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There is a long-established equitable jurisdiction to strike out terms of a security interest which are inconsistent with its nature as a security interest. The jurisdiction applies to all types of security interest over any kind of property. The scope of the jurisdiction was settled in a series of major cases in the nineteenth and early twentieth centuries, in very different social and economic conditions, and there is some difficulty in applying the principles they established in present conditions.
Equity’s historic intervention in mortgage and loan transactions was influenced by three principal factors. We have already noted the first: the excessive and inappropriate legal rights a mortgagee has always had in the mortgaged property because of the nature of common law security interests. The common law never devised a sui generis security interest, it merely utilised inappropriate property interests and relationships such as ownership, lease and bailment (for the pawn). This explains equity’s creation of the equity of redemption (a development chronicled by Sugarman and Warrington in ‘Telling Stories: Rights and Wrongs of the Equity of Redemption’ (Extract 18.1 below); and see also Lord Parker’s narration in Kreglinger v. New Patagonia Meat & Cold Storage Co. Ltd [1914] AC 25, extracted at www.cambridge.org/propertylaw/). It also explains equity’s recognition of the charge as a security device.
The second factor was a deep-rooted distaste for the underlying bargain, usually a contract for the loan of money at interest. As Paddy Ireland relates in ‘Company Law and the Myth of Shareholder Ownership’ (Extract 18.2 below), usury was for a long time prohibited in this country, then prohibited unless licensed under the Moneylenders Acts, and, whether licensed or not, interest rates were regulated with a prescribed maximum rate. Lord Haldane and Lord Parker assess the significance of this point in Kreglinger in the passages extracted at www.cambridge.org/ propertylaw/.
The third factor was that, at least at the beginning of the period of equitable intervention, mortgagors tended to be regarded as needing and deserving protection. It was partly a question of perceived inequality of bargaining power (‘necessitous men are not free men’), but more because the weaker party was a landowner, as were most of the judiciary, whereas the stronger party was a moneylender or financier. In this early period of development most of the judiciary would have considered it a great social evil for a landed estate which had been in the same family for generations to fall into the hands of moneylenders through the enforcement of a mortgage, as Sugarman and Warrington note in Extract 18.1 below.
These second and third factors were particularly strong during equity’s most active period of development, and during that time quite a high level of equitable intervention in mortgage transactions developed. But, by the mid to late nineteenth century, attitudes were changing. Provision of credit was beginning to be regarded as a social and economic good rather than as pernicious, and the
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judiciary’s class identification with mortgagors had begun to break down. Mortgage relationships no longer all fitted into the traditional landowner/moneylender stereotype, and in any event judges began to be drawn from professional classes instead of from landed families (a development noted by Manchester,
A Modern Legal History of England and Wales 1750–1950, p. 81), and were therefore as likely to identify with bankers and merchants as with landowners, if indeed it was any longer accurate to draw such a distinction. So, from the middle of the nineteenth century, the courts were increasingly uncomfortable with the equitable interventionist principles they had developed, and began to qualify the protection they provided. Kreglinger v. New Patagonia Meat & Cold Storage Co. Ltd [1914] AC 25 epitomises the turn away from protectionism, and the principles it establishes are essentially those still applicable today.
The problem is that the pattern of secured finance today is as far removed from that which was developing at the time when Kreglinger was decided, as the latter was from the pattern which existed when equity first started to intervene in mortgage transactions. Even within the limited field of land mortgages, there are at least three very different secured credit markets. We have already noted the routine financing of virtually all commercial sectors by secured credit, and the vast house-purchase and home-improvement loan markets. The latter in particular is remarkably low-risk, lucrative and highly competitive. On the other hand, there is also a significant market for high-risk last-resort secured lending of the type described by Dyson LJ in Broadwick Financial Services Ltd v. Spencer [2002] EWCA Civ 35 (extracted at www.cambridge.org/propertylaw/). The type and level of protection appropriate is quite different for each of these three sectors, and that provided by the Kreglinger principles is not particularly apt for any of them. Also, there is the complicating factor that the courts are wary of doing anything that would have an impact on the supply of credit, understandably unsure whether increasing or varying equitable protection principles will have unwelcome social and economic consequences.
