CORNELL LAW SCHOOL

LEGAL STUDIES RESEARCH PAPER SERIES

Modern Equity

Emily Sherwin

Cornell Law School

Myron Taylor Hall
Ithaca, NY 14853-4901

Cornell Law School research paper No. 18-24

This paper can be downloaded without charge from:

The Social Science Research Network Electronic Paper Collection:
http://ssrn.com/abstract= 3149818

Electronic copy available at: https://ssrn.com/abstract=3149818

 Modern Equity

Emily Sherwin*

Maitland defined equity as “that body of laws administered by our English courts of

justice which, were it not for the operation of the Judicature Acts, would be administered by

courts that would be known as Courts of Equity.”1 The implication is that nothing unifies the

various principles, doctrines, and remedies associated with equity other than their procedural

origin. This is strictly true, and yet it raises the question why the concept of legal equity has not

simply disappeared as procedural merger has become the norm. The answer may be that courts

have administered the equitable principles, doctrines, and remedies in ways that are distinct from

their administration of ordinary rules of law. The special roles that courts have assigned to

equity continue to be important in our modern legal system.

One distinguishing feature of equity is that courts have used it to correct unsatisfactory

outcomes that sometimes result from the application of general, determinate rules.2

*
Frank B. Ingersoll Professor of Law, Cornell Law School.
1
F.W. Maitland, Equity and Also the Forms of Action at Common Law (J.H. Chaytor &

J. Whittaker, eds.) (Cambridge: Cambridge University Press 1929), 1.

2
This is equity in the Aristotelian sense. See Aristotle, Nicomachean Ethics ¶1138b25

(Hackett Pub., Terence Irwin, ed. & trans., 1985) (“And this is the nature of what is decent -

rectification of law in so far as the universality of law makes it deficient.”). Although Maitland

argued that equity did not follow a set of specifically equitable principles, he did view equity as a

supplement or “gloss” on the common law, which softened the operation of common law rules.

Electronic copy available at: https://ssrn.com/abstract=3149818

Determinate rules serve a number of important legal and social purposes, the foremost of which

is to enable individuals to coordinate their actions with the actions of others. Yet determinacy

builds unacceptable outcomes into the administration of law. Strictly applied, a determinate rule

may invite opportunism or it may impose undeserved hardship on a party.

Traditionally, another distinguishing feature of equity has been its subordinate position in

the system of law. Courts have treated equity as a branch of law that comes into play only when

the resolutions offered by legal rules and remedies are objectionable in one way or another.

Douglas Laycock has argued at length that courts no longer adhere in practice to traditional

standards giving priority to legal remedies.3 Laycock admits, however, that whatever courts

may do in fact, they still tend to speak of equity as a secondary component of the legal system.

Another traditional feature of equity, both before and after procedural merger, is that

equity has operated relatively obscurely within the system. Rules are comparatively easy to

grasp, and courts tend to refer first to rules before turning to equitable exceptions. Further,

corrective equity often takes the form of defenses that apply only to historically equitable forms

See Maitland, Equity, 18-19 (“if the legislature had passed a short act saying ‘Equity is hereby

abolished,’ we might still have got on fairly well, in some respects our law would have been

barbarous, unjust, absurd, but still the great elementary rights . . . would have been decently

protected.” Id., 19.

3
See Douglas Laycock, The Death of the Irreparable Injury Rule 3-23 (New York:

Oxford University Press 1991) 3-23 (arguing that although courts continue to cite the rule that

equitable relief is not available if the plaintiff has an adequate legal remedy, they do not in

practice withhold equitable relief unless there are functional reasons to do so).

Electronic copy available at: https://ssrn.com/abstract=3149818

of relief. The result is to decrease the perceived effects of equitable correction on legal rules:

correction appears to be confined to one limited form of legal redress.

The combined effect of these three features of equity is to maintain a precarious but

useful balance between the benefits of determinate legal rules and the attraction of leniency. For

reasons I will describe below, an system of law must provide in some way for corrective equity.

At the same time, too much equity can undermine rules and consequently threaten other

important ends of the legal system. The problem is that determinate rules, which allow for

coordination, and corrective equity, which allows for justice, cannot easily coexist unless equity

remains both subordinate to law and relatively obscure.

The Legal Realists who shaped American law in the last century were skeptical of rules

and enthusiastic about particularized, fact-based decisionmaking. They also disliked obscurity in

law and insisted that the grounds of legal decisions should be clear: only through clarity can law

be harnessed effectively to social scientific objectives. The result of this combination of

attitudes was a program that altered the relation between law and equity by placing corrective

equity front and center in the legal system. Pleading and procedure were geared toward facts

rather than law and substantive rules were supplemented or replaced by explicitly particularistic

doctrines such as unconscionability.

If the Realists were wrong about rules, the strategies they pursued may be costly over

time. By enlarging and spotlighting equity, they dispensed with the protective cover that once

surrounded equitable decisionmaking and limited the effects of equity on general, determinate

rules. When rules and equitable correction are equally open to view in a public system of law,

the reliability of rules is significantly, and progressively, diminished.

This is not to suggest that equity can or should be hidden deliberately from public view.

3
At least in a system that aspires to maintain the allegiance of its citizens, deceptive tactics will

backfire. My objective is simply to explain the need for equity and the dilemma that equity

poses for law.

