LAW EXTENSION COMMITTEE – EQUITY
SUMMER 2006-07 SESSION
Lecture 2 - Law and Equity
1.2
The Relationship between Law and Equity
[1.10] The relationship between law and equity prior to the introduction of Judicature
Act style legislation. Even though Judicature Acts have now unified the administration
of law and equity throughout Australia the two bodies of law remain separate and to
properly understand the nature of modern equity it is essential to comprehend the
relationship between equity and the law before their administration was united under the
one court. There were a number of major features of that relationship.
[1.11] Common law courts would not recognise equitable rights, titles and interests.
Thus, at common law, the trustee, and not the beneficiary was regarded as the 'owner' of
trust property. This meant, for instance, that no action could be brought at common law
for breach of a purely equitable obligation.
In Castlereagh Motels v Davies-Roe (1967) 67 SR (NSW) 279 a company brought
an action against one of its directors seeking damages for breach of his duty to act
in the interests of the company. Asprey and Jacobs JJ rejected the company's claim
saying at 285-6, We do not think that . . . all those principles which must govern
the conduct of directors as fiduciaries which have been developed in equity have
become in some manner transposed into the common law so that there is at
common law an action for their breach .... The courts of equity having developed
the principles of duty enforce those principles by their own remedies'.
But there were exceptions to this rule. The common law recognised the validity of devises
of equitable interests; in Pawlett v A-G (1667) Hard 465; 145 ER 550 a devise of an
equity of redemption was upheld. The common law also recognised equitable claims in
interpleader cases: Gourlay v Lindsay (1879) 2 SCR (NSW) 278; in garnishee
proceedings: M G Charley Pty Ltd v F H Wells Pty Ltd [1963] NSWR 22, and in contracts
for the sale of land always held the purchaser to be entitled to insist on a conveyance of
the equitable as well as the legal title. In contract cases the common law would sometimes
take into account the interests of a third party cestui que trust when assessing damages at
law.
In Robertson v Wait (1853) 8 Exch 299;155 ER 1360 a ship was chartered from
Liverpool to Calcutta. A clause in the charterparty provided that at Calcutta the
vessel was to be chartered there to a third firm, Ewing & Co, and the plaintiff
expected to receive a commission from that further charter. The ship was lost on
its way to Calcutta and the plaintiff was held to be entitled to damages on its own
account and also to substantial damages as trustee for the third party.
In some circumstances courts of common law have recognised trusts, particularly where
leases have been held on trust, ie, May v Taylor (1843) 6 Man & G 261; 134 ER 891, and
decrees in Chancery have for a long time been allowed as a set-off in actions at law.
Common law courts also recognised equitable rights, titles and interests where they were
the subject matter of a claim in tort or contract, such as breach of a contract to sell some
equitable interest. There were other breaches in the wall,1 but none of any great effect and
the disadvantages flowing from the separate administration of common law and equity far
outweighed these slim concessions.
[1.12] Equity had no power to decide disputed legal rights and titles. A plaintiff seeking
an equitable remedy to enforce a legal right would not be able to do so unless the common
law right was admitted. In New South Wales s 4 of the Equity Act 1880 (s 8 Equity Act
1901), adopting s 61 of the English Court of Chancery Procedure Act 1852, gave the
Supreme Court in its equitable jurisdiction power to determine incidental questions of law
arising in suits for equitable relief.
[1.13] Equity had no power to award damages. The Court of Chancery had power to
award monetary remedies by way of restitutionary relief but not damages as they were
known at law. In England a power to award damages in lieu of or in addition to the
remedies of injunction and specific performance was conferred on Chancery by Lord
Cairns' Act in 1858 which was adopted in New South Wales as s 32 of the Equity Act
1880 (s 9 Equity Act 1901). This has since been re-enacted as s 68 of the Supreme Court
Act 1970 (NSW) This right to award damages was not unlimited. Some entitlement to one
of the two equitable remedies had to be shown before damages could be awarded.
