Myths: Magna Carta (“The Great Charter”) and other myths?

In 1866 Thomas Keightley wrote of the Magna Carta [MC] that:

 It is the foundation of all the abundant liberty which we now enjoy, and no other nation can produce such a monument of genuine patriotism and tended and enlightened humanity as it presents; and that too, it should be observed, in an age which we are apt to regard and despise as rude and barbarous. For those enlightened prelates and high-minded nobles who wrested the Great Charter from a reluctant despot, were not actuated by a selfish regard to their own peculiar interests. They provided for the security of even the lowest of the people.  

An Elementary History of England at 53.

The MC protected our civil and criminal rights so that, in the words of Chapter 40: “To no one will we sell, to no one will we deny, right and justice”.

The myth? Well there are two views on that. First, many scholars "have dismissed the traditional interpretation of what the MC actually achieved as a myth" Lectures on Legal History : WJV Windeyer: (1957) at 79. This group of critics considered that the Charter was to serve ‘the dominant class” only.  Second, which version was “the real thing”?  Apparently the MC was re-copied several times without exactitude. Several versions were thereafter published with varying mirror-image terms, some of which were exact, others were not so. Tales of lost copies, plus quashing of the MC by papal rule, the deposing of “bad” King John and so on, have lead to the mystique of the MC up to this day. Whatever are perceived, or actual, defects of the MC, no one can deny that its spirit remains, and will continue to remain, as a core value of our common law thereby giving us the “rule of law” so that we can celebrate its 800th birthday. Indeed as Windeyer wrote: “We cannot lightly dismiss the greatest document in English history, the good root of title of the British constitution”, even if it was not as perfect as we theorise.

The terms of the MC were considered to have been derived from Roman and canon law. Roman law apparently in most common law schools is no longer taught. Canon law as religious law prevails in other spheres, but no longer the source of common law.

The lowest level of criticism of the MC was that it denied relief to the ‘unfree villein”. Feudalism required layers of rights to function and produce income for the overlord. An unfree villain had the use of land from his overlord, he could not leave the land without the overlord’s consent, and he was subject to certain punishments by the overlord. By and large, the missing rights can now be found in section 8 of the Hong Kong Bill of Rights Ordinance, and in parts of the Basic Law.

We seek to ensure that the rule of law is ongoing in the common law world with only a few dissenters. Without the MC what would common law be like? So whatever we may seek to establish precision in its terms, it is undeniable that without it eight hundred years of common law would have been bleak indeed.

MC allowed the natural justice and moral obligations of Equity to flourish, although the Court still maintain that morality has no place in the common law.

Happy 400th birthday also this year to Equity. The court of conscience, Chancery later that of Equity, is also celebrating a milestone this  year – namely the Earl of Oxford’s case (1615) in which the right of Chancery, to maintain its separate court from the King’s courts, and even perhaps for Equity to prevail over the common law, was upheld. Equity was said to be necessary “to correct men’s consciences against frauds, breaches of trust, wrongs and oppressions of what nature soever they be, and to soften and mollify the extremes of the law”.

The myth of the English Mortgage

The phrase “suppressio veri and suggestio falsi” was applied to the traditional form of mortgage, introduced in the twelfth century.

This traditional mortgage was identified as a conveyance plus a contract, to redeem title, by reference to its external appearance. It involved the conveyance or assignment of the legal estate of the mortgagor to the mortgagee, usually as a collateral security for a loan, with a right of defeasance to the mortgagor.

On the surface – the common lawyer would see that the mortgagee now owned the land. Common law did not trouble itself with equitable interests. Equity acknowledged the legal estate to the land in the hands of the common law, but went further to treat the defeasance right of the mortgagor as the main element for protection, and that as an equity of redemption, able to override the contractual right to redeem.

