff has an adequate legal remedy, they do not in practice withhold equitable relief unless there are functional reasons to do so). 2

3 of relief. The result is to decrease the perceived effects of equitable correction on legal rules: correction appears to be confined to one limited form of legal redress. The combined effect of these three features of equity is to maintain a precarious but useful balance between the benefits of determinate legal rules and the attraction of leniency. For reasons I will describe below, an system of law must provide in some way for corrective equity. At the same time, too much equity can undermine rules and consequently threaten other important ends of the legal system. The problem is that determinate rules, which allow for coordination, and corrective equity, which allows for justice, cannot easily coexist unless equity remains both subordinate to law and relatively obscure. The Legal Realists who shaped American law in the last century were skeptical of rules and enthusiastic about particularized, fact-based decisionmaking. They also disliked obscurity in law and insisted that the grounds of legal decisions should be clear: only through clarity can law be harnessed effectively to social scientific objectives. The result of this combination of attitudes was a program that altered the relation between law and equity by placing corrective equity front and center in the legal system. Pleading and procedure were geared toward facts rather than law and substantive rules were supplemented or replaced by explicitly particularistic doctrines such as unconscionability. If the Realists were wrong about rules, the strategies they pursued may be costly over time. By enlarging and spotlighting equity, they dispensed with the protective cover that once surrounded equitable decisionmaking and limited the effects of equity on general, determinate rules. When rules and equitable correction are equally open to view in a public system of law, the reliability of rules is significantly, and progressively, diminished. This is not to suggest that equity can or should be hidden deliberately from public view. 3

4 At least in a system that aspires to maintain the allegiance of its citizens, deceptive tactics will backfire. My objective is simply to explain the need for equity and the dilemma that equity poses for law. A. Rules4 One way to look at legal decisionmaking is from the forward-looking perspective of a benevolent lawmaking authority. I assume for this purpose that the lawmaking authority aims to serve the interests of those who are governed by law. I assume also that it approaches this task in a competent way. From the authority s vantage point, legal rules perform a number of important functions. If the authority has better information about the consequences of behavior than most of its subjects have, it can guide decisionmaking by enacting rules to govern conduct or transactions. Whether or not the authority has superior information, it can enact rules that will enable private actors to coordinate their behavior.5 In the absence of reliable rules, self-regulation may be difficult and in any event individual actors cannot anticipate what others will do. Once a set of 4 The most comprehensive source on the benefits of rules and the problems they pose is Frederick Schauer, Playing By the Rules: A Philosophical Examination of Rule-Based Decision- Making in Law and Life (Oxford: Clarendon Press 1991). The points made in this subsection are also discussed at length in Larry Alexander and Emily Sherwin, The Rule of Rules: Morality, Rules, and the Dilemmas of Law (Durham: Duke University Press 2001) 5 On the coordination effects of rules, see, e.g., Gerald J. Postema, Coordination and Convention at the Foundations of Law, 11 J. Legal Stud.(1982) 165,

5 rules is in place and regularly followed, it becomes easier to anticipate what others will do and so to plan around the predicted conduct. Finally, regularly followed rules settle controversy and uncertainty that might otherwise consume individual and social resources. To provide these benefits, rules must be general in application and reasonably determinate.6 Generality allows the rulemaker to provide in a single rule for similarly situated parties and like cases that cannot be fully specified in advance. Determinacy enables the rule to provide effective guidance, to serve as a basis for coordination, and to settle controversy in terms that do not revive the dispute when the rule is interpreted and applied. General and relatively determinate rules, however, will sometimes prescribe outcomes that are incorrect, all things considered. General language chosen in advance will cover unanticipated cases in which the rule s prescription is out of place. Determinate terms will sweep in some situations that a more open-ended inquiry would exclude. If the errors brought about by a general, determinate rule are too frequent or too great, the rule should be discarded or revised. In at least some cases, however, the benefits a rule provides through guidance, coordination, and settlement are more significant than the errors it periodically 6 See Schauer, Playing By the Rules, The arguments made here assume that rules have a core of determinate meaning, even if their meaning is uncertain in some contexts. See generally Kent Greenawalt, Law and Objectivity (New York: Oxford University Press 1992), 34-89; H.L.A. Hart, The Concept of Law (Oxford: Clarendon Press 1961), ; Schauer, supra note 3, at 53-68; Jules L. Coleman and Brian Leiter, Determinacy, Objectivity, and Authority, 142 U. Pa. L. Rev. 549 (1993); Lawrence B. Solum, On the Indeterminacy Crisis: Critiquing Critical Dogma, 54 U. Chi. L. Rev. 462 (1987) 5