However it was ultimately held that a claim for injunction or specific performance which
could be justified on the original pleadings was sufficient, even though the claim might be
defeated by some subsequent intervening factor: Goldsborough Mort v Quinn (1910) 11
CLR 674, per Isaacs J. This provision has been carried over into the judicature system and
the distinction between damages under Lord Cairns' Act and damages at common law
remains a matter of some controversy. At the same time there has been considerable
growth in equity's jurisdiction to award monetary relief by way of restitution or equitable
compensation (see Chapter 25).
In King v Poggioli (1923) 32 CLR 222 a purchaser of rural land sought specific
performance against the vendor and damages for the vendor's failure to complete
on a specified day as stipulated. However, the purchaser had refused to tender the
full purchase price and retained a sum sufficient to cover the cost of stock lost
through lack of grazing. The High Court held that specific performance was not
available as the purchaser could not show that he was at all times ready and
willing to fulfil his part of the contract and, as he was not entitled to specific
performance, he could not get damages under s 9 of the Equity Act 1901.
[1.14] The common law courts lacked power to give interlocutory relief. Chancery had
inherent power to order discovery, interrogatories, to award interim injunctions and to
appoint receivers. The common law courts lacked these powers, although a power to order
discovery and interrogatories was conferred on the common law courts in England by ss
50 and 51 of the Common Law Procedure Act 1854. The discovery power was adopted in
New South Wales as ss 23-24 of the Common Law Procedure Act 1857. Apart from those
1
MG & L para [141].
limited reforms, litigants at common law had to resort to equity if they wanted any such
interim relief.
[1.15] The courts of common law had no power to award specific performance, or
injunctions. The only exceptions to this were, first, a power to award injunctions in
addition to damages given to the common law courts by ss 48-51 of the Common Law
Procedure Act (Imp) 1854, as adopted in New South Wales by the Common Law
Procedure Act 1857, ss 44-47 which was necessarily limited by the precondition of
damages, and, secondly, a limited power to award injunctions in commercial causes given
in 1965 to the common law side of the Supreme Court by s 7B of the Commercial Causes
Act 1903 (NSW).
[1.16] The common law courts lacked power to make declarations Chancery had an
inherent power to make declarations when giving other relief but it was not until Sir
George Turner's Act 1850, s 35, that a specific power to make declarations, provided the
parties agreed to state a case, was conferred on Chancery. That power was clarified in
1852 by a provision which allowed Chancery to make declarations whether other relief
was granted or not.2 This power was read down to apply only to cases where other relief
could have been granted: Rooke v Lord Kensington (1856) 2 K & J 753; 69 ER 986 (see
Chapter 24).
[1.17] No power existed to transfer cases from one jurisdiction to the other. There was
a very real risk, particularly in cases concerning mistake or breach of contract, of
commencing proceedings in the wrong court. It was not until 1854 in England and 1857 in
New South Wales that a power to recognise equitable defences was conferred on the
courts of common law.3 However, the courts of common law had no power to impose
conditional relief. They could only find for or against a party. As a result the right to raise
2
3
15 & 16 Vict c 86 (Imp) s 50 which was adopted in New South Wales as s 50 of the
Equity Act 1880 and re-enacted as s 10 of the Equity Act 1901.
Common Law Procedure Act (Imp) 1854, ss 83 86; Common Law Procedure Act
(NSW) 1857, ss 48-51, re-enacted as ss 95-98 of the Common Law Procedure Act
(NSW) 1899.
equitable defences at law was restricted to cases in which a court of equity would have
granted an absolute, perpetual and unconditional injunction on the pleading raised: Mines
Royal Societies v Magnay (1854) 10 Ex 489; 156 ER 531.