A. Rules4

One way to look at legal decisionmaking is from the forward-looking perspective of a

benevolent lawmaking authority. I assume for this purpose that the lawmaking authority aims to

serve the interests of those who are governed by law. I assume also that it approaches this task in

a competent way.

From the authority’s vantage point, legal rules perform a number of important functions.

If the authority has better information about the consequences of behavior than most of its

subjects have, it can guide decisionmaking by enacting rules to govern conduct or transactions.

Whether or not the authority has superior information, it can enact rules that will enable private

actors to coordinate their behavior.5 In the absence of reliable rules, self-regulation may be

difficult and in any event individual actors cannot anticipate what others will do. Once a set of

4
The most comprehensive source on the benefits of rules and the problems they pose is

Frederick Schauer, Playing By the Rules: A Philosophical Examination of Rule-Based Decision-

Making in Law and Life (Oxford: Clarendon Press 1991). The points made in this subsection are

also discussed at length in Larry Alexander and Emily Sherwin, The Rule of Rules: Morality,

Rules, and the Dilemmas of Law (Durham: Duke University Press 2001)
5
On the coordination effects of rules, see, e.g., Gerald J. Postema, Coordination and

Convention at the Foundations of Law, 11 J. Legal Stud.(1982) 165, 172-86.

4
rules is in place and regularly followed, it becomes easier to anticipate what others will do and so

to plan around the predicted conduct. Finally, regularly followed rules settle controversy and

uncertainty that might otherwise consume individual and social resources.

To provide these benefits, rules must be general in application and reasonably

determinate.6 Generality allows the rulemaker to provide in a single rule for similarly situated

parties and like cases that cannot be fully specified in advance. Determinacy enables the rule to

provide effective guidance, to serve as a basis for coordination, and to settle controversy in terms

that do not revive the dispute when the rule is interpreted and applied.

General and relatively determinate rules, however, will sometimes prescribe outcomes

that are incorrect, all things considered. General language chosen in advance will cover

unanticipated cases in which the rule’s prescription is out of place. Determinate terms will

sweep in some situations that a more open-ended inquiry would exclude.

If the errors brought about by a general, determinate rule are too frequent or too great, the

rule should be discarded or revised. In at least some cases, however, the benefits a rule provides

through guidance, coordination, and settlement are more significant than the errors it periodically

6
See Schauer, Playing By the Rules, 53-68. The arguments made here assume that rules

have a core of determinate meaning, even if their meaning is uncertain in some contexts. See

generally Kent Greenawalt, Law and Objectivity (New York: Oxford University Press 1992), 34-

89; H.L.A. Hart, The Concept of Law (Oxford: Clarendon Press 1961), 122-38; Schauer, supra

note 3, at 53-68; Jules L. Coleman and Brian Leiter, Determinacy, Objectivity, and Authority,

142 U. Pa. L. Rev. 549 (1993); Lawrence B. Solum, On the Indeterminacy Crisis: Critiquing

Critical Dogma, 54 U. Chi. L. Rev. 462 (1987)

5
generates. In that case, the rule is a good rule and should be retained.7 I will assume, for the

purpose of this essay, that the rules at issue are good rules in this sense, despite some flawed

results.

It might be thought that the flawed results of justified rules can be eliminated by adding a

general exception for all cases in which, as a result of a rule’s generality and determinate

language, the rule prescribes a wrong result. In other words, it might be thought that the solution

is a policy of unlimited corrective equity. An general equitable exception of this kind would

come into play at the time the rule is applied to a particular set of facts, when more is known

about the likely consequences of following the rule. If it appears at the time of application, after

taking into account the damage that a violation of the rule will cause to values such as future

guidance, coordination, and settlement, that following the rule is a mistake, then an equitable

modification would be called for; otherwise, it would not.

The difficulty with this solution, from the point of view of a benevolent lawmaking

authority, is that a general equitable exception must be applied by human agents, who are not

omniscient and do not reason flawlessly from the evidence they have. The rule-applier may be a

rule-subject deciding whether to obey, or a judge deciding whether to enforce the rule according

to its terms. Either way, she is likely to have incomplete evidence about the consequences of

breaking or following the rule. Moreover, the rule-applier will be subject to common reasoning

biases. Like most human agents, she will tend to overvalue relatively immediate and salient

7
If the rule is a good rule, but revisions could reduce the number of bad results, then

ideally the rule should be revised. In the law/equity debate, however, this is a secondary

problem.

6
facts, as compared to facts about long-term consequences of violating the rule such as

diminished capacity for interpersonal coordination.8 As a result, the rule-applier is likely to

undervalue reasons to follow the rule in a systematic way. For example, she may focus on the

cost or unfairness of following the rule in this case, omitting to consider that violating the rule, or

failing to enforce the rule, may affect general perceptions that the rule is regularly followed, and

so reduce its usefulness as a source of coordination.9 Accordingly, it is more likely than not that

the rule-applier will err in deciding when corrective equity is warranted.

Another possible compromise solution is to add both a general exception for recalcitrant

cases and a presumption in favor of following the rule unless it appears that there are reasons of

considerable magnitude to violate the rule.10 Presumptive rule-following, however, is also

8
For overviews of the problem of cognitive biases and studies documenting the

availability heuristic and similar patterns of human reasoning, see Daniel Kahneman, Paul

Slovic, & Amos Tversky, eds., Judgment Under Uncertainty: Heuristics and Biases

163)(Cambridge: Cambridge University Press 1982); Daniel Kahneman, Paul Slovic, & Amos

Tversky, eds, Heuristics & Biases: The Psychology of Intuitive Judgment (Cambridge:

Cambridge University Press 2002).