6 generates. In that case, the rule is a good rule and should be retained.7 I will assume, for the purpose of this essay, that the rules at issue are good rules in this sense, despite some flawed results. It might be thought that the flawed results of justified rules can be eliminated by adding a general exception for all cases in which, as a result of a rule s generality and determinate language, the rule prescribes a wrong result. In other words, it might be thought that the solution is a policy of unlimited corrective equity. An general equitable exception of this kind would come into play at the time the rule is applied to a particular set of facts, when more is known about the likely consequences of following the rule. If it appears at the time of application, after taking into account the damage that a violation of the rule will cause to values such as future guidance, coordination, and settlement, that following the rule is a mistake, then an equitable modification would be called for; otherwise, it would not. The difficulty with this solution, from the point of view of a benevolent lawmaking authority, is that a general equitable exception must be applied by human agents, who are not omniscient and do not reason flawlessly from the evidence they have. The rule-applier may be a rule-subject deciding whether to obey, or a judge deciding whether to enforce the rule according to its terms. Either way, she is likely to have incomplete evidence about the consequences of breaking or following the rule. Moreover, the rule-applier will be subject to common reasoning biases. Like most human agents, she will tend to overvalue relatively immediate and salient 7 If the rule is a good rule, but revisions could reduce the number of bad results, then ideally the rule should be revised. In the law/equity debate, however, this is a secondary problem. 6

7 facts, as compared to facts about long-term consequences of violating the rule such as diminished capacity for interpersonal coordination.8 As a result, the rule-applier is likely to undervalue reasons to follow the rule in a systematic way. For example, she may focus on the cost or unfairness of following the rule in this case, omitting to consider that violating the rule, or failing to enforce the rule, may affect general perceptions that the rule is regularly followed, and so reduce its usefulness as a source of coordination.9 Accordingly, it is more likely than not that the rule-applier will err in deciding when corrective equity is warranted. Another possible compromise solution is to add both a general exception for recalcitrant cases and a presumption in favor of following the rule unless it appears that there are reasons of considerable magnitude to violate the rule.10 Presumptive rule-following, however, is also 8 For overviews of the problem of cognitive biases and studies documenting the availability heuristic and similar patterns of human reasoning, see Daniel Kahneman, Paul Slovic, & Amos Tversky, eds., Judgment Under Uncertainty: Heuristics and Biases 163)(Cambridge: Cambridge University Press 1982); Daniel Kahneman, Paul Slovic, & Amos Tversky, eds, Heuristics & Biases: The Psychology of Intuitive Judgment (Cambridge: Cambridge University Press 2002). 9 The rulemaker might build an exception into the rule, for cases with special features. To avoid the reasoning errors the rule is designed to prevent, however, the exception must be stated in fairly objective terms. Consequently, an exception of this type is really just an additional term of the rule. 10 This is Schauer s preferred solution. See Schauer, Playing By the Rules, , Frederick Schauer, Rules and the Rule of Law, Harv. J.L. & Publ. Pol y 14 (1991): 645,

8 subject to error at the point of application. A general practice of presumptive rule-following may also tend to erode over time: a presumption in favor of compliance assumes that subjects will weigh the immediate reasons to break a rule against reasons to follow the rule, such as the potential harm to coordination and other benefits of the rule. Each decision to violate the rule slightly decreases the perception that the rule is generally followed, and therefore slightly decreases the weight that other potential rule-followers will assign to the benefits associated with the rule. For these reasons the best resolution, from authority s point of view, is for all persons to follow the rule in all cases. Thus if, on average, the benefits of the rule outweigh the errors it will cause, the rule is justified. And if, on average, the rule outperforms individual judgment at the point of application, a general equitable exception is unwarranted. Another way to put this is that, from the authority s point of view, it is best that all those who apply the rule should treat the existence of the rule as an exclusionary reason for action.11 An exclusionary reason is one that functions both as a first-order reason to act in a certain way and as a second-order reason not to consider, or at least not to act on, a range of possible contrary reasons for action.12 Treating rules as exclusionary reasons for action solves the problem of error, and preserves the benefits of the 11 On exclusionary reasons for action, see Joseph Raz, The Morality of Freedom (Oxford: Oxford University Press 1986), 57-62; Joseph Raz, The Authority of Law (Oxford: Oxford University Press 1979), 16-19, 22-23, See Joseph Raz, Promises and Obligation, in Law, Morality, and Society, P.M.S. Hacker & J. Raz, eds. (Oxford: Clarendon Press), (indicating that the exclusion is limited). 8