In Carter v Smith (1952) 52 SR (NSW) 290 a defendant in an action of ejectment
sought to rely on an oral sharefarming agreement. The relevant agricultural
holdings statute required such agreements to be in writing. Street CJ held that
while the agreement might be recognised in equity under the equitable doctrine of
part performance it could not be raised as a defence at common law as a court of
equity would only grant a conditional injunction on such a claim, ie, one which
restrained the plaintiff pending execution of a lease in proper form.
[1.18] As most injunctions awarded by Chancery were conditional the benefit of this
reform was quite limited. Other jurisdictions resolved this continuing procedural dilemma
by enacting judicature legislation. New South Wales clung to the ancient system and
sought to alleviate it by passing legislation which allowed for the transfer of cases from
common law to equity where the judge at common law was of the opinion that the matter
pleaded would not produce an absolute, perpetual and unconditional injunction with
ludicrous results.4 There was no complementary power to transfer cases from equity to the
common law where it became clear that equity could not deal with the matter. New South
Wales attempted a further patch up piece of reform in 1957 by adding s 84A to the Equity
Act 1901.5 Under s 8A the Court, in its equity jurisdiction, was required to transfer a suit
to common law when it appeared at any stage of the proceedings that the Court had no
jurisdiction and that the appropriate remedy lay in the common law. There was some
judicial confusion about what was meant by 'no jurisdiction',6 while the logical conclusion
of 'any stage of the proceedings' remained unexplored when the Supreme Court Act 1970
came to the rescue.
4
5
6
M G & L [152].
M G & L [152].
M G & L [153].
1.3
The Judicature System
[1.19] The English Judicature Act of 1873 and 1875.
While law and equity were
administered by separate courts the only way to resolve conflicts between the two, as in a
case where a defendant at common law had a good equitable defence to the claim but
could not raise it in the common law court, was the common injunction which stopped the
proceedings at common law. That clumsy mechanism was replaced in the Judicature Act
(Imp) 1873 by s 25(11) which provided that where there was any conflict between the
rules of equity and those of the common law, equity should prevail.7 Under the judicature
system the administration of these two bodies of law was brought under control of the one
court, obviating any need for a multiplicity of actions on the one cause. It is crucial to
remember that it is only the administration of these principles which is fused, not the
principles themselves. The main features of a judicature system are:
1.
All branches of the court have power to administer equitable remedies.
2.
Equitable defences can be pleaded in all branches of the court and the
appropriate relief given.
3.
All branches of the court must recognise equitable rights, titles and
interests.
4.
All branches of the court have a general power to determine legal rights
and titles.
5.
The common injunction is abolished.
Fusion fallacies
[1.20] The unification of the administration of common law and equity caused some
judicial confusion, particularly in the early days of the judicature system in England,
resulting in a number of decisions where the judgment proceeded on the erroneous
assumption that the Judicature Acts had united the common law and equity into the one
bundle of principles from which desired pieces could be picked out like rags at a jumble
sale. But that was not the intention of the legislature in bringing in a judicature system.
That proposition has been recognised since. In O’Rourke v Hoeven [1974] 1 NSWLR 622
at 626 Glass JA said of the Supreme Court Act 1970 (NSW) that it effected a fusion not of
two systems of principle but of the courts which administer the two systems. In Bank of
Boston Connecticut v European Grain and Shipping Ltd (The Dominique) [1989] AC
1056 at 1109 Lord Brandon said that the judicature Acts, while making important changes
in procedure, did not alter and were not intended to alter the rights of parties. Or, as
Mummery LJ put it in MCC Proceeds Inc v Lehman Bros International (Europe) [1998]
4 All ER 675 at 691, the Judicature Acts were “intended to achieve procedural
improvements in the administration of law and equity in all courts, not to transform
equitable interests into legal titles or to sweep away altogether the rules of the common
law”. Despite the fact that the Judicature Acts did not state that the two systems of law
were to be, as to the principles applied in each system, decisions have been made over the
years that have suggested some judicial confusion on this point.