18.3.2. The Kreglinger principles
The parties in Kreglinger emphatically did not fit the landowner/moneylender stereotype. The borrower was a manufacturer – meat preservers and canners, and renderers of animal products – and the lender was a woolbroker, i.e. an intermediary between sheepskin producers such as the borrower and manufacturers of wool/sheepskin products. The woolbroker lent the meat company £10,000 (not repayable for five years if no default, although the borrower could repay earlier if it wanted) at an interest rate of 6 per cent, and the meat company also granted the woolbroker a right of pre-emption on all its sheepskins for five years, the woolbroker to pay the ‘best market price’ for all sheepskins it chose to buy and to receive 1 per cent ‘commission’ on all those it did not buy and which the meat company sold elsewhere. To secure repayment, the meat company granted the woolbroker a floating charge over all its assets. The meat company repaid early, and then wanted
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to be freed from the right of pre-emption, claiming that it fettered its right to redeem (since if it redeemed within five years, it would not get back everything it mortgaged) and also that it gave the lender an improper collateral advantage in addition to repayment of its capital with interest. The House of Lords refused to intervene. Lord Haldane rationalised the principles on which equity would intervene in a mortgage transaction down to four. In his formulation (different formulations appear in the other judgments, a fertile source of dispute in later cases) the applicable principles are as follows:
1Once a mortgage, always a mortgage. In other words, transactions which are in substance mortgages will be treated as such, even if they take some other form. So, for
example, an apparent sale will be set aside if it took place only as security for an obligation, and that obligation has now been fulfilled, albeit too late.
2Once the prohibition against usury was abolished in 1854, the parties to a mortgage are entitled to bargain for an additional advantage to be given to the lender during the mortgage (i.e. an advantage additional to repayment of capital plus interest) provided it is not unconscionable (variously expressed as ‘imposed unfairly or oppressively’ or as ‘harsh and unconscionable’, and see also Lord Parker at pp. 54–5 and 56 on this). This is just part of the general equitable jurisdiction to interfere in unconscionable
bargains, not restricted to mortgages. This principle is, however, subject to the third principle, as follows.
3Any term will be void in so far as it makes the mortgaged property ‘irredeemable’ – i.e. it removes, or fetters, the mortgagor’s right to have the mortgaged asset back, free from any interest of, or obligation owed to, the mortgagee, by paying off everything due. The terms likely to have this effect are:
a.a term which postpones the mortgagor’s right to repay the loan, or perform the obligation, for an unduly long period;
b.a term which confers on the mortgagee an advantage which continues after repayment, on the basis that this would deter the mortgagor from repaying (what is the point of repaying capital if you still have to go on, in effect, paying for the loan?), or alternatively that, having performed his obligation as agreed, the mortgagor ought to be able to get his asset back free from the mortgage;
c.a term which gives the mortgagee an option to purchase the mortgaged property, or some interest in it which continues after repayment;
d.a term which amounts to a penalty for early or late repayment.
In Lord Haldane’s view, none of these principles was violated here. Principle 3(b), which seems a likely candidate, was inapplicable in his view because the sheepskin transaction was not a term of the mortgage at all but a separate transaction ‘outside and clear of the mortgage’, as Lord Parker put it (a difficult conclusion to accept, given that the security interest was a floating charge covering all the assets of the borrower, including its sheepskins). As later cases have demonstrated, it is easier to state this distinction than to apply it (see, for example, Jones v. Morgan [2001] EWCA Civ 995, and Warnborough Ltd v. Garmite Ltd [2003] EWCA Civ 1544,
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both concerning options to purchase the mortgaged property contained in commercial financing transactions, and the discussion by Alan Berg, ‘Clogs on the Equity of Redemption – Or Chaining the Unruly Dog’).
Lord Haldane’s second principle is the one most frequently relied on by mortgagors complaining about high interest rates and other exorbitant payment terms. However, it has been established that this principle is applicable only where the terms complained of were imposed in a morally reprehensible manner (Multiservice Bookbinding v. Marden [1979] Ch 84). This has two consequences. First, however high the interest rate, and however harsh the repayment terms, the courts are most unlikely to interfere if the borrower was independently advised, or had other means of appreciating the financial significance of what it was doing. Secondly, it makes the principle inapplicable to excessive repayments arising out of the way in which the mortgagee exercises its right to vary the interest rate unilaterally. Variable interest rate mortgages are common in this country. Sometimes the mortgagee’s right to vary the rate is contractually restricted in some way, so that, for example, the rate must remain within a specified range, or must follow variations in market rates. In other cases, however, there are no such restrictions. Lord Haldane’s principles are of no use here, and it has been left to the common law to step in to make up the deficiencies in the equitable protection. In
Paragon Finance plc v. Staunton and Nash [2002] 1 WLR 685, CA (extracted at www.cambridge.org/propertylaw/), the Court of Appeal held that, where the agreement allows the mortgagee to vary the interest rate at its absolute discretion, there is an implied term, first, that rates of interest will not be set dishonestly, for an improper purpose, capriciously or arbitrarily (per Dyson LJ at paragraph 36), and, secondly, that the lender will not exercise its discretion to vary the rate of interest in a way that no reasonable lender, acting reasonably, would do (paragraphs 41–2). It will be noted, however, that this was of no help to the borrowers in that case. Their interest rate, originally 2 per cent above the rate charged by the Halifax Bank, was increased to 5.14 per cent above the Halifax rate (so that they were paying 12.09 per cent when the Halifax was charging 6.95 per cent), but this was held not to be in breach of the implied term, for reasons apparent from the extract from Dyson LJ’s judgment given at www.cambridge.org/propertylaw/.