9 rule, by blocking evidence of special particular circumstances, as least if they fall within the general range of circumstances the lawmaker considered in designing the rule. B. Equity A strict approach to rules, in which rules function as exclusionary reasons for action, has significant practical benefits as long as the rules are good rules and perform better on average than human judgment at the point of application. Why, then, might there be a need for corrective equity? 1. Opportunism One answer, proposed by Henry Smith, is that equity allows judges to police the opportunism that determinate rules inevitably attract.13 Relatively sophisticated players can profit through bad behavior that is accidentally allowed, or not quite covered, by the terms of the rule. Corrective equity allows judges to intervene after the fact and eliminate unfair gains obtained in this way. 13 See, e.g., Henry E. Smith, Why Fiduciary Law Is Equitable, in Philosophical Foundations of Fiduciary Law 261 (Andrew S. Gold & Paul B. Miller, eds., Oxford University. Press 2014); Yuval Feldman & Henry E. Smith, Behavioral Equity, 170 J. of Institutional and Theoretical Economics 137 (2014); Henry E. Smith, Equity as Second-Order Law: The Problem of Opportunism, available at (January 15, 2015); Henry E. Smith, Equitable Defenses as Meta-Law, forthcoming in Defences in Equity, eds. Paul S. Davies, Simon Douglas, and James Goudkamp (London: Hart Publishing). 9

10 This is an appealing argument, which assigns a function to equity in a procedurally merged legal system without endorsing the sort of open-ended correction that does most damage to the value of rules. The opportunism argument, however, raises several questions. One of these is empirical. From the point of view of the lawmaking authority, it may or may not be the case that the instrumental benefits of penalizing opportunists counterbalance the loss of rulebased benefits such as coordination that occurs when rules are not enforced according to their terms. Moreover, if judges can recapture enough opportunistic gain to outweigh the benefits of full enforcement, then the rule probably is not a good rule and its terms should be amended. Another problem that enters into the empirical balance is the possibility that judges may fail to distinguish accurately between deliberate advantage-taking and innocent reliance on rules that generate losses for one party. Smith characterizes the anti-opportunism function of equity as a second-order function in a system that otherwise enforces the rules. Equity, in other words, is a type of law about law, distinct from the ordinary business of enforcing legal rules. This characterization seems designed in part to limit the effects of equity on rules. The distinction between first-order and second-order law, however, is not likely to affect actors practical assessments of their legal reasons for action unless equity is not only second-order but also hidden from full view. In a legal system in which all judicial decisions, legal and equitable, are publically accessible, what matters is which set of reasons ultimately will prevail. To the extent that equity wins, legal rules are inert This seems to have been Hohfeld s view: Though it may represent an important stage of thought in the solution of a given problem... as regards the very relation in which it suffers 10

11 2. The Rules Gap My argument for equity is somewhat different, and depends on gap between the point of view of the rulemaking authority and the point of view of those who act under rules.15 Rule subjects and rule-appliers encounter rules in the context of a particular case, in which adverse consequences of a general, determinate rule are likely to be both evident and salient. From this perspective, correction will sometimes seem necessary, and limited correction based on opportunistic behavior may not be enough. Consider the position of an conscientious actor who confronts a case governed by a general rule. The actor agrees with the rulemaking authority that the rule is a good rule and understands the various reasons why, from the authority s point of view, she should follow the rule in this case. She understands that rules yield important practical benefits when regularly followed. She also understands that individual reasoners are prone to errors, especially when confronted with the salient facts of a single situation. Consequently, she understands that in the long run, the sum of outcomes will be best if all actors, including her, follow the rule in all cases that fall within its terms. direct competition with a rule of equity, the law is, pro tanto, of no greater force that an unconstitutional statute. Wesley Newcomb Hohfeld, The Relations Between Law and Equity, 11 Mich. L. Rev. (1913) 537, Frederick Schauer has used the term asymmetry of authority to describe this difference in perspective. Schauer, Playing by the Rules, Larry Alexander refers to the problem as The Gap. Larry Alexander, The Gap, 14 Harv. J. L. & Public Pol y (1991), 695, 695. For further discussion, see Alexander & Sherwin, Rule of Rules,