Damages for Innocent Misrepresentation
At common law damages were available for the tort of deceit which required proof of
conscious dishonesty: Derry v Peek (1889) 14 App Cas 337. Equity would grant
rescission of a contract on the grounds of innocent misrepresentation, provided the parties
could be restored to their original positions. In Redgrave v Hurd (1881) 20 Ch D 1 Sir
George Jessel MR suggested that the difference between equity and the common law had
disappeared with the passing of the Judicature Acts and that damages might thus be
obtainable for innocent misrepresentation which had previously been recognised in equity
only as a ground for rescission. More recently damages were awarded for breach of
confidence, a purely equitable obligation, without any reference to Lord Cairns' Act as the
basis for the award, nor any suggestion that the remedy was actually a matter of
7
Re-enacted in NSW in the Law Reform (Law and Equity) Act 1972.
restitution, both of which would have satisfied established principle: Seager v Copydex
[1967] 2 All ER 415; [1967] RPC 349.8
Refusal of damages for breach of covenant on the ground that the plaintiff is a
volunteer
The maxim that equity will not assist a volunteer has, in one narrow line of cases, been
carried across to the common law to frustrate an action brought by a party entitled to the
benefit of a covenant executed under seal which, for over five hundred years, had
provided a perfectly good action for damages at common law: Re Pryce [1917] 1 Ch 234.
The trustee of a marriage settlement9 approached the court for directions as to
whether he ought to sue another party to the deed of settlement for breach of its
provisions, specifically, that the party had failed to convey certain after acquired
property to the trustee. Eve J held that the trustee 'ought not to sue' as the
beneficiaries under the deed, by then the wife's next of kin, were volunteers, and
equity would not assist a volunteer. His Lordship also added his view that, 'nor
could damages be awarded either in this court or, I apprehend, at common law
where since the Judicature Act the same defences would be available to the
defendant as would be raised in an action brought in this court for specific
performance or damages'.
The survival of the action for damages for breach of covenant at common law testifies to
the magnitude of the error in this judgment. If it was correct, apart from a number of odd
results, it would be possible to plead the equitable defence of hardship at common law in,
say, an action for money had and received, with absurd consequences. With the legal
8
9
This practice has continued in breach of confidence cases and is now generally
regarded as a matter of equitable compensation rather than a fusion fallacy.
A trust established on the marriage of a woman from a wealthy family whereby
property was settled on trust for the woman for life and thereafter for her children or
heirs. The woman, and usually her husband to be, were parties to the deed, as were
recognition, albeit only by statute, of the rights of married women to own property in their
own name, the marriage settlement has passed into history along with the breech loading
musket and ignorance of penicillin. The varied fortunes of the law of trusts may produce
some new species of arrangements in which covenants to settle after acquired property in
favour of future beneficiaries are a central feature. For the moment, the issues which arose
in Re Pryce and cases of its ilk are unlikely to trouble modern courts of equity.
Damages on the basis of the doctrine of part performance
Under the Statute of Frauds, and its modern re-enactments, certain contracts were
unenforceable if they did not meet certain formal requirements, usually that they be in
writing. In New South Wales the most common example of that is s 54A of the
Conveyancing Act 1919;
54A Contracts for sale etc of land to be in writing
(1)
No action or proceedings may be brought upon any contract for the sale or other
disposition of land or any interest in land, unless the agreement upon which such action
or proceedings is brought, or some memorandum or not thereof, is in writing, and signed
by the party to be charged or by some other person thereunto lawfully authorised by the
party to be charged.
(2)
This section applies to contracts whether made before or after the commencement
of the Conveyancing (Amendment) Act 1930 and does not affect the law relating
to part performance, or sales by the court.