9
The rulemaker might build an exception into the rule, for cases with special features. To

avoid the reasoning errors the rule is designed to prevent, however, the exception must be stated

in fairly objective terms. Consequently, an exception of this type is really just an additional term

of the rule.
10
This is Schauer’s preferred solution. See Schauer, Playing By the Rules, 202-05,

Frederick Schauer, Rules and the Rule of Law, Harv. J.L. & Publ. Pol’y 14 (1991): 645, 674-79.

7
subject to error at the point of application. A general practice of presumptive rule-following may

also tend to erode over time: a presumption in favor of compliance assumes that subjects will

weigh the immediate reasons to break a rule against reasons to follow the rule, such as the

potential harm to coordination and other benefits of the rule. Each decision to violate the rule

slightly decreases the perception that the rule is generally followed, and therefore slightly

decreases the weight that other potential rule-followers will assign to the benefits associated with

the rule. For these reasons the best resolution, from authority’s point of view, is for all persons

to follow the rule in all cases.

Thus if, on average, the benefits of the rule outweigh the errors it will cause, the rule is

justified. And if, on average, the rule outperforms individual judgment at the point of

application, a general equitable exception is unwarranted. Another way to put this is that, from

the authority’s point of view, it is best that all those who apply the rule should treat the existence

of the rule as an exclusionary reason for action.11 An exclusionary reason is one that functions

both as a first-order reason to act in a certain way and as a second-order reason not to consider,

or at least not to act on, a range of possible contrary reasons for action.12 Treating rules as

exclusionary reasons for action solves the problem of error, and preserves the benefits of the

11
On exclusionary reasons for action, see Joseph Raz, The Morality of Freedom (Oxford:

Oxford University Press 1986), 57-62; Joseph Raz, The Authority of Law (Oxford: Oxford

University Press 1979), 16-19, 22-23, 30-33.

12
See Joseph Raz, Promises and Obligation, in Law, Morality, and Society, P.M.S.

Hacker & J. Raz, eds. (Oxford: Clarendon Press), 221-23 (indicating that the exclusion is

limited).

8
rule, by blocking evidence of special particular circumstances, as least if they fall within the

general range of circumstances the lawmaker considered in designing the rule.

B. Equity

A strict approach to rules, in which rules function as exclusionary reasons for action, has

significant practical benefits as long as the rules are good rules and perform better on average

than human judgment at the point of application. Why, then, might there be a need for corrective

equity?

1. Opportunism

One answer, proposed by Henry Smith, is that equity allows judges to police the

opportunism that determinate rules inevitably attract.13 Relatively sophisticated players can

profit through bad behavior that is accidentally allowed, or not quite covered, by the terms of the

rule. Corrective equity allows judges to intervene after the fact and eliminate unfair gains

obtained in this way.

13
See, e.g., Henry E. Smith, Why Fiduciary Law Is Equitable, in Philosophical

Foundations of Fiduciary Law 261 (Andrew S. Gold & Paul B. Miller, eds., Oxford University.

Press 2014); Yuval Feldman & Henry E. Smith, Behavioral Equity, 170 J. of Institutional and

Theoretical Economics 137 (2014); Henry E. Smith, Equity as Second-Order Law: The Problem

of Opportunism, available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2617413

(January 15, 2015); Henry E. Smith, Equitable Defenses as Meta-Law, forthcoming in Defences

in Equity, eds. Paul S. Davies, Simon Douglas, and James Goudkamp (London: Hart

Publishing).

9
 This is an appealing argument, which assigns a function to equity in a procedurally

merged legal system without endorsing the sort of open-ended correction that does most damage

to the value of rules. The opportunism argument, however, raises several questions. One of

these is empirical. From the point of view of the lawmaking authority, it may or may not be the

case that the instrumental benefits of penalizing opportunists counterbalance the loss of rule-

based benefits such as coordination that occurs when rules are not enforced according to their

terms. Moreover, if judges can recapture enough opportunistic gain to outweigh the benefits of

full enforcement, then the rule probably is not a good rule and its terms should be amended.

Another problem that enters into the empirical balance is the possibility that judges may fail to

distinguish accurately between deliberate advantage-taking and innocent reliance on rules that

generate losses for one party.

Smith characterizes the anti-opportunism function of equity as a second-order function in

a system that otherwise enforces the rules. Equity, in other words, is a type of law about law,

distinct from the ordinary business of enforcing legal rules. This characterization seems

designed in part to limit the effects of equity on rules. The distinction between first-order and

second-order law, however, is not likely to affect actors’ practical assessments of their legal

reasons for action unless equity is not only second-order but also hidden from full view. In a

legal system in which all judicial decisions, legal and equitable, are publically accessible, what

matters is which set of reasons ultimately will prevail. To the extent that equity wins, legal rules

are inert.14

14
This seems to have been Hohfeld’s view:“Though it may represent an important stage

of thought in the solution of a given problem . . . as regards the very relation in which it suffers

10
 2. The Rules Gap

My argument for equity is somewhat different, and depends on gap between the point of

view of the rulemaking authority and the point of view of those who act under rules.15 Rule

subjects and rule-appliers encounter rules in the context of a particular case, in which adverse

consequences of a general, determinate rule are likely to be both evident and salient. From this

perspective, correction will sometimes seem necessary, and limited correction based on

opportunistic behavior may not be enough.

