Fusion of Equity

I THE FUSION FALLACY If an Australian lawyer were asked about the significance of 1975 in the development of Australian law, he or she would no doubt point to the famous constitutional crisis that culminated, on Armistice Day of that year, in the use by the Governor-General of the ‘reserve powers’ to dismiss the government of the day. That event generated great legal and political controversy for many years, and ‘left many unresolved problems’. 2] Yet, except as an issue in the now muted republican debate,[3] it is not currently a matter of focus in constitutional law; nor is it part of the consciousness of young Australians. Another, less dramatic, event in 1975 has had a more profound and lasting effect on the fabric of Australian law: the publication of the first edition of Meagher, Gummow and Lehane ’s Equity, Doctrines and Remedies (‘Meagher, Gummow and Lehane’), now in its fourth edition. [4] Writing extra-curially, Justice Heydon has said that ‘no greater legal work has been written by Australians. [5] The book has, indeed, been extremely influential throughout the common law world in arresting the decline of the serious study of legal doctrine, and of the unique contribution of equity jurisprudence in particular. Its great strength is its advocacy of the importance of an appreciation of the historical development of doctrine to the understanding, and shaping, of the modern legal system. And, as Spigelman CJ has recently reminded us, the method of common law systems demands that lawyers ‘acknowledge and respect the collective wisdom of our predecessors’,[6] a comment that is, of course, as applicable in equity as it is at law.

Arguably the greatest legacy of Meagher, Gummow and Lehane, certainly its most renowned feature, is its exposition of the ‘fusion fallacy’, which seeks to define the relationship between law and equity in a judicature world (that is, in a common law system in which, emulating the Judicature Act 1873 (UK), law and equity are administered in the same court). Professor Ashburner had put the orthodox view of that relationship in a celebrated dictum that ‘the two streams of jurisdiction, though they run in the same channel, run side by side and do not mingle their waters’. 7] Meagher, Gummow and Lehane takes this further by explaining how a mingling of the waters is likely to involve an unacceptable ‘fusion fallacy’, that is the administration of a remedy, for example common law damages for breach of fiduciary duty, not previously available either at law or in equity, or the modification of principles in one branch of the jurisdiction by concepts which are imported from the other and thus are foreign, for example by holding that the existence of a duty of care in tort may be tested by asking whether the parties concerned are in fiduciary relations. 8] The second limb of the ‘fallacy’ set out in Meagher, Gummow and Lehane encapsulates its most general sense and is capable of application in any area of the legal system in which relevant bodies of law and equity may influence one another. I refer to this as ‘the general limb’. The first limb is more particularised since it asserts only that remedies from the one jurisdiction cannot go in support of rights in the other jurisdiction where that was impossible before the fusion of the administration of law and equity.

Following Justice Priestley, I refer to this aspect of the fusion fallacy as the ‘crossover of remedies’. [9] The ‘crossover of remedies’ is, in one sense, an illustration of the general limb of the fallacy, since it necessarily involves the importation into one jurisdiction of ‘foreign concepts’ from the other jurisdiction. But it also involves something more.

If equity were merely to borrow a concept from the common law (for example, if it were to hold, by analogy to the award of exemplary damages at law, that the equitable remedies of compensation or account of profits could include an exemplary element), the result may simply be a modified rule of equity that could have occurred before 1873. The result can, of course, be dismissed as an aberration or hailed as a sensible development.

But if exemplary damages were to be made available as such in support of a breach of fiduciary duty that arises only in equity, this could not be regarded simply as a development in equity (or of law) since it would have been impossible before 1873: in equity, because the court of Chancery did not (in the absence of statutory authority)[10] apply legal remedies; at law, because the law did not generally recognise equitable rights or make its remedies available in support of such rights. [11] Thus, the outcome cannot be rationalised as the product either of law or of equity. The outcome ssumes – as may analogical developments infringing the general limb – ‘the creation by the Judicature system of a new body of law containing elements of law and equity but in character quite distinct from its components’. [12] Australian authority supports, at least implicitly, both the general limb of the fusion fallacy[13] and its rejection of a crossover of remedies. [14] No doubt, this also reflects the weight of professional opinion, at least in New South Wales. [15] Academic commentary in Australia also generally supports the orthodox position that the fusion fallacy is thought to represent. 16] Commonwealth and English authority is, however, divided on the issue. [17] The leading authority espousing a ‘fusion philosophy’[18] is the decision in Aquaculture Corporation v New Zealand Green Mussel Co Ltd,[19] where the New Zealand Court of Appeal held (in an apparent impermissible crossover of remedies) that monetary compensation was obtainable in response to a breach of a duty of confidence or other duty deriving historically from equity and it did not matter whether such compensation was styled ‘damages’ or not. [20] In reaching its decision, a majority of the Court said:

For all purposes now material, equity and common law are mingled or merged. The practicality of the matter is that in the circumstances of the dealings between the parties the law imposes a duty of confidence. For its breach a full range of remedies should be available as appropriate, no matter whether they originated in common law, equity or statute. [21] And Professor Andrew Burrows, arguing for the eradication of all unnecessary distinctions between law and equity in a fused system, has recently begun the academic assault on the fusion fallacy:

I fundamentally disagree with Meagher, Gummow and Lehane. Indeed, my own view is that we should be doing much more than we already are to recognize unnecessary inconsistencies between common law and equity and to remove such inconsistencies, whether by judicial or legislative reform. To my way of thinking, the anti-fusion school of thought rests on an unacceptable willingness to be slaves to history and on an unacceptable implicit rejection of the need for like cases to be treated alike. [22]

My purpose in writing this paper is not to survey the cases or literature dealing with the fusion fallacy but to analyse the concept itself in order to determine the place that it ought to have in the development of the common law of Australia. Two reasons require that analysis. First, the late Justice John Lehane challenged, rightly, those who assert that law and equity are fused to explain what they mean, how fusion happened and what flows from it. [23] And Justice Gummow has recently pointed out that ‘explanations have been slow in coming’. 24] Secondly, the fusion fallacy has recently been the subject of intense judicial scrutiny in the important decision of the New South Wales Court of Appeal in Harris v Digital Pulse Pty Ltd (‘Harris’). [25] In breach of their contractual and fiduciary duties of loyalty, the defendants diverted projects away from the plaintiff, their employer. The trial judge found the defendants liable to pay equitable compensation or, at the election of the plaintiff, to account for profits. In addition, the trial judge made an award of exemplary damages against the defendants for their breach of fiduciary duty.

By majority (Spigelman CJ and Heydon JA), the Court of Appeal reversed the trial judge’s decision, holding that there was no power to award exemplary damages for the breach of the fiduciary relationship in issue in the instant case. [26] The basis of the majority’s decision was that equitable relief does not pursue penal objective s,[27] Spigelman CJ adding that it was, in any event, inappropriate (in the case of a breach of a fiduciary relationship of the type in question in the instant case) to import such objectives by analogy from the legal remedy of damages. 28] In dissent, Mason P held that established legal policies, found in the ‘amplitude of equitable remedial principle’ and in analogy to tort, required the award of exemplary damages in response to this breach of the fiduciary duty. [29] Relevant aspects of the reasoning of the Court are considered further at appropriate points of this article.