12 Yet, the actor may still believe that she should not follow the rule in this case. The authority s position is a position that holds on average, subject to the further understanding that any general and determinate rule will sometimes dictate the wrong result for a particular case. A reflective actor will consider not only which action best fits the circumstances, but also whether others are likely to observe her conduct and if, so, what effect a violation would have on the coordination value of the rule. She must also consider the likelihood that her own reasoning is biased or otherwise faulty and the chance that authority possesses special expertise that exceeds her own. Nevertheless, after taking all these considerations into account, the actor may conclude that it is best to violate the rule in this case. In these circumstances, the perspective of the actor diverges from that of the rule-making authority. From the actor s point of view, following the rule will seem irrational and wrong. In fact, the actor may be incorrect: she may have underestimated the probability of harm to the rule and overestimated her reasoning abilities. Nevertheless, if she complies with the rule she is acting against her own best understanding of current reasons for action. This dilemma can be restated in terms of practical rationality. Practical rationality is the rationality of agents in choosing and taking action.16 I assume a primarily instrumental understanding of practical rationality, in which it is rational for an agent to choose the action that will best advance her ends A classic discussion appears in Derek Parfit, REAsons and Persons (Oxford: Clarendon Press 1984). 17 See, e.g., Michael E. Bratman, Intentions, Plans, and Practical Reason (Cambridge, MA: Harvard University Press, 1987), 52. Instrumental benefit can be defined broadly to 12

13 Traditionally, practical rationality is evaluated in terms of the agent s current reasons for action.18 More recently, a number of writers have suggested that it is a mistake to think about practical rationality solely in terms of present reasons for action. Instead, practical rationality is a condition that extends over time: actors often can achieve greater instrumental benefits by forming intentions and sticking with them over time than by focusing exclusively on current reasons for action.19 Thus, if the actor will do better in the long run by always following the rule than by always exercising her best judgment, then the rational choice is to follow the rule. encompass moral values of the agent. 18 Edward McClennen calls this the principle of Separability and illustrates with a decision tree in which each new decisional node starts fresh with current forward-looking reasons. A decision tree of this type separates rationality into slices of time and rationality at each slice tied to current reasons for action. See Edward F. McClennen, Pragmatic Rationality and Rules, in Phil. & Publ. Affairs 23 (1997), See Bratman, Intentions, 2-3, 83-91; David Gauthier, Intention and Deliberation, in Modeling Rationality, Morality, and Evolution, ed. P. Danielson (Oxford: Oxford University Press 1998); David Gauthier, Assure and Threaten, Ethics 104 (1998); Edward F. McClennen, Pragmatic Rationality and Rules, in Phil. & Publ. Affairs 26:3(1997), 23; Edward F. McClennen and Scott J. Shapiro, Rule-Guided Behavior, in III New Palgrave Dictionary of Economics and the Law, ed. Peter Newman (New York: Stockton Press 1998), 367; Scott J. Shapiro, Legality (Cambridge, MA: Harvard University Press, 2011), ; Scott J. Shapiro, The Difference that Rules Make, in Analyzing Law: New Essays in Legal Theory, ed. Brian Bix (Oxford: Clarendon Press (1998). 13

14 There are difficulties with this temporally extended approach to rationality, particularly in the context of rule-following. First, rationality seems to presuppose the possibility of a reasoned change of mind when the agent confronts circumstances that she did not specifically anticipate when she formed her intention.20 Sticking doggedly to a plan when current reasons for action appear to support a change in course may be a practical mistake. Second, it is hard to explain the cognitive mechanism that would allow a rational actor to act on a prior intention in the face of a contrary belief about what she now should do. Arguably, deliberation can only conclude in action when the action is supported by the agent s will.21 Once the actor forms a belief about reasons for action, based on current evidence, she will lack the will necessary to support the act. One possible way to explain the rationality of acting on prior intentions is to argue that once the actor has settled on a plan, rationality does not require further reflection at the time of action. In other words, although it might not be rational for an actor to act against her present reflective understanding of reasons for action, it can be rational to act on prior intentions without reflection at the point of action. Michael Bratman, in particular, has argued that it is rational to act unreflectively on prior intentions as long as the actor is guided by practically reasonable general dispositions toward intentions, meaning dispositions that achieve good results over time. 20 This is most clear in Bratman s discussion. See Bratman, Intentions, 60 (suggesting that whenever an agent spontaneously reflects on reasons for an action, she effectively reconsiders prior intentions relating to that action). 21 Raz, for example, argues that deliberation does not lead directly to action but instead requires the assistance of both intention and an element of will. See Joseph Raz, From Normativity to Responsibilty (Oxford: Oxford University Press 2011),

