Equity as Meta-Law
abstract. With the merger of law and equity almost complete, the idea of equity as a special part of our legal system or a mode of decisionmaking has fallen out of view. This Article argues that much of equity is best understood as performing a vital function. Equity and related parts of the law solve complex and uncertain problems—including interdependent behavior and misuses of legal rules by opportunists—and do so in a characteristic fashion: as meta-law. From unconscionability to injunctions, equity makes reference to, supplements, and sometimes overrides the result that law would otherwise produce, while primary law operates without reference to equity. Equity operates on a domain of fraud, accident, and mistake, and employs triggers such as bad faith and disproportionate hardship to toggle into a “meta”-mode of more open-ended scrutiny. This Article provides a theoretical account of how a hybrid law, consisting of relatively simple and general primary-level law and relatively intense and directed second-order equity can regulate behavior better through these specialized modes than would homogeneous law alone. The Article tests this theory on the ostensibly most unpromising aspects of equity, the traditional equitable maxims, as well as equitable fraud, defenses, and remedies. Equity as meta-law sheds light on how the fusion of law and equity spawned multifactor balancing tests, polarized interpretation, and led to the confusion of equity with standards, discretion, purely public law, and “mere” remedies. Viewing equity as meta-law also improves on the tradeoff between formalism and contextualism and ultimately promotes the rule of law.
author. Henry E. Smith is Fessenden Professor of Law, Harvard Law School. Email: firstname.lastname@example.org. For helpful comments I would like to thank Leigh Anenson, Benito Arruñada, Lisa Austin, Shyam Balganesh, Sam Bray, Yun-chien Chang, Eric Claeys, Bob Ellickson, Yuval Feldman, Andrew Gold, John Goldberg, John Golden, Erik Hovenkamp, Bruce Johnsen, Louis Kaplow, Andrew Kull, Michael Kenneally, Dan Klerman, Dennis Klimchuk, Bentley MacLeod, Paul Miller, Susan Morse, Eduardo Peñalver, Mark Ramseyer, Duane Rudolph, Emily Sherwin, Ted Sichelman, Steve Spitz, James Stern, Alex Stremitzer, and audiences at the Italian Society of Law and Economics, University of Bolzano, Italy; the Workshop on Entrepreneurship and the Law, Brigham Young University Law School; the American Law and Economics Annual Meeting, Columbia Law School; the Fourth Annual Triangle Law and Economics Conference, Duke Law School; the Robert A. Levy Fellows Workshop in Law & Liberty, George Mason University School of Law; the University of Georgia School of Law Faculty Workshop; a chair talk at the Harvard Law School; the Harvard Law School Law and Economics Seminar; the International Society for New Institutional Economics, 14th Annual Conference, University of Stirling, Scotland; the Workshop on Property Law and Theory, New York University School of Law; the Law and Political Economy Colloquium, Northwestern University School of Law; the University of Notre Dame Law School Faculty Workshop; the Law and Economics Workshop at the University of Chicago Law School; the Carl Jacob Arnholm Memorial Lecture, Institute of Private Law, University of Oslo Faculty of Law; the Faculty Workshop, Washington University in St. Louis School of Law; and the Law, Economics and Organization Workshop, Yale Law School. Many thanks to Alex King, Alex Schwennicke, and Quinn Zhang for excellent research assistance. Legal and equitable title to all errors is mine.
No aspect of law is as pervasive and as misunderstood as equity. Doctrines from unconscionability to estoppel, defenses sounding in unclean hands and disproportionate hardship, remedies like injunctions and much of restitution, entire areas including trusts and corporate law, and much of our system of civil procedure all trace back to the courts of equity. As if that were not a sprawling enough menagerie of law, the whole idea of equity, associated as it was with courts that drew their share of justified criticism, was engulfed in the process of fusion,1 which unified the court system and placed the distinctiveness of equity in a harsh and unflattering light. Common-law legal systems have been trying to digest equity ever since.
With limited success. After a century or so of fusion, equity refuses to be consigned to the dustbin of history. For all the efforts to diffuse it throughout the legal system, to assimilate it into law, or to abolish it altogether, equity hangs on by its fingernails. In this country, culprits for the delay include the federal constitutional requirement of jury trial in civil cases,2 which leads courts to distinguish legal issues that fall under this requirement from equitable ones that do not. Beyond that, equity is regarded as a mere hanger-on, benefiting from inertia rather than doing anything special to justify its continued existence.
This Article challenges that view. Contrary to the deflationary view of equity, a major theme of equity was, and is, to solve complex and uncertain problems by going to a new level of law. Equity is law about law, or meta-law.
What does it mean for equity to be meta-law? In the theory of language and in the theory of complex systems, orders are defined in terms of the domain of their operation. A meta-language takes a lower-order language as an input. Thus, when we talk about language, we need to use a meta-language.3 Likewise, a second-order component system acts on the output or the structure of the first-order system, but not vice versa.4 Thus, a temperature-control module will take input information on temperature from a first-order component and act on the rest of the system in response. In terms of its operation, the temperature-control module presupposes the rest of the system, but the rest of the system operates without reference to temperature control. Similarly, some law regulates other law and needs to take it as an input. This Article will argue that meta-law in this sense is a theme of equity.