18.3.3. Statutory intervention
Largely as a result of the equitable jurisdiction’s failure to adapt to the conditions of twentieth-century secured lending, some statutory regulation has been introduced, most notably by the Consumer Credit Act 1974. The Consumer Credit Act 1974 contains two sets of provisions relating to mortgages. The first set applies only to mortgages ‘securing a regulated agreement’ (in effect, only second mortgages securing loans not exceeding £25,000). These provisions impose detailed requirements about the form and content of the documentation, how and when documents are to be executed, and provision for printed warnings and cooling-off periods. These provisions are currently under review by the government.
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The second set – the extortionate credit bargain provisions contained in sections 137–139 – apply to all mortgages where the borrower is an individual. There is no monetary limit. The scope of these provisions, and their limited effect in practice, is apparent from Broadwick Financial Services Ltd v. Spencer [2002] EWCA Civ 35 (extracted at www.cambridge.org/propertylaw/). In particular, it should be noted that they have been largely ineffective in controlling interest rates. The first reason for this is that it has been held that sections 137–139 share the defect of the equitable jurisdiction noted above: they do not cover the way in which lenders operate the terms of the agreement, notably by varying interest rates (see Paragon Finance again, in the passages cited in Broadwick). The second reason, however, is fundamental. The courts have taken the view that, in deciding whether an interest rate is ‘extortionate’, the appropriate comparable is the market rate charged by that type of lender to that type of borrower. Consequently, different sectors of the secured lending industry (including those at the shadier end of the spectrum) have been left free to set their own market rates. Only those who step out of line from their own market risk intervention under the 1974 Act.
The other source of statutory regulation is the Unfair Terms in Consumer Contracts Regulations 1999 (SI 1999 No. 2083), which apply to security interests, and which may prove to have some impact on standard form mortgage terms. They replace the 1994 Regulations of the same name (SI 1994 No. 3159), which implemented Council Directive 93/13/EEC on unfair terms in consumer contracts. It was not clear how far the 1994 Regulations applied to land transactions, but they certainly applied to the terms of loans provided by institutions to consumers. Changes made by the 1999 Regulations now make it clear that the Regulations apply to all aspects of land transactions between ‘professionals’ and consumers, including all standard form mortgages. For consideration of the scope of the Regulations, reference should be made to the House of Lords decision in
Director-General of Fair Trading v. First National Bank plc [2001] UKHL 52.
Extract 18.1 David Sugarman and Ronnie Warrington, ‘Telling Stories: Rights and Wrongs of the Equity of Redemption’, in J. W. Harris (ed.), Property Problems: From Genes to Pension Funds (London: Kluwer, 1997)
I . T H E R I S E O F T H E E Q U I T Y O F R E D E M P T I O N
1. Mortgages and the equity of redemption
Historically, a mortgage arose where an owner of property (usually land) required money and arranged to transfer the property to a lender as security in return for a loan. The loan agreement would generally provide for a reconveyance of the property to the borrower at a specific date on repayment of the money borrowed and the interest due. If the loan was not repaid, the property became forfeited to the lender. At common law, the date for repayment had to be strictly adhered to. Even one day’s delay in tendering repayment could result in the borrower losing the entire property to the lender, though the amount of the loan was far less than the value of the land.
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This interpretative stance was challenged by the courts of equity. Dating from at least the turn of the seventeenth century, the courts of equity determined that the strict date for repayment was somewhat irrelevant. Accordingly, the lender’s claim to the property became subject: ‘to a right called the equity of redemption, which arose from the court’s consideration that the real object of the transaction was the creation of a security for the debt. This entitled the [borrower] to redeem (or recover the property), even though he had failed to repay by the appointed time.’
Time was not to be the essence of the agreement. Although the mortgagor’s legal right to redeem the property was lost after the expiration of the time specified in the contract, in equity the mortgagor had an equitable right to redeem on payment within a reasonable period of the principal, interest and costs. A reasonable period could in some cases span many years. The rights of the mortgagor were further enhanced by the rules governing foreclosure.