At law such provisions meant that no action for damages could be brought for breach of such a
contract. Equity, on the other hand, by way of the doctrine of part performance, would enforce
such contracts by granting a decree of specific performance, provided the party seeking the
order could prove acts of part performance sufficient to give rise to an equity in his or her
favour. The test for the application of the doctrine of part performance was laid down in
Maddison v Alderson (1883) 8 App Cas 467.
other members of her family The deed usually contained a covenant to settle
property acquired thereafter on the trustees.
The appellant had lived for many years as housekeeper in the service of Thomas
Alderson, who died in 1877. In return for her unpaid services, Alderson had
promised to leave her a life estate in Moulton Manor Farm. He included that gift in
a will which he signed in 1874 and which later failed for want of proper attestation.
After Alderson’s death the appellant took possession of the title deeds to the farm.
Alderson’s heir sought to recover the deeds. In her defence the appellant claimed
that she was entitled to the benefit she would have received under the will because
of the parol agreement between herself and the deceased. The House of Lords, led
by Lord Selborne LC, held that the agreement was one on which the appellant might
have been entitled to relief but for the Statute of Frauds, there being no written
memorandum of it, and that the acts of the appellant were not sufficient to invoke
the doctrine of part performance which required that the acts relied upon as part
performance be unequivocally, and in their own nature, referable to some such
agreement as that alleged. The defendant would then be ‘charged’ upon the equities
resulting from the acts done in execution of the contract and not upon the contract
itself. Mere continuance in Alderson’s service, though without payment of wages,
was not of itself evidence of a new contract, much less one concerning land.
That statement of the rule in Maddison v Alderson was followed by the High Court in
McBride v Sandiland (1918) 25 CLR 69, in which Isaacs and Rich JJ, in a joint judgment,
at 78, confirmed that ‘some such agreement as that alleged’ meant some contract of the
general nature of that alleged. McBride v Sandiland has since been followed in Cooney v
Burns (1922) 30 CLR 216, and in Regent v Millett (1976) 50 ALJR 799. The latter case
was applied in Watson v Delaney (1991) 22 NSWLR 358 as authority for the principle
stated in Maddison v Alderson to give effect to an oral grant of a tenancy for life. The acts
of part performance, which were held to be sufficient, included going into possession,
paying rent, and effecting substantial capital repairs on the premises. The doctrine is not a
rule of evidence through which the court can find proof of a contract otherwise required to
be in writing; it is a rule of substantive law concerned with the question of whether the
acts of part performance relied upon by the plaintiff give rise to an equity entitling him or
her to specific performance. The acts of part performance are not manifestations of the
alleged agreement which satisfy some spirit of the legislation requiring that the agreement
not be secret.
In some cases arguments have been put to the effect that a claim for damages could be
brought for breach of a “partly performed” contract, even though the contract was
otherwise unenforceable for lack of writing.
In Meagher Gummow & Lehane's, Equity Doctrines and Remedies, 4th ed 2002, when
listing examples of fusion fallacies, the learned authors (now Meagher, Heydon and
Leeming) include at para [2-165] "Damages for part performance". In the opening
sentence to that paragraph they say, "Part performance is a doctrine of equity which if
successfully asserted by a plaintiff will take from the defendant to a suit for specific
performance of a contract for sale of an interest in land the defence that the contract does
not satisfy the requirements for writing of s 4 of the Statute of Frauds and its successors.
They then point to a number of cases in which a party has sought to argue that damages
might be awarded for breach of a contract rendered unenforceable by the statute but in
which case the court would not, or could not decree specific performance.
In O'Rourke v Hoeven [1974] 1 NSWLR 622 per Glass JA (with whom Reynolds and
Hutley JJA agreed) citing Dixon J in J C Williamson Ltd v Lukey and Mulholland (1931)
45 CLR 282 at 297 in which his Honour said, "An action of damages could not but fail,
because when a common law remedy is sought, part performance never did and does not
now afford an answer to the Statute of Frauds ... if the doctrine is not confined to cases in
which a decree might be made for specific performance of the contract, it is at least true
that the doctrine arose in the administration of that relief and has not been resorted to
except for that purpose".