Consider the position of an conscientious actor who confronts a case governed by a

general rule. The actor agrees with the rulemaking authority that the rule is a good rule and

understands the various reasons why, from the authority’s point of view, she should follow the

rule in this case. She understands that rules yield important practical benefits when regularly

followed. She also understands that individual reasoners are prone to errors, especially when

confronted with the salient facts of a single situation. Consequently, she understands that in the

long run, the sum of outcomes will be best if all actors, including her, follow the rule in all cases

that fall within its terms.

direct competition with a rule of equity, the law is, pro tanto, of no greater force that an

unconstitutional statute.” Wesley Newcomb Hohfeld, The Relations Between Law and Equity,

11 Mich. L. Rev. (1913) 537, 543-544.

15
Frederick Schauer has used the term “asymmetry of authority” to describe this

difference in perspective. Schauer, Playing by the Rules, 128-44. Larry Alexander refers to the

problem as “The Gap.” Larry Alexander, The Gap, 14 Harv. J. L. & Public Pol’y (1991), 695,

695. For further discussion, see Alexander & Sherwin, Rule of Rules, 54-95.

11
 Yet, the actor may still believe that she should not follow the rule in this case. The

authority’s position is a position that holds on average, subject to the further understanding that

any general and determinate rule will sometimes dictate the wrong result for a particular case. A

reflective actor will consider not only which action best fits the circumstances, but also whether

others are likely to observe her conduct and if, so, what effect a violation would have on the

coordination value of the rule. She must also consider the likelihood that her own reasoning is

biased or otherwise faulty and the chance that authority possesses special expertise that exceeds

her own. Nevertheless, after taking all these considerations into account, the actor may conclude

that it is best to violate the rule in this case.

In these circumstances, the perspective of the actor diverges from that of the rule-making

authority. From the actor’s point of view, following the rule will seem irrational and wrong. In

fact, the actor may be incorrect: she may have underestimated the probability of harm to the rule

and overestimated her reasoning abilities. Nevertheless, if she complies with the rule she is

acting against her own best understanding of current reasons for action.

This dilemma can be restated in terms of practical rationality. Practical rationality is the

rationality of agents in choosing and taking action.16 I assume a primarily instrumental

understanding of practical rationality, in which it is rational for an agent to choose the action that

will best advance her ends.17

16
A classic discussion appears in Derek Parfit, REAsons and Persons (Oxford: Clarendon

Press 1984).
17
See, e.g., Michael E. Bratman, Intentions, Plans, and Practical Reason (Cambridge,

MA: Harvard University Press, 1987), 52. Instrumental benefit can be defined broadly to

12
 Traditionally, practical rationality is evaluated in terms of the agent’s current reasons for

action.18 More recently, a number of writers have suggested that it is a mistake to think about

practical rationality solely in terms of present reasons for action. Instead, practical rationality is

a condition that extends over time: actors often can achieve greater instrumental benefits by

forming intentions and sticking with them over time than by focusing exclusively on current

reasons for action.19 Thus, if the actor will do better in the long run by always following the

rule than by always exercising her best judgment, then the rational choice is to follow the rule.

encompass moral values of the agent.

18
Edward McClennen calls this the principle of “Separability” and illustrates with a

decision tree in which each new decisional node starts fresh with current forward-looking

reasons. A decision tree of this type separates rationality into slices of time and rationality at

each slice tied to current reasons for action. See Edward F. McClennen, Pragmatic Rationality

and Rules, in Phil. & Publ. Affairs 23 (1997), 229.

19
See Bratman, Intentions, 2-3, 83-91; David Gauthier, Intention and Deliberation, in

Modeling Rationality, Morality, and Evolution, ed. P. Danielson (Oxford: Oxford University

Press 1998); David Gauthier, Assure and Threaten, Ethics 104 (1998); Edward F. McClennen,

Pragmatic Rationality and Rules, in Phil. & Publ. Affairs 26:3(1997), 23; Edward F. McClennen

and Scott J. Shapiro, Rule-Guided Behavior, in III New Palgrave Dictionary of Economics and

the Law, ed. Peter Newman (New York: Stockton Press 1998), 367; Scott J. Shapiro, Legality

(Cambridge, MA: Harvard University Press, 2011), 122-24; Scott J. Shapiro, The Difference that

Rules Make, in Analyzing Law: New Essays in Legal Theory, ed. Brian Bix (Oxford: Clarendon

Press (1998).

13
 There are difficulties with this temporally extended approach to rationality, particularly in

the context of rule-following. First, rationality seems to presuppose the possibility of a reasoned

change of mind when the agent confronts circumstances that she did not specifically anticipate

when she formed her intention.20 Sticking doggedly to a plan when current reasons for action

appear to support a change in course may be a practical mistake. Second, it is hard to explain the

cognitive mechanism that would allow a rational actor to act on a prior intention in the face of a

contrary belief about what she now should do. Arguably, deliberation can only conclude in

action when the action is supported by the agent’s will.21 Once the actor forms a belief about

reasons for action, based on current evidence, she will lack the will necessary to support the act.