15 In Bratman s view, intentions are special cognitive states that carry with them an element of volitional commitment as long as they remain in place. As a result, unless the actor pauses to reconsider, her prior intention will support current action without the need to form new beliefs about current reasons for action.22 In this way, the actor can obtain the benefits of making and acting on stable plans without sacrificing rationality. Bratman s account of temporally extended practical rationality provides a cognitive explanation for adherence to rules, and for the idea that legal rules provide exclusionary reasons for action. A rational actor can form an intention to follow a set of good rules, then act directly on her intention without considering contrary reasons for action, based on her prior volitional commitment to follow the rules. In seems to follow that there is rationality does not require equitable exceptions to rules. If it is rational over the long run to follow the governing rules, rational actors can and should adopt the authority s point of view and follow the rules unreflectively in particular cases. Yet, the argument that it is always rational to act on a prior intention to obey sound rules has several weaknesses. One is that nothing other than the force of habit requires actors to follow or apply rules without reflection. At least according to Bratman s account of rationality, the volitional commitment associated with rules dissipates if the actor chooses to reflect. As a result, there may still be cases in which the actor reflects, reconsiders, and then must face a 22 See Bratman, Intentions, 15-16, 64-65, Bratman s approach also provides an answer to Raz s point that deliberative action depends on will. Volitional commitment can be understood to carry the element of will and so to satisfy the requirement of will. See text at note XX, supra. 15

16 conflict between the demands of the rule and what she perceives to be the rational choice of action. A second problem is this. Assume the actor does not reflect before complying with a rule, and assume that it is practically rational for her to do so, in the sense that regular unreflective compliance with rules will be instrumentally beneficial over time. In this type of case, practical rationality appears to lead the actor into epistemic irrationality. A very plausible understanding of epistemic rationality holds that individuals must advert to evidence in their possession that defeats beliefs they currently hold.23 This standard of responsibility can easily be extended to the case of rule-follower who believes that it is generally best follow a rule but has evidence suggesting that she should not follow the rule in a particular case. The evidence does not defeat her belief that is it is generally best to follow the rule, but it indicates that her belief is misplaced in her current circumstances and that she should adjust her belief to suit the case. Thus, although the practically rational course may be to treat the rule as an exclusionary rule and follow it without reflection, an actor who does this may not be epistemically rational. 23 See Richard Feldman, The Ethics of Belief, in Earl Conee and Richard Feldman, Evidentialism: Essays in Epistemology (Oxford: Oxford University Press, 2004), (beginning with a very limited view of epistemic responsibility but later qualifying it by requiring agents to take account of defeating evidence); Alvin Goldman, Toward a Synthesis of Reliabilism and Evidentialism, in Evidentialism and Its Discontents, ed. Trent Doherty (Oxford: Oxford University Press, 2011), 23 (writing from a process reliabilist point of view, but adding a standard of epistemic responsibility to process defeating evidence) 16

17 C. Judicial Equity Equity enters in because the foregoing observations about discomfort and irrationality in particular cases apply not only to actors who are called on to follow rules but also to judges who must apply rules to individual actors after the fact. Judges often act as rulemakers, and so are likely to understand the long-term benefits of regular application of rules. Yet judges are also rule-appliers, who confront rules in the setting of particular cases and face difficulties similar to those actors fact when a general rule produces a result that seems unintended or wrong. Morever, judges are human reasoners, who are similarly susceptible to the type of cognitive bias in favor of immediate, salient facts that affects any fallible reasoner.24 From the point of view of the rulemaking authority, it is best that judges apply good rules according to their terms, even when the judge believes the outcome the rule calls for is wrong. Because judges are not perfect reasoners, regular enforcement of the rule according to its terms often will produce better results over time than particularistic decisionmaking by judges. Moreover, when judges err, the risk of harm to rule values is especially high. If actors perceive that judicial decisions do not regularly conform to rules, they will not expect other actors to follow the rules and can no longer rely on them as focal points for coordination. From the point of view of the judge, however, enforcing the rule when the judge believes the outcome is wrong will appear irrational and unfair to the parties affected. 24 See Jeffrey J. Rachlinski, Bottom-Up and Top-Down Decisionmaking, 73 U. Chi. L. Rev. (2006) 933, (discussing the effects of affect and availability biases in judicial decisionmaking); Frederick Schauer, Do Cases Make Bad Law?, 73 U. Chi. L. Rev. 883, 895 (2006) 883, 895 (observing that judges, as rulemakers, are subject to the availability bias). 17

18 In cases involving equitable defenses, judges often self-consciously invoke the corrective function associated with the equity side of law. For example, in Panco v. Rogers, Panco agreed to sell his house to Rogers.25 Mr. Panco, a retired carpenter who had built his own house, agreed to sell the house to the Rogers. After discussing the transaction with Mrs. Panco, who was not a native English speaker, Mr. Rogers prepared an agreement naming a price of $5500. Panco, who was elderly and deaf, signed the agreement without reading it, then later refused to convey. Panco testified that he intended to ask $12,500 for the house and the court found the house was worth at least $10,000. The court found no evidence that Rogers had engaged in fraud, concealment, or undue influence, and determined that Panco had breached the contract. It nevertheless denied Rogers claim for specific performance, saying that an application for specific performance is directed to the sound discretion of a court of equity... [T]he court must be satisfied that the claim is fair, reasonable, and just, and in judging of its fairness, the court will look not only at the terms of the contract itself, but at all of the surrounding circumstances, including the relations the parties.... Where the enforcement of a contract for the sale of land would be harsh, oppressive or manifestly unjust to one of the parties thereto, its specific performance will not be decreed, but the parties will be left to their remedy at law. 26 This is a classic example of corrective equity, applied to deny equitable relief. The applicable rules did not recognize unilateral mistake as a ground for rescission, so the contract 25 Panco v. Rogers, 87 A.2d 770 (N.J. Ch. Div. 1952) 26 Id. at