The discretion to allow the borrower to get back property notwithstanding the contractual terms soon hardened into a right. In addition to this right (the fully fledged equity of redemption), the courts developed various analogous protections for borrowers. Partly under the umbrella of that seemingly tautological maxim of equity, ‘once a mortgage always a mortgage’, the courts also laid down that the borrower’s right to get property back could not be rendered ineffective either by postponing the right for some unacceptable period or by making the right subject to some penalty, such as the borrower being deprived of some or all of the property mortgaged on exercising the right to redeem. What became known as a ‘collateral advantage’, that is, the lender asserting a claim to some or all of the borrower’s property irrespective of repayment of the loan, was outlawed.
2. The establishment of the equity of redemption
It is generally agreed that the exact origin of the equity of redemption in its modern form is probably lost. A. W. B. Simpson suggested that the Chancery courts were prepared to relieve mortgagors from strict forfeiture conditions from the fifteenth century (Simpson, An Introduction to the History of the Land Law (1961), p. 227). But although there are examples to support this, these probably relate to what Simpson calls ‘peculiarly scandalous cases’. The most common example of this would be where the mortgagee was repaid entirely from the rents and profits of the property and still refused to reconvey the property to the mortgagor. Richard Turner, the leading historian of the equity of redemption, concluded that the equity of redemption arose during the reign of Elizabeth I (Turner, The Equity of Redemption (1931)). While the court of Chancery did grant relief to mortgagors during this period, there are only two reported decisions where relief was given after a forfeiture. It was probably not until the start of the seventeenth century that courts began to grant relief to borrowers as a matter of course, without looking for the special circumstances that would have previously been necessary to activate equity’s conscience. The courts gradually extended the list of circumstances that they regarded as causing the special hardship necessary for the court’s protection. Thus, the jurisdiction to intervene which had originally operated only in exceptional circumstances became the rule; and the cases where no relief was granted became the exception. Despite the attempts of the
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Commonwealth Parliament to limit the effectiveness of the right to redemption, and the effort of common lawyers to defeat the equity of redemption on the grounds that it was only a mere chose in action, that is, not a real property interest but merely a personal right recoverable by a suit at law, the mortgagor’s claim to preferential treatment as against the mortgagee, irrespective of the terms of the contract, was established.
3. The jurisdiction consolidated
The courts quickly established that the mortgagor (the borrower) could not be prevented from redeeming, either before or after the contractual redemption date. Put simply, the date was fully effective against the lender, but rather less than effective against the borrower. Although later courts stressed that in certain circumstances the mortgagee may be prevented from redeeming early, the vital principle that a mortgagor cannot be prevented from seeking the return of the mortgaged property has been taken to be established in the seventeenth century by Lord Nottingham.
Lord Nottingham was instrumental in starting the shift of the equity of redemption from a ‘thing’ to an ‘estate’ in equity, that is, in conceptualising the equity of redemption as a kind of real property rather than as a kind of chattel property. Increasingly, mortgagors’ claims were given precedence over other interests to which they had earlier been postponed: for example, mortgagors’ claims came to take precedence even over a real property claim like the wife’s right to dower. In Attorney-General v. Pawlett (1667), Lord Hale first characterised the equity of redemption as a title in equity. According to Lord Hale, a trust was contractual in nature, while the equity of redemption was proprietorial . . .
Despite these legal developments, numerous lenders tried to circumvent the equitable protections. But time and again the courts stressed they would strike down the actual terms of a contract. Claims that the mortgage had subsisted for too long to permit a redemption were also rejected. Nor were the courts impressed when the mortgagee claimed to have suffered particular hardship or taken unusual risks. This justice was not an abstract principle. It turned upon the assumptions of those who were deciding what was or what was not ‘just’. And, for most judges most of the time, justice in this context meant the restoration of landed property to the original owner.
As already suggested, Turner reduces much of his history of the equity of redemption to the ‘personality’ of the Chancellors. This allows him to move straight from Lord Nottingham, the father of the equity of redemption, to Lord Hardwicke, who became the most important figure in the story by ‘consolidating’ the work of Lord Nottingham. Lord Hardwicke’s influential tenure as Lord Chancellor from 1736 to 1756 helped to settle equity as a system of general rules. If nothing else, Lord Hardwicke’s claim to the central position in the story is assured by his famous decision in Casborne v. Scarfe (1735). While this case is by no means the first to define the equity of redemption as an estate, the importance of the equity of redemption as the equivalent of ownership limited through time is fundamental. It provided the legal foundation to underpin the ‘fairness’ of the courts’ interference in contract. Not only was this just, it was technically correct. Although doubts lingered in the minds of some judges for a century or more as to the accuracy of characterising the equity of
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redemption as an estate, for practical purposes they were of no further significance. By 1822, Thomas Coventry could write as incontrovertible: ‘An equity of redemption will follow the custom as to the legal estate.’