The only possible basis upon which damages might be awarded in a case involving a
contract otherwise rendered unenforceable by the Statute of Frauds would be in exercise
of the power conferred by Lord Cairns Act, to award damages in lieu of or in addition to a
decree of specific performance, by courts having such power.
The jurisdiction to award damages in substitution for, or in addition to specific
performance, has not been extended to cases where specific performance could not
possible have been directed. So that where a contract has become incapable of specific
performance, such as by lapse of time, the equitable doctrine of part performance will not
enable a plaintiff to obtain relief in damages.
Lavery v Pursell (1888) 39 Ch D 508 at 518-519 per Chitty J
That case involved a contract made November 1886 house standing on a property. As the
house was thus a fixture the contract was held to be one for the sale of an interest in land.
The vendor subsequently repudiated the contract and returned the deposit on 17
December 1886. The purchaser commenced proceedings seeking an order for specific
performance. No interim orders were obtained and the matter did not come on for trial
until February 1888. At that time the purchaser conceded that because of the lapse of time
the contract could not be specifically enforced. He argued, nonetheless, that he should be
awarded damages for breach of the contract, in lieu of specific performance.
At 519 Chitty J said of the question of whether damages could be awarded on the ground
of part performance;
"It was suggested that after Lord Cairns' Act the Court of Equity could give damages in
lieu of specific performance. Yes, but it must be in a case where specific performance
could have been given. It was a substitute for specific performance. It did not give the old
Court of chancery a general jurisdiction to give damages whenever it thought fit, it was
only in that kind of case where specific performance would have been the right decree
and there were reasons why it would have been better to substitute damages, but that
could not apply to a case where you could not have given specific performance".
The point was restated by the New South Wales Court of Appeal in Batey v Gifford
(1997) 42 NSWLR 710 at 718 per Handley JA (with whom Priestley JA and Clarke A-JA
agreed), where his Honour said:
"Compensation awarded in equity ancillary to specific performance was only available as
Lord Haldane said "for a deficiency in the subject matter described in the contract"
(Rutherford v Acton-Adams [1915] AC 866 at 870) or as Starke J said "for some
diminution or deterioration in the value of the property contracted to be sold". (King v
Poggioli (1923) 32 CLR 222 at 246.) Compensation could not be awarded for
unliquidated damages for breach of contract (King v Poggioli at 246), or for "a claim to
make good a representation about (the) subject matter made not in the contract but
collaterally to it". (Rutherford v Acton Adams at 870.)"
The award of damages for breach of an equitable obligation, particularly exemplary
or aggravated damages
The Court of Chancery had no power to award damages. With the introduction of Lord
Cairns’ act in 1858 it was given power to award damages in lieu of or in addition to the
remedies of injunction or specific performance. In Aquaculture Corporation v NZ Mussel
Co Ltd [1990] 3 NZLR 299 the New Zealand Court of Appeal awarded exemplary
damages for a breach of confidence. Palmer J did the same in Digital Pulse Pty Ltd v
Harris [2002] NSWSC 33 bringing a regrettably childish response from the authors of
Meagher Gummow & Lehane’s Equity Doctrines and Remedies 4th ed (at para 23-020).
In the Court of Appeal, in Harris v Digital Pulse Pty Ltd [2003] NSWCA 10 (7 February
2003) Palmer JK’s decision was overturned, by a majority (Spigelman CJ and Heydon JA,
Mason P in dissent). Those judgments provide a much more reasoned critique of the
question.
The doctrine of Walsh v Lonsdale
[1.21] Perhaps the most famous fusion fallacy is that perpetrated by Sir George Jessel
MR in Walsh v Lonsdale (1882) 21 Ch D 9.