19 was valid and Panco theoretically was liable for breach. In fact, the equitable defense probably was conclusive. A damage claim would require Rogers to incur additional expense, and in any event a jury fixing damages for the value of the Rogers lost bargain would likely fix a low sum based on the same considerations that led the court to deny an equitable remedy. Therefore, the decision amounts to an exception to court s stated rule, that a unilateral mistake is not a defense to contract obligation. Panco v. Rogers can be viewed as a case of opportunism. Rogers had reason to believe that the Pancos were not experienced bargainers, may have known the price was low, and may have suspected that Panco had not read the contract. If so, the case fits well with the view that corrective equity operates, or should operate, as a mechanism by which courts can detect and penalize parties who taken advantage of general, determinate rules to obtain unjustified gains. The potential for equitable correction, however, goes beyond opportunism. Suppose instead that, on the best understanding of the facts, Rogers acted in good faith: he was an inexperienced buyer who was not familiar with prices, he believed that Mrs. Panco stated and intended a price figure of $5500, and he did not realize that Panco was mistaken about the contents of the written agreement. Although there are no signs of opportunism in this case, the bargain is one-sided and there is no reason to believe that the exchange is efficient. Thus, the judge in this revised case would still be under rational and sympathetic pressure to depart from the rules and deny full enforcement of the contract. Another example is Patel v. Ali.27 Mrs. Ali, a young mother, agreed to sell her home to the Patels in what appears to have been a fair transaction. Closing was significantly delayed for 27 Patel v. Ali, [1984] 48 P. & C.R

20 various reasons that were not attributable to the Patels, including a claim by Mr. Ali s bankruptcy trustee that eventually was dismissed. In the interim, Mrs. Ali had a second and third child. She also developed bone cancer, which resulted in amputation of a leg. By the time of the closing, she was dependent on help from her sister, who lived nearby, and other sympathetic neighbors in a close Muslim community. In these circumstances, the court refused to grant specific performance and limited the Patels remedy to damages for loss of bargain (to be financed by helpful friends). As in the case of Mr. Panco, it seems unlikely that the plaintiffs would choose to press a claim for damages or that, if they did, the jury would award substantial damages. So in effect, the judge made an exception to the normal rules of contract obligation.28 The ambivalence he felt in doing so is evident in his opening remarks: The circumstances of [this] case are unusual and it has caused me some anxiety. The argument for the defendant... necessarily arouses so much sympathy that I felt for a long time that any exercise of discretionary jurisdiction in her favour would probably be unfair to her opponents, just because of the force of such sympathy.29 In the end, however, sympathy in light of Mrs. Ali s circumstances prevailed over fidelity to the rules. In each of these cases, it might be better from the authority s point of view to enforce the rule, both to preserve its value as a guide to contracting parties and to contain judicial error over 28 The court stated that subsequent personal hardship is not normally a defense to contract obligation; the seller takes the risk of unexpected events. It reasoned that in the case of Ms. Ali, she never bargained for a situation in which years would pass before closing. Arguably, however, delay can also be a risk the buyer assumes by signing a contract. Id., Id.,

21 the long run. But this approach is unsatisfying from the vantage point of the particular case. The two viewpoints at work are fundamentally different: they cannot be reconciled or averaged, because they pit long-term practical rationality against epistemic rationality, human sympathy, and human error. Both viewpoints are important to a legal system that depends in part on the loyalty of both actors and judges. Corrective equity gives recognition to the second, particularized point of view. C. Equity and Legal Realism Modern American law has been much influenced by the Legal Realist movement that began in the first half of the twentieth century. Although the American Legal Realists took various views on judicial decisionmaking, they converged on several general ideas. First, most were skeptical about the value of general, determinate rules. They argued that judges typically have a choice among eligible but conflicting rules and that in any event, rules are subject to conflicting interpretations. Consequently, rules exert no real force on judicial decisions Even Karl Llewellyn, principal drafter of the Uniform Commercial Code, took this view, saying that every single precedent, according to what may be the attitude of future judges, is ambiguous, is wide or narrow at will ) Karl N. Llewellyn, The Bramble Bush: Some Lectures on the Law and Its Study 2-4 (New York: Oceana, 1930), (emphasis omitted); see also Karl N. Llewellyn, A Realistic Jurisprudence - The Next Step, 30 Colu. L. Rev. 431(1930), (discussing the difference between paper rules and the real rules that govern decisions). See generally Brian Leiter, American Legal Realism, in The Blackwell Companion to Philosophy of Law and Legal Theory (Oxford: Blackwell, Dennis Patterson ed., 2d ed. 2010) 21