A similar transformation took place to the rules governing what were termed ‘collateral advantages’. These rules policed any additional benefit that the mortgagee had extracted from the mortgagor, additional that is to the interest and the principal owed to the mortgagee. As with the rules relating to attempts to limit rights to redeem, anything that allowed the mortgagee the slightest opportunity of obtaining the mortgaged property itself was, by definition, oppressive or unjust.
When doubts were cast on these decisions by Lords Lindley, Romer, Jessel and others at the end of the nineteenth century, many reasons were given as to why the collateral advantage rules should not be followed. But, as we shall see, the crucial thing was that the late nineteenth-century courts no longer found these decisions ‘just’ or ‘reasonable’. According to Lindley LJ, delivering judgment in 1898, to call a normal collateral agreement unconscionable, ‘would shock any business man’. Perhaps it would, and in this area at least, so far as his Lordship was concerned, what did not shock a business man did not shock him.
In summary, the general effect of the rules governing the equity of redemption was to protect the owners of landed wealth as far as possible. The rules never purported to allow borrowers to escape from the actual debts they contracted, but the courts took it upon themselves to decide the limits beyond which lenders of money secured on landed estates could not go. In the mid-nineteenth century, the jurisdiction was seemingly incontrovertible. Even as late as 1912, Lord Halsbury spoke of ‘this equitable doctrine which, I agree, is now part of the jurisprudence of this country’.
4. Little short of ideal
Why was this highly interventionist jurisdiction fair; and how was it justified? Judges and jurists tended to adopt two intersecting rationales for this special jurisdiction. First, one distinctive strand of equity’s broad and highly discretionary jurisdiction in fraud concerned the protection of young heirs. In these cases it would be argued that landed heirs should be relieved from their bargains to borrow money, convey land, buy horses, jewellery, etc., because these bargains were unconscionable and fraudulent. They were fraudulent and unconscionable because the young heir concerned was in ‘necessitous circumstances’. Because they felt impelled to undertake the sort of bargains that others would scorn, they were the obvious targets of what were characterised as ‘unscrupulous moneylenders’ or ‘rogues’ selling goods at a high price. It was co-extensive with these developments that equity developed and consolidated the equity of redemption. The doctrine was intended to protect the landowner from the money-hungry activity of commercial interests. The anomalous character of this protection for the ‘necessitous’ is evident when one considers the many other instances in which starker necessitousness did not postpone debts due.
Secondly, it was emphasised that the court’s function was to ensure that ultimately land was returned to its ‘rightful’ (often meaning historical or traditional) owner. Even when the terms of the contract unequivocally pointed to an agreement to transfer the
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ownership of the land in exchange for money, goods or services, the courts were seemingly loath to accept it at face value.
As the story was told by Turner, the development of the equity of redemption was a minor miracle. Speaking of Lord Hardwicke’s role in the development, he could hardly contain his enthusiasm. His Lordship had created a body of law that was ‘fair’, ‘rational’, and ‘noble’, ‘a structure which soon became one of the most important features of English land law, having a far-reaching effect upon the internal economic position of the country’. Although Turner conceded that the end result was not quite up to the high standard of Roman law: ‘The conceptions upon which the rules in application are based are sound in character and little short of the ideal.’ He even allowed his enthusiasm to go so far as to suggest a comparison between the creation and development of the equity of redemption and the development of new symbols in mathematics making possible further advances into ‘unknown realms of mathematical speculation’. Here was a doctrine that could indeed perform miracles.
Ironically, Turner completely failed to comprehend that this near perfect doctrine had been substantially recast by the House of Lords in Kreglinger, a case which he describes but whose significance escaped him. In this case, their Lordships sought to cut back the long-standing doctrine that all collateral advantages in favour of the mortgagee, that is, something granted to the mortgagee in addition to the return of the loan and interest, were invalid. These contracts were no longer viewed as automatically unfair and unconscionable. The result was that the equity of redemption had been significantly weakened. One conception of fairness (the fairness needed to protect and entrench the superior position of the landed oligarchy) had been largely supplanted by another conception of fairness (the fairness demanded by the financier) which appeared to demand the rigorous enforcement of the letter of contracts. Since Turner treated the development of the equity of redemption as intrinsically natural, desirable and superior, thereby abstracting the history of the doctrine from the context within which it was inscribed, he was unable to recognise that when circumstances changed the doctrine might no longer appear so natural and superior.
I I . A N O T H E R W A Y O F S E E I N G: T H E E C O N O M I C , C U L T U R A L A N D P O L I T I C A L D I M E N S I O N S O F T H E E Q U I T Y O F R E D E M P T I O N
1. England’s patrician polity, the law of real property and myth-making
What were the particular circumstances that sustained the construction and expansion of the equity of redemption, and enabled the landed elite to exploit it? First and foremost was the fact that until the 1870s England was a ‘patrician polity’. Until the 1870s, the landed establishment owned about four-fifths of the land in the British Isles. Their political, economic and cultural hegemony was exemplified by their pre-eminence in government, parliament, the law, the church, the civil service and the armed forces.