One possible way to explain the rationality of acting on prior intentions is to argue that

once the actor has settled on a plan, rationality does not require further reflection at the time of

action. In other words, although it might not be rational for an actor to act against her present

reflective understanding of reasons for action, it can be rational to act on prior intentions without

reflection at the point of action. Michael Bratman, in particular, has argued that it is rational to

act unreflectively on prior intentions as long as the actor is guided by practically reasonable

general dispositions toward intentions, meaning dispositions that achieve good results over time.

20
This is most clear in Bratman’s discussion. See Bratman, Intentions, 60 (suggesting

that whenever an agent spontaneously reflects on reasons for an action, she effectively

reconsiders prior intentions relating to that action).

21
Raz, for example, argues that deliberation does not lead directly to action but instead

requires the assistance of both intention and an element of will. See Joseph Raz, From

Normativity to Responsibilty (Oxford: Oxford University Press 2011), 131-137.

14
In Bratman’s view, intentions are special cognitive states that carry with them an element of

“volitional commitment” as long as they remain in place. As a result, unless the actor pauses to

reconsider, her prior intention will support current action without the need to form new beliefs

about current reasons for action.22 In this way, the actor can obtain the benefits of making and

acting on stable plans without sacrificing rationality.

Bratman’s account of temporally extended practical rationality provides a cognitive

explanation for adherence to rules, and for the idea that legal rules provide exclusionary reasons

for action. A rational actor can form an intention to follow a set of good rules, then act directly

on her intention without considering contrary reasons for action, based on her prior volitional

commitment to follow the rules. In seems to follow that there is rationality does not require

equitable exceptions to rules. If it is rational over the long run to follow the governing rules,

rational actors can and should adopt the authority’s point of view and follow the rules

unreflectively in particular cases.

Yet, the argument that it is always rational to act on a prior intention to obey sound rules

has several weaknesses. One is that nothing other than the force of habit requires actors to

follow or apply rules without reflection. At least according to Bratman’s account of rationality,

the volitional commitment associated with rules dissipates if the actor chooses to reflect. As a

result, there may still be cases in which the actor reflects, reconsiders, and then must face a

22
See Bratman, Intentions, 15-16, 64-65, 811-83. Bratman’s approach also provides an

answer to Raz’s point that deliberative action depends on will. Volitional commitment can be

understood to carry the element of will and so to satisfy the requirement of will. See text at note

XX, supra.

15
conflict between the demands of the rule and what she perceives to be the rational choice of

action.

A second problem is this. Assume the actor does not reflect before complying with a

rule, and assume that it is practically rational for her to do so, in the sense that regular

unreflective compliance with rules will be instrumentally beneficial over time. In this type of

case, practical rationality appears to lead the actor into epistemic irrationality. A very plausible

understanding of epistemic rationality holds that individuals must advert to evidence in their

possession that defeats beliefs they currently hold.23 This standard of responsibility can easily

be extended to the case of rule-follower who believes that it is generally best follow a rule but

has evidence suggesting that she should not follow the rule in a particular case. The evidence

does not defeat her belief that is it is generally best to follow the rule, but it indicates that her

belief is misplaced in her current circumstances and that she should adjust her belief to suit the

case. Thus, although the practically rational course may be to treat the rule as an exclusionary

rule and follow it without reflection, an actor who does this may not be epistemically rational.

23
See Richard Feldman, The Ethics of Belief, in Earl Conee and Richard Feldman,

Evidentialism: Essays in Epistemology (Oxford: Oxford University Press, 2004), 186-88

(beginning with a very limited view of epistemic responsibility but later qualifying it by

requiring agents to take account of defeating evidence); Alvin Goldman, Toward a Synthesis of

Reliabilism and Evidentialism, in Evidentialism and Its Discontents, ed. Trent Doherty (Oxford:

Oxford University Press, 2011), 23 (writing from a process reliabilist point of view, but adding a

standard of epistemic responsibility to process defeating evidence)

16
C. Judicial Equity

Equity enters in because the foregoing observations about discomfort and irrationality in

particular cases apply not only to actors who are called on to follow rules but also to judges who

must apply rules to individual actors after the fact. Judges often act as rulemakers, and so are

likely to understand the long-term benefits of regular application of rules. Yet judges are also

rule-appliers, who confront rules in the setting of particular cases and face difficulties similar to

those actors fact when a general rule produces a result that seems unintended or wrong.

Morever, judges are human reasoners, who are similarly susceptible to the type of cognitive bias

in favor of immediate, salient facts that affects any fallible reasoner.24

From the point of view of the rulemaking authority, it is best that judges apply good rules

according to their terms, even when the judge believes the outcome the rule calls for is wrong.

Because judges are not perfect reasoners, regular enforcement of the rule according to its terms

often will produce better results over time than particularistic decisionmaking by judges.

Moreover, when judges err, the risk of harm to rule values is especially high. If actors perceive

that judicial decisions do not regularly conform to rules, they will not expect other actors to

follow the rules and can no longer rely on them as focal points for coordination. From the point

of view of the judge, however, enforcing the rule when the judge believes the outcome is wrong

will appear irrational and unfair to the parties affected.