22 A closely related idea was that judicial decisions respond primarily to the facts of particular cases. Judges may be moved by the impact of their decisions on the parties involved, or by the social and economic consequences of their decisions, or simply by their own hunches about the dispute before them.31 It follows that operative law is located not in rules but in the facts and outcomes of individual disputes or empirical judgments about the impact of decisions , (discussing Realist endorsement of rational indeterminacy). 31 See, e.g., Jerome Frank, Law and the Modern Mind (New York: Brentano s 1930), 111 ( The peculiar traits, dispositions, biases and habits of the particular judge will, then, often determine what he decides to be the law); Joseph C. Hutcheson, The Judgment Intuitive: The Function of the Hunch in Judicial Decision, 14 Cornell L.Q. 274 (1929), 278 ( I, after canvassing all the available material... wait for the feeling, the hunch - that intuitive flash of understanding that makes the jump-spark connection between question and decision... ); Llewellyn, Bramble Bush, 69 (advocates must build an inductive case for their desired result); Herman Oliphant, A Return to Stare Decisis, Pt. 2, 14 A.B.A J. 159 (1928) 159( we see that courts are dominantly coerced not by the essays of their predecessors but by a surer thing, - by the intuition of fitness of solution to problem, - and a renewed faith in judicial government is engendered. ). 32 Frank, Law and the Modern Mind, 276 ( Law is what happened or will happen in concrete cases ); Llewellyn, Bramble Bush, 2-4 ( to my mind the main thing is seeing what officials do...; and seeing that there is a certain regularity in their doing - a regularity which makes possible prediction ). See generally Leiter, American Legal Realism, 257 ( the Core 22

23 This understanding of nature of law and legal decisionmaking led to several prescriptions. Pleading and procedures should be oriented toward the fullest possible discovery of facts and legal doctrine should be stated in open terms that lead judges to investigate the facts of cases before them.33 Legal theory should be empirical rather than analytical and legal reform should work from the from the premise that decisionmaking turns on facts.34 Finally, judges should state the grounds of their decisions as forthrightly as possible, so that these can be studied and understood by all actors in the system. Covert tools are never reliable tools. 35 Claim of realism is that judges respond primarily to the stimulus of the underlying facts of the case ). 33 Stephen N. Subrin, How Equity Conquered Common Law: The Federal Rules of Civil Procedure in Historical Perspective, 135 U. Pa. L. Rev. 909 (1987), (relating the history of Charles Clark and the Federal Rules of Civil Procedure); Llewellyn, Realistic Jurisprudence, 452 (lawmakers must so shape [the rule] as to induce its application ); Oliphant, Stare Decisis, 160 (proposing reclassification of most of law in terms of the human relations affected by it ). 34 See, e.g., Llewellyn, Realistic Jurisprudence, (the focal point of legal thought should be the area of contact between judicial (or official) behavior and the behavior of laymen )(emphasis omitted); Walter Wheeler Cook, The Logical and Legal Bases of the Conflict of Laws, 33 Yale L.J. 457 (1924), 460 (proposing to observe concrete phenomena first and form generalizations afterwards ). 35 Karl N. Llewellyn, The Common Law Tradition: Deciding Appeals (Boston: Little, Brown, 1960), 365, quoting Karl N. Llewellyn, Book Review, 52 Harv. L. Rev. 700 (1939), 703. See Oliphant, Stare Decisis, 159 ( With eyes cleared of the old and broad abstractions which 23

24 Steven Subrin has argued persuasively that in the realm of procedure, Legal Realism brought about a fundamental shift from traditional common law methods to fact-oriented methods associated with equity.36 Subrin does not advocate a return to rigid common law procedures, but he suggests that the Realist-inspired Federal Rules of Civil Procedure may have gone too far in the direction of unstructured and particularized decision-making. Lawsuits often lack focus, costs are high, outcomes are unpredictable, and the system consequently is not as effective as it might be in vindicating rights.37 The Realist program brought about similar changes in the substantive law, favoring factspecific equitable doctrines over the more technical rules of the common law. A leading example is Karl Llewellyn s Uniform Commercial Code, which makes liberal use of equitable terms such as unconscionability and good faith that are virtually impossible to define outside the setting of a particular dispute.38 Broad defenses of this kind are no longer confined to curtain our vision, we come to recognize more and more the eminent good sense in what courts are wont to do about disputes before them. ) 36 See Subrin, Equity, 973 ( the major theme [of the Federal Rules of Civil Procedure] was that procedures should step aside and not interfere with substance ), 1000 (in this way, equity procedures have swallowed those of common law ). 37 Id., See U.C.C (good faith in performance and enforcement), (2-302)(unconscionability). Arthur Alan Leff was highly critical of the unconscionability provisions of the UCC and also distinguished Code unconscionability from the more modest unconscionability defense previously recognized in equity. See Arthur Allen Leff, 24