Thus, on repayment, the mortgagor could recover the legal estate even if common law had already cancelled the mortgagor’s right to do so for failure to repay on the due date. Contrary to section 11 of the Law Amendment and Reform (Consolidation) Ordinance [“LARCO”], Equity allowed an extension of time Equity considered that any prevention of recovery – within a reasonable time, perhaps 6 months from the due date – was improper; any recovery but with an attached ‘clog’, or restrictive covenant, was improper. Further to allow the common law “right to redeem” to be extinguished merely because of delay in repayment was too harsh bearing in mind that the majority of mortgagors in early days were farmers, and the loss of the land meant the end of their livelihood. Equity, maintaining its policy of preventing a ‘penalty’ to operate,  justified its extension of time.

Looking at the transaction, at its creation, common law and equity saw different things. The truth of the equitable interest was hidden from view, and the surface was an assignment of title to the land – common with a sale. Thus common law saw a contract of sale. Possession passed to the mortgagee who could allow the mortgagor to remain by (a) a licence or (b) a lease or (c) by attornment.

Equity saw the right of the borrower to recover his land on repayment, even if that repayment was a little late. Hence to equity it was not a sale, but use of land as a security.

The common law interpretation of the transaction succumbed to the maxim “once a mortgage always a mortgage” under which the mortgage was a “security”[thus able to be discharged in appropriate circumstances] rather than a “sale with (possible) resale”. Today, we examine the “sale and resale” transaction to ascertain whether it is a sham. Is it hiding a security? Is the asset sold the only remaining asset held by the borrower who has already secured loans over all other assets? If so, then it is too late for the “purchaser” qua lender, to obtain priority, or even to become a secured creditor in priority of other creditors of the “vendor” qua borrower? The nature of the transaction is dependent on replies to two questions focusing on each party: does the purchaser have an obligation to re-sell: and does the vendor have a right to re-purchase or merely an option to do so? An obligation to re-sell looks like an equity of redemption; an option to re-purchase makes the sale transaction just that.

In Hong Kong, the traditional, legal mortgage over land has now been displaced by a hypothecation under which nothing is transferred to the lender. The effect of this form of security over land is that it is a “legal mortgage by way of legal charge by deed”; this merely creates an encumbrance against the land indicating the identity of the asset available for seizure and sale on default. Possession is given only on default. When repayment is achieved, nothing is redeemed or re-assigned: section 44(1) of the Conveyancing and Property Ordinance (Cap 219) [“CPO”]. Section 44(2) applies all incidents of a true mortgage to this charge other than that of possession until default. This represents the old maxim: “the common law looks at the form: equity looks at the substance”.

A release or satisfaction is available: sec 56. If the mortgagor/chargee sells on default, the bona fide purchaser receives good title: sec 52. Terminology alone, the security over land under the CPO is not clear and apparent. Thus there remains an aura of suppression and suggestion.

More myths and the law

The statutory or legal assignment of the benefit of a chose in action under section 9 of the Law Amendment and Reform (Consolidation) Ordinance (Cap 23) [“LARCO”] can take the form of a transfer or a (traditional) mortgage. The assignment requires the whole of the benefit of the chose to be assigned. Where the form chosen is that of the mortgage, the right of redemption is ignored as part of that transaction. It is a legal transaction and so equitable principles are irrelevant.

By contrast, in equity assignment of the benefit of a chose in action requires consideration but nothing else. The form of this assignment is usually that of an equitable charge, ie a hypothecation. The common “benefit” being charged is that of book debts owed to a company borrower. These book debts are both present as well as future property. Equity has no problem dealing with future property. “Equity looks on that as done, that which ought to be done”. Conscience and the trust are the sine qua non of Equity.

For Equity, aliter the common law, lending money on non-existent property with a right on default to seize and sell the non-existent asset (when it comes into existence), was perfectly fine. The undertaking from the beginning registered with Equity as an obligation to repay; with luck the lender could seize and sell the named assets (although of course not yet clearly identified). On failure of the assets to materialize there still was the promise to repay which had its own personal remedy. Early derivatives must have had a lot of the same aura of “non-existence” that the proceeds of book debts (the future part) had in the late, nineteenth century.