24
See Jeffrey J. Rachlinski, Bottom-Up and Top-Down Decisionmaking, 73 U. Chi. L.

Rev. (2006) 933, 942-43 (discussing the effects of affect and availability biases in judicial

decisionmaking); Frederick Schauer, Do Cases Make Bad Law?, 73 U. Chi. L. Rev. 883, 895

(2006) 883, 895 (observing that judges, as rulemakers, are subject to the availability bias).

17
 In cases involving equitable defenses, judges often self-consciously invoke the corrective

function associated with the equity side of law. For example, in Panco v. Rogers, Panco agreed

to sell his house to Rogers.25 Mr. Panco, a retired carpenter who had built his own house,

agreed to sell the house to the Rogers. After discussing the transaction with Mrs. Panco, who

was not a native English speaker, Mr. Rogers prepared an agreement naming a price of $5500.

Panco, who was elderly and deaf, signed the agreement without reading it, then later refused to

convey.

Panco testified that he intended to ask $12,500 for the house and the court found the

house was worth at least $10,000. The court found no evidence that Rogers had engaged in

fraud, concealment, or undue influence, and determined that Panco had breached the contract. It

nevertheless denied Rogers’ claim for specific performance, saying that

“an application for specific performance is directed to the sound discretion of a court of

equity. . . [T]he court must be satisfied that the claim is fair, reasonable, and just, and in

judging of its fairness, the court will look not only at the terms of the contract itself, but

at all of the surrounding circumstances, including the relations the parties. . . . Where the

enforcement of a contract for the sale of land would be harsh, oppressive or manifestly

unjust to one of the parties thereto, its specific performance will not be decreed, but the

parties will be left to their remedy at law.”26

This is a classic example of corrective equity, applied to deny equitable relief. The

applicable rules did not recognize unilateral mistake as a ground for rescission, so the contract

25
Panco v. Rogers, 87 A.2d 770 (N.J. Ch. Div. 1952)
26
Id. at 773.

18
was valid and Panco theoretically was liable for breach. In fact, the equitable defense probably

was conclusive. A damage claim would require Rogers to incur additional expense, and in any

event a jury fixing damages for the value of the Rogers’ lost bargain would likely fix a low sum

based on the same considerations that led the court to deny an equitable remedy. Therefore, the

decision amounts to an exception to court’s stated rule, that a unilateral mistake is not a defense

to contract obligation.

Panco v. Rogers can be viewed as a case of opportunism. Rogers had reason to believe

that the Pancos were not experienced bargainers, may have known the price was low, and may

have suspected that Panco had not read the contract. If so, the case fits well with the view that

corrective equity operates, or should operate, as a mechanism by which courts can detect and

penalize parties who taken advantage of general, determinate rules to obtain unjustified gains.

The potential for equitable correction, however, goes beyond opportunism. Suppose

instead that, on the best understanding of the facts, Rogers acted in good faith: he was an

inexperienced buyer who was not familiar with prices, he believed that Mrs. Panco stated and

intended a price figure of $5500, and he did not realize that Panco was mistaken about the

contents of the written agreement. Although there are no signs of opportunism in this case, the

bargain is one-sided and there is no reason to believe that the exchange is efficient. Thus, the

judge in this revised case would still be under rational and sympathetic pressure to depart from

the rules and deny full enforcement of the contract.

Another example is Patel v. Ali.27 Mrs. Ali, a young mother, agreed to sell her home to

the Patels in what appears to have been a fair transaction. Closing was significantly delayed for

27
Patel v. Ali, [1984] 48 P. & C.R. 118.

19
various reasons that were not attributable to the Patels, including a claim by Mr. Ali’s

bankruptcy trustee that eventually was dismissed. In the interim, Mrs. Ali had a second and third

child. She also developed bone cancer, which resulted in amputation of a leg. By the time of the

closing, she was dependent on help from her sister, who lived nearby, and other sympathetic

neighbors in a close Muslim community.

In these circumstances, the court refused to grant specific performance and limited the

Patels’ remedy to damages for loss of bargain (to be financed by helpful friends). As in the case

of Mr. Panco, it seems unlikely that the plaintiffs would choose to press a claim for damages or

that, if they did, the jury would award substantial damages. So in effect, the judge made an

exception to the normal rules of contract obligation.28 The ambivalence he felt in doing so is

evident in his opening remarks:

“The circumstances of [this] case are unusual and it has caused me some anxiety. The
argument for the defendant . . . necessarily arouses so much sympathy that I felt for a
long time that any exercise of discretionary jurisdiction in her favour would probably be
unfair to her opponents, just because of the force of such sympathy.29

In the end, however, sympathy in light of Mrs. Ali’s circumstances prevailed over fidelity to the

rules.

In each of these cases, it might be better from the authority’s point of view to enforce the

rule, both to preserve its value as a guide to contracting parties and to contain judicial error over

28
The court stated that subsequent personal hardship is not normally a defense to contract

obligation; the seller takes the risk of unexpected events. It reasoned that in the case of Ms. Ali,

she never bargained for a situation in which years would pass before closing. Arguably,

however, delay can also be a risk the buyer assumes by signing a contract. Id., 123-24.
29
Id., 119.

20
the long run. But this approach is unsatisfying from the vantage point of the particular case. The

two viewpoints at work are fundamentally different: they cannot be reconciled or averaged,

because they pit long-term practical rationality against epistemic rationality, human sympathy,

and human error. Both viewpoints are important to a legal system that depends in part on the

loyalty of both actors and judges. Corrective equity gives recognition to the second,

particularized point of view.