25 equitable relief, but applied to legal remedies as well.39 Thus, in many places, Mr. Panco could now rescind his contract with the Rogers, based on a unilateral mistake with unconscionable consequences.40 Mrs. Ali s defense of subsequent hardship remains unusual. When allowed, however, it is likely to be a full defen to contractual obligation, rather than a special defense to equitable relief. Thus, in the post-realist legal system, equity no longer operates in the background as way for judges to act on their best judgment that a rule has misfired. Instead, corrective equity functions as part of the primary law governing legal obligations. D. Clarity About Equity Legal Realism not only pushed law in the direction of particularistic decisionmaking, but also made the equitable component of legal decisionmaking more open and explicit. Traditionally, the main vehicles for corrective equity were equitable defenses of the type applied Unconscionability and the Code: The Emperor s New Clause, 115 U. Pa. L. Rev. 485 (1967). Unconscionability and similar terms were also incorporated into Realist-inspired Restatements. See, e.g., Restatement (Second) of Contracts 153 (unilateral mistake), 205 (good faith and fair dealing) (American Law Institute, 1979). 39 For example, the UCC s provision on unconscionability provides judges with a broad array of remedies in response to unconscionability, including refusal to enforce the contract by any means, legal or equitable. UCC 302; see also Restatement (Second) of Contracts 208 (1981). 40 Restatement (Second) of Contracts 153(a) (1981). 25

26 in Panco v. Rogers and Patel v. Ali, which may not be immediately evident at the planning stage of actions and transactions. Although the existence of equitable defenses has long been publically accessible in judicial reports, parties - even those acting with professional legal advice - may not comprehend the importance of equitable relief or the special defense that may apply if an equitable remedy is needed. As a result, the effect of traditional equitable defenses on the level of public confidence in the rules governing legal obligation is considerably muted. Judges deciding cases after the fact may understand that allowing an equitable defense creates an exception to the governing rules, but parties acting under rules may not fully grasp this point. In this way, the comparative obscurity of equitable defenses provides a partial solution to the dilemma of general rules and equitable correction: judges perceive the effects of their decisions but actors may not fully comprehend the unreliability of the rules.41 In addition to widening the scope of equitable correction, Realist reforms placed equitable correction in a more visible role. The role of equity in modifying the outcome of rules has been codified, restated, and extended beyond the traditional, less visible realm of defenses to equitable relief. Whatever cover the features of subordination and obscurity may once have provided to equitable correction is now largely gone. D. Conclusion: The Place of Equity in Modern Law Corrective equity is inevitable in a legal system. Even given a set of rules such that the sum of outcomes over time would be better if all people followed the rules in all cases, it will 41 See generally Meir Dan-Cohen, Conduct Rules and Decision Rules: On Acoustic Separation in Criminal Law, 97 Harv. L. Rev. 625 (1984). 26

27 sometimes appear wrong, irrational, and unfair to enforce a rule. Corrective equity, however, impairs the reliability of, and so decreases the benefits of, determinate rules. As a consequence of Realist reforms, the effect of corrective equity on rules is no longer limited by the obscurity of equitable doctrines and defenses and their seemingly secondary role in the system. Nor can this type of obscurity be reinstated. In a public system of law, obscurity cannot be engineered; it can only arise by an accident such as the separation of common law courts and chancery courts in much of Anglo-American legal history. Any proposal for deliberate obfuscation of corrective equity would surely be rejected as a form of manipulation practiced on judges and citizens. In the current legal world, the only available answer is that judges must do their best to understand the effects that relief from the errors of rules may have on the value of rules. This is not an ideal answer. It requires that judges, in making their decisions, must bear in mind the coordination benefits and other advantages of regularly enforced rules, try to calculate at least roughly the cumulative effects that exceptions in the current case and other similar cases will have on those benefits, and take account of the possibility that their own reasoning will be mistaken. In requires, in other words, that they must not take too seriously the Realist faith in the accuracy of judicial hunches and particularistic situation sense. 27