Competing equitable rights (with legal rights and with other equitable rights)

While equitable interests dictate or limit how legal rights are supposed to be used, they do not normally remove the legal owner’s power to deal with those rights even when acting improperly.

The priority of competing equitable interests is not normally resolved by the nemo dat principle or its exceptions.

For instance, if A holds an asset on trust for B and, in breach of the trust, transfers the legal interest to C then nemo dat will not save B’s interest as A had the legal title. Whether C will be bound by the trust for B (determining whether B receives the asset or the traceable proceeds (if any) received by A and a claim against A for breach of trust) depends primarily on the defence of Bona Fide Purchase, which is sometimes referred to as the doctrine of notice.

It is a defence, and the cases Bassett v Nosworthy and Pilcher v Rawlins illustrate this.

There are four separate elements to the defence of bona fide purchase, a purchase made in good faith, for valuable consideration and without notice. Where a purchaser has obtained legal title for valuable consideration in good faith, the resolution of the dispute will depend on notice. There are different kinds of notice, actual notice as in Jared v Clements below and constructive notice where a person or entity is legally presumed to have knowledge of something being examples.

Jared v Clements provides a useful illustration of this requirement of notice. In the case Clements found out through his solicitor that the property he was trying to buy off Taylor had an equitable mortgage upon it from Jared. Parr, Taylor and Jared’s solicitor fraudulently completes a receipt suggesting that this equitable mortgage had been paid off and Clements bought the property. Once it was ascertained that Jared was guilty of no negligence or misconduct (and that Parr was not acting within his remit as his lawyer), the judgement was held in his favour because it was held that a purchaser with actual notice of a prior claim (in this case the equitable mortgage) completes the purchase at his own risk. Would the purchaser in the case have had constructive notice if his solicitor had not searched the file in bankruptcy? He would not.

In Joseph v Lyons what interest did the plaintiff have in Manning’s stock-in-trade and how did it arise? Joseph had a bill of sale giving him an equitable interest (legal title does not pass until either delivery or contract). What interest did the defendant have in those assets and how did it arise? The defendant gained legal title as he acquired the jewellery in the normal course of his business as a pawnbroker. Joseph sues Lyons for the goods claiming conversion or detention of them. Held in favour of Lyons, he had no notice of the equitable title belonging to Joseph and had no duty to inquire into the register of bills of sale as to goods pledged with him in the course of his business as a pawnbroker. If he had notice of the equitable title he would have had that duty. Until the property passes to the buyer, he can have only an equitable title which may be postponed to the legal claim of some third party acquired for value and in good faith.

An equitable right to rescind or rectify a transaction is often called a “mere equity”. That term is confusing because it is used to refer to a variety of different equitable rights. If a claimant has only a

right in personam to use an asset then it does not matter whether people have notice of it or not, see National Provincial Bank v Ainsworth.

An equitable interest is an actual right of property, such as an interest under a trust. A mere equity is not a right of property but a right, usually of a procedural nature, which is ancillary to some right of property, and which limits or qualifies it in some way. The distinction between equitable interests and mere equities is slight since even mere equities show some of the features of a right of property. They may bind successors in title of the property to which they relate, provided that their priority has been protected over the disposition to the successor in title. In Smith v Jones this priority was not protected. Smith had clear legal tenancy of a property Jones bought. Though in the written contract the cost of the repairs fell on Smith, when his rent was put up an oral variation between himself and his landlord shifted this burden to the landlord. This oral variation provided Smith with an equitable right that did not bund subsequent landlords and therefore did not bind Jones. Jones could not be expected to conduct further investigations than the written lease. Even if Jones had had constructive notice of the equitable right of rectification that would not have been sufficient to make it enforceable against him as constructive notice doesn’t extend to the equity of rectification.

In Blacklocks v JB Developments an equitable right to rectify a conveyance and recover land conveyed by mistake did bind a subsequent purchaser (and was affirmed to be a mere equity). It bound the subsequent purchaser here and not in Smith because, even though in both cases the right was accompanied by actual occupation of the property, in Smith the principle that a purchaser of unregistered land will not be liable to rectify if he was a bona fide purchaser for value of the land without notice of the equity of rectification applied but in Blacklocks, the eqitable right to rectify is ancilliary to or dependent upon an estate in land (right to rectify a conveyance and recover land conveyed by mistake) and therefore binds the subsequent owner.

Though the principles to be applied in determining whether the right to rectify passes to a subsequent owner depends on whether the land is registered or unregistered, the essential question to consider here is whether the plaintiff had a right in rem which could bind a subsequent purchaser (the judge concludes in Blacklocks that the result would be no different if the land had been unregistered...)

The defence of bona fide purchase does not apply to competitions between 2 equitable interests since the parties are not “purchasers” even if they acquired their equitable interests for valuable consideration. Here, the older interest will have priority over the newer interest, prior est tempore, potior est jure.

According to Abigail v Lapin, if the newer interest is acquired for value and without notice of the older interest, the older interest might be postponed to be newer interest but only if the holder of the older interest is responsible in some way for the problem. While the holders of equitable interests under an equitable mortgage or contract of sale might be expected to take steps to protect their interests, this is not true of trust beneficiaries.

Another exception to the ‘first in time’ rule is that it does not apply to mere equities. If a mere equity is a right in rem it can bind donees and persons who acquire competing interests with notice of it, but it will be subject to newer equitable interests acquired for value and without notice of it. This is the equitable equivalent of a sale of goods under a voidable title.

In Latec Investments v Hotel Terrigal Pty Ltd a mortgagee (Latec) exercised its power of sale and then fraudulently sold the land to a wholly owned subsidiary organisation. The subsidiary subsequently charged the land to a trustee who had no notice of the fraudulent circumstances. Five years later the mortgagor (Terrigal) sought to set aside the sale and transfer and assert priority over the interest of the trustee. Thus arose the issue of whether a prior mere equity should take priority over a later equitable interest. It was held that a person who acquires a subsequent equitable interest in good faith for value and without notice of an earlier mere equity will not be bound by the mere equity and that mere equity is of lesser priority than an equitable interest.