In Britain, land was sacred: it denoted status and citizenship. Most landowners were faced at some time or other with pressure to sell their land. Writing in 1827, Sir James Graham recognised the problems that heavy indebtedness caused many country gentlemen, and conceded that sale was a possibility:
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But what agony of mind does that word convey? The snapping of a chain, linked perhaps by centuries, the destruction of the dearest attachments, the dissolution of the earliest friendships, the violation of the purest feelings of the heart.
This reluctance to sell was part of a larger ethos: namely, the landowners’ desire to create and maintain a dynasty. As Edmund Burke put it, land ownership was: ‘a partnership not only between those of the living, but between those who were living, those who were dead, and those who are to be born.’ Most large landowning families schemed with varying degrees of success to ensure that the interests of future generations were secure. The legal system played a decisive role in these developments. As Maitland observed, ‘our whole constitutional law seems at times to be but an appendix to the law of real property’.
The landed elite and the law were intensely bound together. From 1621 until 1844, the kingdom’s supreme judges were not the professional lawyers of Kings Bench or Chancery but England’s nobility assembled in parliament. The largest owners of property became the highest judges of the law of property. Even after 1844, England’s most senior judges and law officers continued to be peers in part because the House of Lords remained the kingdom’s supreme court of judicaters. The close relationship between the landed establishment and the law was reinforced by the fact that a significant proportion of the aristocracy took up the law in some form up to as late as the 1880s.
In myriad ways the law constituted and symbolised the elevated position of the landed establishment. Of major importance to the landed oligarchy was the fabrication of a system of equity alongside the common law from the fifteenth century onwards. The Court of Chancery was the great conduit of this equitable jurisdiction, a jurisdiction which tended to moderate the rigidities and formalism of the common law, particularly as it affected the landed. The close relationship between land and the law was further entwined with the privatisation of the process by which land ownership was transferred (conveyancing). In an elaborate process of judicial construction, the Statute of Uses of 1536 was interpreted so that conveyancing came to be undertaken by private contract, designed and overseen by lawyers, rather than involving the supervision of the courts. Nowhere was this dependence upon the legal profession more evident than in the extensive use that large land owning families made of the strict settlement, a legal device developed during the seventeenth century to forestall estate fragmentation.
The attitude that it was the landowners’ natural privilege to take loans on security and then be relieved from the terms of the bargain, persisted until well into the nineteenth century. Lord Guildford borrowed money at 60 per cent when an expectant heir and then successfully claimed that the strict terms of the bond that he gave against the expectancy should not be upheld. The exchange between counsel for the lender and Lord Guildford shows his Lordship denying that he even understood the meaning of ‘60 per cent’. ‘I did not know whether it high or low interest; I thought money-lenders always charged that amount’ he said. Asked whether he thought the rate too high, he replied: ‘I think they ought to let me have money at a lower interest; because they know perfectly well that I was certain to come into the property, and that I could pay them and I was quite right to borrow the money if I wanted it.’
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To emphasise the significance of England’s landed polity does not require that we marginalise the significance of commerce, and from the late eighteenth century to the Thatcher era, Britain’s industrial and manufacturing economy. The significance of credit, and the relations of mutual dependence that it gave rise to helped to bind together landowners, bankers and shopkeepers. Indeed, the equity of redemption helped to foster increased consumption and the expansion of credit by convincing more landowners that the risk of losing their property by way of mortgage was minimal . . .
5. The metamorphosis of the equity of redemption
As we have seen, there have always been some members of the judiciary who took issue with the doctrine of the equity of redemption even in its seventeenth and eighteenthcentury heydays. These misgivings grow louder from about the middle of the nineteenth century. Those elements of resistance within the discourse itself were galvanised anew as a more middle class judiciary found themselves privileging a social group, the landed, who no longer seemed to need nor merit this privileging. The period from the late eighteenth to the late nineteenth century witnessed a ‘shift in emphasis from property law to contract . . . [The] equation of general principles of contract law with the free market economy led to an emphasis on the framework within which individuals bargained with each other.’ Law was one of several discursive processes which helped to forge these new representations of the social world and personhood, determining who could speak and how. These narratives celebrated commerce, the crucial economic role played by the middle classes, the freedom of the market, self-help and a less aristocratic notion of property and personhood. Freedom of contract served to fuse the tradition of the ancient constitution to a new emphasis on business and the town as the expressions of a liberal sense of evolutionary progress and national advance. These narratives presented the middle classes as the real guardians of society.