Going meta is usually done for functional reasons, and equity is no exception.5 Like other meta-systems, equity addresses a special class of problems—those of high complexity and uncertainty, which lack foreseeability. By “complex,” I do not mean complicated or having many parts. A system is complex when it is so interconnected that system behavior is difficult to trace to individual elements.6 In complex systems such as brains, social networks, economies, and ecosystems—and the law—the action is in the connections, and not in the elements themselves.7
Problems combining high complexity and uncertainty are those best suited for meta-law. Increased variance at one level can be better handled by going to a higher level through another system that acts on the first-order system from outside.8 Everything from safety systems to thermostats work this way. In law, complexity and its attendant uncertainty stem from at least three major phenomena isolated and explored in this Article. First, some problems involve many densely interacting elements and so are multiparty, multipolar, or, as is sometimes said, “polycentric.” Multiple parties with conflicting customary rights and potential third-party effects would be a prime example.9 Second, conflicting presumptive rights that are each context-dependent lead to complexity and uncertainty, as in situations of good faith purchase or nuisances in which activities clash in a particular setting.10 And third, and quite characteristically for equity, deliberately caused or exploited uncertainty and complexity stem from the problem of opportunism, in which an actor takes unforeseen advantage of a rule that works under normal circumstances.11 The traditional heading for this phenomenon was “constructive fraud” and included much of unconscionability and violations of custom.
All of these types of problems—polycentricity, conflicting rights, and opportunism—are defined functionally. They are special because multiplex interactions lead to hard-to-foresee results. It is exactly here that law, in its normal aspirations of ex ante certainty, is at its weakest. As Aristotle put it, equity intervenes when law fails because of its generality.12 Courts have long cited this Aristotelian account,13 especially when it comes to the question of when equity will intervene. The question thus becomes: When does law fail and why would it fail because of its generality?
The account offered here allows us to fill in this picture: because regular law seeks generality and ex ante certainty, it cannot handle situations in which intense interactions can lead to unforeseen and undesired results. Equity is a second system that corrects these problems from without and thereby allows law to be more general and certain than it otherwise could be. Despite equity’s reputation as a wild card, a combination of distinct law and equity can promote the law’s ends—including rule-of-law values—better than could a more homogeneous legal system.
The account of equity this Article offers is functional, rather than jurisdictional or historical. While equity jurisdiction has left traces all over the law, and although equity is a major strand of the history of legal systems in the English-speaking world, the theory offered here focuses on a functional inquiry into what equity does. The jurisdiction and the history are relevant because they are the partly contingent vehicle through which a more basic function expresses itself. It is for that reason that we can speak of an “equitable” function rather than some anodyne “System II” of law that solves uncertain and complex problems with law’s “System I.”
This Article’s reconstruction of equity goes against the grain in another way. Simply put, complexity is seen as the weakness of equity.14 And indeed equity’s opponents have stressed its arbitrariness, epitomized by the “Chancellor’s foot.”15 I will argue that this view of equity gets things exactly backwards. Equity is part of law’s response to the world’s inevitable complexity. Explaining and justifying equity requires being clear on what functions it does and does not serve. The conventional view of equity is tenacious because it is plausible. Commentators are correct that not everything denominated “equitable” can receive a unified justification. And it is true that only by being justified functionally does equity deserve to survive. Putting these criticisms together, it would be hopeless to give a unified functional explanation of even a broad swath of such a seemingly variegated collection of legal odds and ends.
And yet. Nothing in the pages that follow will require us to fetishize the label “equity,” to engage in empty formalism, or to be ruled by the dead hand of the past. On the contrary, equity in American law is a response to universal problems in legal systems and human institutions generally. Equity serves a vital and dynamic function in the law and should be better understood.
This Article does not just fill the equity-shaped gap in our understanding of the law; it shows that there is such a gap in the first place. Although this Article focuses more on the theory of equity as a function that every legal system serves in some way, it sheds unique light on our system and where it comes from. The fusion of law and equity half obscured the essential role of equity, which now requires some excavation. Part of that process is overcoming reflexive skepticism that equity could be serving a characteristic function that does more good than harm. Thus, in this Article I focus on those aspects of equity that are the most resistant to making sense in our bottom-line-oriented, post-Realist age. As a major testing ground, I consider the maxims of equity. The maxims are as central to equity as they are dismissed as empty and malleable.16 I will show that the role of the maxims is orthogonal to our expectations: rather than serving as clumsy rules or vague standards, they are signals that meta-law reasoning is occurring—a process that needs to be brought out in the open in order to understand equity in the first place. More generally, I will integrate much previous work on equity and show that it hangs together—as meta-law.
This Article reconstructs equity along functional lines. It begins in Part I with how equity developed as meta-law and where the current state of fusion leaves us today. It also sets out how equity as meta-law pervades the interstices between property and contract, and lays out equity’s domain and structure and how these have functioned and still do function as meta-law. Part II turns to a theoretical account of the specialization of equity as meta-law, drawing on notions of specialization and emergence in complex adaptive systems. This analysis shows that a combination of equity that specializes in solving complex, uncertain problems and regular law that focuses on providing relatively simple guidance can be superior to a homogeneous model that tries to do everything in an undifferentiated fashion. Part III tackles some of the biggest challenges for any account of equity’s specialness: the maxims of equity, varieties of fraud, equitable defenses, and remedies. With this positive picture in hand, Part IV turns to the place of equity in the legal system today. Seeing equity as meta-law allows us to understand why equity is so misunderstood as being reducible to standards, discretion, contextualized interpretation, public law, and, perhaps most commonly, “mere” remedies. All of these misconceptions can be traced to the misfiring of fusion, giving rise to the polarization and exaggeration of certain problems and the obscuring of others. The Article concludes after some thoughts on the prospects for revitalizing equity as meta-law.