C. Equity and Legal Realism

Modern American law has been much influenced by the Legal Realist movement that

began in the first half of the twentieth century. Although the American Legal Realists took

various views on judicial decisionmaking, they converged on several general ideas. First, most

were skeptical about the value of general, determinate rules. They argued that judges typically

have a choice among eligible but conflicting rules and that in any event, rules are subject to

conflicting interpretations. Consequently, rules exert no real force on judicial decisions.30

30
Even Karl Llewellyn, principal drafter of the Uniform Commercial Code, took this

view, saying that “every single precedent, according to what may be the attitude of future judges,

is ambiguous, is wide or narrow at will”) Karl N. Llewellyn, The Bramble Bush: Some Lectures

on the Law and Its Study 2-4 (New York: Oceana, 1930), 64-69 (emphasis omitted); see also

Karl N. Llewellyn, A Realistic Jurisprudence - The Next Step, 30 Colu. L. Rev. 431(1930), 447-

48 (discussing the difference between “paper rules” and the “real rules” that govern decisions).

See generally Brian Leiter, American Legal Realism, in The Blackwell Companion to

Philosophy of Law and Legal Theory (Oxford: Blackwell, Dennis Patterson ed., 2d ed. 2010)

21
 A closely related idea was that judicial decisions respond primarily to the facts of

particular cases. Judges may be moved by the impact of their decisions on the parties involved,

or by the social and economic consequences of their decisions, or simply by their own “hunches”

about the dispute before them.31 It follows that operative “law” is located not in rules but in the

facts and outcomes of individual disputes or empirical judgments about the impact of

decisions.32

249, 253-54 (discussing Realist endorsement of “rational” indeterminacy).

31
See, e.g., Jerome Frank, Law and the Modern Mind (New York: Brentano’s 1930), 111

(“The peculiar traits, dispositions, biases and habits of the particular judge will, then, often

determine what he decides to be the law); Joseph C. Hutcheson, The Judgment Intuitive: The

Function of the “Hunch” in Judicial Decision, 14 Cornell L.Q. 274 (1929), 278 (“I, after

canvassing all the available material . . . wait for the feeling, the hunch - that intuitive flash of

understanding that makes the jump-spark connection between question and decision. . .”);

Llewellyn, Bramble Bush, 69 (advocates must build an inductive case for their desired result);

Herman Oliphant, A Return to Stare Decisis, Pt. 2, 14 A.B.A J. 159 (1928) 159(“we see that

courts are dominantly coerced not by the essays of their predecessors but by a surer thing, - by

the intuition of fitness of solution to problem, - and a renewed faith in judicial government is

engendered.”).
32
Frank, Law and the Modern Mind, 276 (“Law is what happened or will happen in

concrete cases”); Llewellyn, Bramble Bush, 2-4 (“to my mind the main thing is seeing what

officials do. . .; and seeing that there is a certain regularity in their doing - a regularity which

makes possible prediction”). See generally Leiter, American Legal Realism, 257 (“the Core

22
 This understanding of nature of law and legal decisionmaking led to several

prescriptions. Pleading and procedures should be oriented toward the fullest possible discovery

of facts and legal doctrine should be stated in open terms that lead judges to investigate the facts

of cases before them.33 Legal theory should be empirical rather than analytical and legal reform

should work from the from the premise that decisionmaking turns on facts.34 Finally, judges

should state the grounds of their decisions as forthrightly as possible, so that these can be studied

and understood by all actors in the system. “Covert tools are never reliable tools.”35

Claim of realism” is that “judges respond primarily to the stimulus of the underlying facts of the

case”).
33
Stephen N. Subrin, How Equity Conquered Common Law: The Federal Rules of Civil

Procedure in Historical Perspective, 135 U. Pa. L. Rev. 909 (1987), 962-74 (relating the history

of Charles Clark and the Federal Rules of Civil Procedure); Llewellyn, Realistic Jurisprudence,

452 (lawmakers “must so shape [the rule] as to induce its application”); Oliphant, Stare Decisis,

160 (proposing “reclassification of most of law in terms of the human relations affected by it”).
34
See, e.g., Llewellyn, Realistic Jurisprudence, 442-43 (the focal point of legal thought

should be “the area of contact between judicial (or official) behavior and the behavior of

laymen”)(emphasis omitted); Walter Wheeler Cook, The Logical and Legal Bases of the Conflict

of Laws, 33 Yale L.J. 457 (1924), 460 (proposing to “observe concrete phenomena first and form

generalizations afterwards”).
35
Karl N. Llewellyn, The Common Law Tradition: Deciding Appeals (Boston: Little,

Brown, 1960), 365, quoting Karl N. Llewellyn, Book Review, 52 Harv. L. Rev. 700 (1939), 703.