A mill, or factory, was leased for seven years under a written agreement, but no
deed of lease under seal was executed as required by s 3 of the Real Property Act
(Imp) 1845 and thus the lease was void at law. At law the tenant was merely a
tenant from year to year, one year's rent having been paid in advance.
Traditionally, equity would have awarded specific performance of the agreement
to grant a lease. The Master of the Rolls held that a tenant holding under an
agreement to grant a lease of which specific performance would have been decreed
stood in the same position as to liability as if the lease had been executed, saying,
'He is not, since the Judicature Act, a tenant from year to year, he holds under the
agreement and every branch of the court must give him the same rights .... There
are not two estates as there were formerly, one estate at common law . . . and an
estate in equity under the agreement. There is only one court and equity rules
prevail in it'.
If that judgment was taken literally then all distinctions between equitable and common
law interests would vanish. The continued existence of trusts shows that that has not
happened. It is also incorrect to talk of the rules of equity prevailing. The rules of equity
only 'prevail' when there is a conflict between the two; it does not apply to the relationship
between equity and the common law generally. It is also wrong to talk of a party as
having the benefits of a decree of specific performance before the remedy has been
awarded. Decrees of specific performance are not automatic. They are discretionary and
there are many factors, not the least of which is the conduct of the party seeking relief,
which must be taken into account before a court will decree specific performance. Despite
these obvious flaws, and considerable criticism since, Walsh v Lonsdale has survived and
has been accepted as authority for the rule that a written lease not in proper form will,
pending a decree of specific performance requiring the lessor to execute the proper form,
give rise to an equitable relationship of landlord and tenant between the parties under
which the former could, if necessary, be restrained by injunction from acting on the
footing that the latter was merely a tenant-at-will or a tenant from year to year:
Progressive Mailing House Pty Ltd v Tabali Pty Ltd (1985) 157 CLR 17, per Mason J at
26; and the equitable estate thus recognised endures until the contract upon which it is
founded is avoided or dissolved: Cricklewood Property & Investment Trust Ltd v
Leighton's Investment Trust Ltd [1945] AC 221, per Lord Wright at 240. Other obligations
arising under the written lease will not, necessarily, be enforceable.
In Chan v Cresdon (1989) 89 ALR 522 an agreement for lease was executed under
which the respondent agreed to lease certain land in Queensland for five years to
Sarcourt Pty Ltd. A form of lease was annexed and a lease in registrable form was
simultaneously executed, but not registered under the Real Property Act 1861
(Qld). After default by Sarcourt, the lessor sought to recover from the appellants as
guarantors under the unregistered lease. Under s 43 of the Act the lease was not
effectual to pass any estate or interest until registration. The High Court, by a
majority, held that the appellants were not liable under the guarantee. What they
had guaranteed was the 'obligations of Sarcourt Pty Ltd under this lease'. Even if it
was assumed that specific performance of the agreement for lease would be
granted, that was not enough to establish liability on the part of the appellants as
guarantors. Only a lease at law would meet this description for the purposes of the
guarantee. Mason CJ, Brennan, Deane & McHugh JJ, having discussed Walsh v
Lonsdale and the authorities which had dealt with it since, said that case
established two propositions: first, the court's willingness to treat the agreement as
a lease in equity, on the footing that equity regards as done that which ought to be
done and equity looks to the intent rather than the form, rests upon the specific
enforceability of the agreement; and, secondly, an agreement for a lease will be
treated by a court administering equity as an equitable lease for the term agreed
upon and, as between the parties, as the equivalent of a lease at law, though the
lessee does not have a lease at law in the sense of having a legal interest in the
term. Because the liability of a guarantor was, 'At law, as in equity, . . . strictissimi
juris, (so) ambiguous contractual provisions should be construed in favour of the
surety': Ankar Pty Ltd v National Westminster Finance (Australia) Ltd (1987) 162
CLR 549; 70 ALR 641, the requirement that the Chans guaranteed payment of rent
'under this lease' meant just that, and no more.