The members of the judiciary closely involved with the equity of redemption at the end of the nineteenth century and the beginning of the twentieth century had lost their aristocratic bias and were strong advocates of the new contract orthodoxy. The mortgagor it argued was ‘usually a grown-up man, with a very clear vision of his own interests, and quite able to take care of himself even without the solicitor who is generally found at his elbow’. Hence, presumably, there was no need for the classic equity of redemption. For these judges, their role was not to protect one species of property, land, but to protect contractual rights generally, that is, to protect forms of property including rights in land, but not privilege rights in land. If the courts were still to interfere with bargains freely made as the equity of redemption demanded, what would happen to sacred laissez faire doctrines? Faced with these two apparently conflicting positions, the courts decided, after some hesitation, that freedom of contract as they understood it meant more to them than anything else, including the classic form of the equity of redemption. From this perspective, the metamorphosis of the equity of redemption was part of a late exorcism of sixteenth, seventeenth and eighteenth-century notions of the place of land and the landed in English property holding and a manifestation of alternative conceptions of justice and Englishness.
The victory of freedom of contract over property had less to do with the intrinsic superiority of the arguments concerned than the circumstances in which they were
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expressed, which enabled certain groups to exploit them. From the Third Reform Act to the First World War, debates concerning citizenship intensified and progressive liberals sought to transcend the atomistic individualism of classic liberalism. In the eyes of old liberals like the constitutional lawyer, Albert Venn Dicey, the much-feared age of collectivism had arrived. From this perspective, the upholding of freedom of contract with respect to the equity of redemption, and by implication minimal state interference, was itself an attempt to entrench the individualism of classic liberalism in a period when it seemed increasingly under attack. Such, then, was the context within which the equity of redemption was reformulated by the House of Lords in 1914.
C O N C L U S I O N
The belated metamorphosis of the equity of redemption, and therefore of the transformation of property, from older monopolistic forms of ownership grounded in the privileges of status to newer, contractual, individualistic and free-market forms of ownership, testifies to the tenacity of what some commentators have called the backward or feudal dimensions of modern English society. Yet, as with so much of English property law, its pre-modern form was deceptive and paradoxical. The tenacity of the equity of redemption demonstrates that in some areas of property relations commercial prosperity was parasitic upon the stability, strength and survival of the landed gentry. The mortgage, and the doctrine of the equity of redemption which accompanied it, facilitated both, on the one hand, the qualification, alienation and fragmentation of property, and, on the other hand, the concentration of landed wealth and more absolute and exclusive property rights. The rise and tenacity of the equity of redemption highlights some of the ways in which certain areas of property law privileged the rights of the landed for a longer time-span than is often assumed, yet, at the same time, fostered the extension of commercial contracts sustained by credit. From an economic perspective, the equity of redemption created a legal bulwark safeguarding land (and the landed) from the encroachments of capital, while helping to fashion the mortgage as a major vehicle for economic development. From a legal perspective, although the creation and development of the equity of redemption has been taken as exemplifying the law’s increasing commitment to the notion of property as individual absolute dominion, it also illustrates the extent to which the law routinely fostered the qualification of property and restraints on alienation. Although the ideology of absolute private property denied those social and collaborative dimensions intrinsic to human endeavour, in practice the law continually threatened to undo the viability of one of the central tropes of eighteenth and nineteenth-century political discourse. In these ways it could be both feudal and modern.
Extract 18.2 Paddy Ireland, ‘Company Law and the Myth of Shareholder Ownership’ (1999) 62 Modern Law Review 32 at 34–7
U S U R Y A N D T H E C O N C E P T O F P A R T N E R S H I P
. . . Although the term usury eventually came widely to be used to describe any extortionate bargain, in its original sense it involved loaning money for interest. The
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usurer was thus an antiquated version of what Marx later called the money capitalist, the only significant difference between usurer’s capital and interest-bearing or money capital lying not in their form (both entail a movement from M – M1) but in the social relations of production within which the money moves. Frowned upon in Greek and Roman times and completely prohibited in the Middle Ages, the taking of interest on loans was later permitted but rates of return regulated by statute, at which point usury came to be identified with the taking of excessive interest rather than with taking interest per se. To the modern mind, with its acceptance of the intrinsic productivity of money, this antipathy to ‘investment’, to money as capital, seems a rather anachronistic theological prejudice, a quaint, pre-modern, superstition. In this context, the survival of the usury laws into the nineteenth century appears rather odd; an example of law lagging behind economy. However, while the hostility to usury can be traced back to biblical sources and came to constitute one of the principal elements of canon law, it had social and political, as well as religious, underpinnings. These were influentially outlined by Aristotle and remain relevant today.