See Oliphant, Stare Decisis, 159 (“With eyes cleared of the old and broad abstractions which

23
 Steven Subrin has argued persuasively that in the realm of procedure, Legal Realism

brought about a fundamental shift from traditional common law methods to fact-oriented

methods associated with equity.36 Subrin does not advocate a return to rigid common law

procedures, but he suggests that the Realist-inspired Federal Rules of Civil Procedure may have

gone too far in the direction of unstructured and particularized decision-making. Lawsuits often

lack focus, costs are high, outcomes are unpredictable, and the system consequently is not as

effective as it might be in vindicating rights.37

The Realist program brought about similar changes in the substantive law, favoring fact-

specific equitable doctrines over the more technical rules of the common law. A leading

example is Karl Llewellyn’s Uniform Commercial Code, which makes liberal use of equitable

terms such as “unconscionability” and “good faith” that are virtually impossible to define outside

the setting of a particular dispute.38 Broad defenses of this kind are no longer confined to

curtain our vision, we come to recognize more and more the eminent good sense in what courts

are wont to do about disputes before them.”)

36
See Subrin, Equity, 973 (“the major theme [of the Federal Rules of Civil Procedure]

was that procedures should step aside and not interfere with substance’), 1000 (in this way,

“equity procedures have swallowed those of common law”).

37
Id., 986-91.
38
See U.C.C. §§1-304 (good faith in performance and enforcement), (2-

302)(unconscionability). Arthur Alan Leff was highly critical of the unconscionability

provisions of the UCC and also distinguished Code unconscionability from the more modest

unconscionability defense previously recognized in equity. See Arthur Allen Leff,

24
equitable relief, but applied to legal remedies as well.39

Thus, in many places, Mr. Panco could now rescind his contract with the Rogers, based

on a unilateral mistake with unconscionable consequences.40 Mrs. Ali’s defense of subsequent

hardship remains unusual. When allowed, however, it is likely to be a full defen to contractual

obligation, rather than a special defense to equitable relief. Thus, in the post-Realist legal

system, equity no longer operates in the background as way for judges to act on their best

judgment that a rule has misfired. Instead, corrective equity functions as part of the primary law

governing legal obligations.

D. Clarity About Equity

Legal Realism not only pushed law in the direction of particularistic decisionmaking, but

also made the equitable component of legal decisionmaking more open and explicit.

Traditionally, the main vehicles for corrective equity were equitable defenses of the type applied

Unconscionability and the Code: The Emperor’s New Clause, 115 U. Pa. L. Rev. 485 (1967).

Unconscionability and similar terms were also incorporated into Realist-inspired Restatements.

See, e.g., Restatement (Second) of Contracts §§ 153 (unilateral mistake), 205 (good faith and fair

dealing) (American Law Institute, 1979).

39
For example, the UCC’s provision on unconscionability provides judges with a broad

array of remedies in response to unconscionability, including refusal to enforce the contract by

any means, legal or equitable. UCC § 302; see also Restatement (Second) of Contracts §208

(1981).
40
Restatement (Second) of Contracts §153(a) (1981).

25
in Panco v. Rogers and Patel v. Ali, which may not be immediately evident at the planning stage

of actions and transactions. Although the existence of equitable defenses has long been

publically accessible in judicial reports, parties - even those acting with professional legal advice

- may not comprehend the importance of equitable relief or the special defense that may apply if

an equitable remedy is needed. As a result, the effect of traditional equitable defenses on the

level of public confidence in the rules governing legal obligation is considerably muted. Judges

deciding cases after the fact may understand that allowing an equitable defense creates an

exception to the governing rules, but parties acting under rules may not fully grasp this point. In

this way, the comparative obscurity of equitable defenses provides a partial solution to the

dilemma of general rules and equitable correction: judges perceive the effects of their decisions

but actors may not fully comprehend the unreliability of the rules.41

In addition to widening the scope of equitable correction, Realist reforms placed

equitable correction in a more visible role. The role of equity in modifying the outcome of rules

has been codified, restated, and extended beyond the traditional, less visible realm of defenses to

equitable relief. Whatever cover the features of subordination and obscurity may once have

provided to equitable correction is now largely gone.

D. Conclusion: The Place of Equity in Modern Law

Corrective equity is inevitable in a legal system. Even given a set of rules such that the

sum of outcomes over time would be better if all people followed the rules in all cases, it will

41
See generally Meir Dan-Cohen, Conduct Rules and Decision Rules: On Acoustic

Separation in Criminal Law, 97 Harv. L. Rev. 625 (1984).

26
sometimes appear wrong, irrational, and unfair to enforce a rule. Corrective equity, however,

impairs the reliability of, and so decreases the benefits of, determinate rules.

As a consequence of Realist reforms, the effect of corrective equity on rules is no longer

limited by the obscurity of equitable doctrines and defenses and their seemingly secondary role

in the system. Nor can this type of obscurity be reinstated. In a public system of law, obscurity

cannot be engineered; it can only arise by an accident such as the separation of common law

courts and chancery courts in much of Anglo-American legal history. Any proposal for

deliberate obfuscation of corrective equity would surely be rejected as a form of manipulation

practiced on judges and citizens.

In the current legal world, the only available answer is that judges must do their best to

understand the effects that relief from the errors of rules may have on the value of rules. This is

not an ideal answer. It requires that judges, in making their decisions, must bear in mind the

coordination benefits and other advantages of regularly enforced rules, try to calculate at least

roughly the cumulative effects that exceptions in the current case and other similar cases will

have on those benefits, and take account of the possibility that their own reasoning will be

mistaken. In requires, in other words, that they must not take too seriously the Realist faith in

the accuracy of judicial “hunches” and particularistic situation sense.

27