Law Merchant is to thank for the share certificate, the Bill of Exchange and other assets, choses in action, but which were capable of being elevated to receive, in certain situations, protection as if the underlying asset was a chose in possession. These documents could be pledged even though the pledge itself is a possessory security. In such a case, the absence of tangibility is irrelevant. This became the same concept in relation to “future property” for the equitable charge. Furthermore, unlawful interference with the document could give rise to an action in conversion or detinue; again there was a possessory core to the relief for relief here resulted from unlawful interference with possession. Justification for this rests with trade, custom and usage of merchants: see now cases such as MCC Proceeds Inc v Lehman Brothers International (Europe)  [1998] 4 All ER 675, CA; and Silver Stone Ltd & Anor v Lau Kwong Ching James & Ors [2007] 4 HKC 77, CA.

The mythical or mysterious “unconscionability”

A consideration of unconscionability has been with Equity since time immemorial – or more correctly since the Chancellor, and later the Court of Chancery and still later the Court of Equity, began to grant relief against the harshness of the common law. If the role of the Chancellor, and then of his court needed explanation, it came in the Earl of Oxford’s Case in 1615 when the rightful role of the inherent nature of “equity” was confirmed and its place in the “common law” of England set to continue without attack.

Equity has traversed a narrow path tiled with discretion and maxims. Today path has become a great avenue mirroring the ambience and exuberance of the Great Trunk Road of Kipling’s Kim.

One of the areas of modern innovation by Equity to relieve against unconscionability has been in quasi-contract, the common law’s answer to unfair situations. These cover “common money counts” such as quantum meruit, quantum valebat, money paid under mistake, and so on. The rigidity of recovery meant that the common law, especially in quantum valebat and quantum meruit, required the presence of an implied, but never an express, promise to pay where there was a defective contract (eg: no price mentioned) or even no contract (money paid under mistake). Without that, no recovery was possible.

Equity took a different line with the common money counts and looked to overturn them by metamorphosing “quasi-contract”, via equity’s remedy of unjust enrichment, into restitution to off-set unconscionability or the harshness of the common law’s quasi-contract: Pavey & Matthews Pty Ltd v Paul (1987) 69 ALR 385, HCtA. This case was one of the first in the new development: see later examples such as Sempra Metals v IRC [2007] 4 All ER 657, HL: Goss v Chilcott [1997] 2 All ER 110, PC. See also the extensions into areas such as “knowing receipt of trust property”: Akal Holdings (In Liq) v Kasikornbank PCL [2011] 1 HKC 357, CFA.

Unconscionability is usually the trigger for restitution. But commencement of the action requires a nominate, equitable, remedy. The resulting restitution has various aliases, fact situations, legal or equitable wrongs, and results. In Kasikornbank, for example, “knowing receipt of trust property’ (from Barnes v Addy  (1874) through to Royal Brunei Airlines v Tan (1996)) was relieved as equitable compensation. Failure of the bank to do due diligence resulted in it being ordered to repay the value of the shares deposited as security, plus compound interest. In AG v Blake [2001] HL common law damages were disguised as “an account of profits”, commonly the remedy against a defaulting trustee. The identity of the monetary relief in this decision was dissembled into “common law damages” even though no loss had been suffered. The restitution through account of profits was the “consideration for hypothetical waiver” of existing rights, even though no fiduciary relationship existed.

Is the equitable relief of the past now merely a memory? Is it now mythical?  Is discretion now merely an ephemeral, vague background for expansive restitution? Trusts are fully at home in the commercial world. Common law limitations are often (expressly in legislation, or by analogy) the same as equity’s laches.

The Privy Council decision in AG v Reid  formerly doubted in England has now been endorsed; thus no longer is a bribe taken by an employee to remain a debt due to his employer. Instead, following the Privy Council in Reid, the bribe is held on a constructive trust for the employer: FHR European Ventures v Cedar Capital [2014] SC.

To end

A quote from Cardoza in [1923] (Growth of the Law: Yale LS)

Adherence to precedent is once a steadying force, the guarantee, as it            seems, of stability and certainty. …. An avalanche of decisions by tribunals great and small is producing a situation where citation of precedents is tending to count for less and appeal to an informing principle is tending to count for more.

Myths. They are throughout the law. Without them the law would be less just, and less protective of those needing protection.

So back to the MC. Without it, would we have had the law we have today?

© Sihombing Law Mentors 2014