For Aristotle, exchange was central to the social intercourse which made community, the prerequisite of human happiness, possible. By providing a standard of commensurability for unlike things, money facilitated exchange and thereby made an important contribution to social bonding. Usury, Aristotle argued, undermined money’s ability to perform these functions and subverted the fairness in exchange which was ‘the salvation of states’. It was, he claimed, ‘unnatural’, for money was inherently unproductive. Lacking genitals – ‘organs for generating any other such piece’, as Bentham put it – money was sterile and barren; of all the ways of getting wealth, ‘money produced out of money . . . was the most contrary to nature’. The usurer made money without working for it, taking, in the form of interest, part of the product of the labour of others. Moreover, Aristotle argued, usury was also unnatural in the sense that the acquisition of money tended towards infinity and endless multiplication, encouraging greed for its own sake. One could, like Midas, have an abundance of money and yet still perish from hunger. For Aristotle, therefore, usury undermined justice in exchange, corrupted market relations and subverted the ethical roots of social, political and economic order. There were many later expressions of this view, among the most vivid, that found in The Divine Comedy, in which Dante located usurers, their faces charred beyond recognition by fiery rain, in the seventh circle of the Inferno at the very edge of the second division of hell, to reflect ‘the degree to which [their] particular offense destroy[ed] communal life and the possibility of spiritual happiness’. In marked contrast to modern legal systems, Dante treated fraud more harshly than violence precisely because it eroded the trust and confidence without which community would disintegrate. The theory of usury which emerged in the Middle Ages was ‘not, then, an isolated freak of casuistical ingenuity, but [a] subordinate element in a comprehensive system of social philosophy’.
The legal antipathy to usury can be traced back at least as far as Roman law. However, not only did Roman law permit usury as long as the interest charged was not excessive, it distinguished potentially usurious contracts of loan (mutuum) from other transactions in which payment for the use of money was considered legitimate, prominent among them the contract of partnership (societas). Over time, as trade
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expanded and money came increasingly to be borrowed as well as lent as capital (rather than to meet an immediate material need), the legitimacy of many forms of ‘investment’ was established through an expansion of the scope of concepts such as partnership and a corresponding narrowing of the concept of the (potentially usurious) loan. The result was the legal constitution of many inactive providers of money as ‘partners’ rather than ‘lenders’, essentially on the grounds that they put their capital at risk. The concept of partnership that emerged – the ‘one great and universal form of licit investment in commerce throughout medieval Europe’ – entered scholastic thought ‘largely in the form given it by Roman law’. Despite their desire to prohibit usury, therefore, for most canonists and jurists ‘there was a world of difference between usury, [profit obtained from] a contract of loan . . . and justifiable returns derived from partnerships, where there was a sharing of risk and venture of the capital’. Nevertheless, there was much disagreement (and confusion) among them as to the status of some contractual arrangements in which money was provided in return for a reward, particularly those in which the liability of investors to third parties was restricted. In ‘analysing and systematising the law of usury for the first time’, however, the canonists not only ‘provided a rational foundation for the dramatic growth of commercial and financial life during the Middle Ages’, they developed a very spacious theory of ‘partnership’ based around ideas of risk and ownership. It was encapsulated by Aquinas:
He who commits his money to a merchant or craftsman by means of some kind of partnership does not transfer the ownership of his money to him but it remains his; so that at his risk the merchant trades, or the craftsman works with it; and therefore he can licitly seek part of the profit thence coming as from his own property.
According to this theory, if an investor of money shared the risk of a venture, the arrangement ceased to be a loan and became a partnership. As Patrick Atiyah points out, the concept of risk employed was rather odd for nobody who lends money is ever guaranteed to get it back. Under the theory, however, if, this inherent risk apart, the investor was promised his money back with an additional sum above that legally permitted, the transaction was a loan and potentially usurious. If, on the other hand, the return was neither guaranteed nor fixed in advance but depended on the success, or otherwise, of the venture, the investor was deemed a risk-taking partner. Usury thus entailed the idea of certain gain. As Aquinas emphasised, the issue of risk was itself bound up with the issue of ownership. In a loan arrangement, it was argued, the money lender transferred ownership of his money to the borrower, took a fixed and guaranteed return, and dispensed with the risk to his property; whereas in a partnership the provider of money retained ownership of his property and thus put it at risk. This not only justified his return, it made it possible to attribute it to the goods which the money had been used to buy, rather than to the sterile and barren money itself. In this way, over time, the usury laws contributed to the radical differentiation of two sorts of money investor: ‘lenders’ outside associations receiving interest; and ‘partners’ inside associations sharing profits.
