Last week, we discussed a recent Court of Appeal decision which reiterated the notion that an oppression remedy is, at its roots, an equitable claim which requires all parties to have clean hands. This week, we explore what equitable claims are, and what the so-called “clean hands doctrine” is in more detail.
Most people believe that ultimate success in a lawsuit means winning a sum of money (i.e. damages). However, damages are not always the outcome in every legal dispute. Historically, there have been two types of claims that can be brought where there is a dispute: a legal claim and an equitable claim.
A person pursuing a legal claim is seeking an monetary award. In contrast, a person pursuing an equitable claim is asking the court to either order a particular action, or stop a particular action or event (for instance, an injunction).
The granting of equitable relief is discretionary, but over the years, equitable doctrines and maxims developed that guided the courts’ in exercising their discretion. These doctrines and maxims are essentially broad statements of principle, whose truth and reasonableness are self-evident. There is no hierarchy of equitable doctrines or maxims, which means that one is not inherently more important than another.
Among the most common equitable maxims are:
- Those who come to equity must come with clean hands;
- Those who seek equity must do equity;
- Equity follows the law; and
- Delay defeats equity.
None of these maxims and doctrines are absolute. Rather, they are flexible principles whose goal is to achieve justice for all parties in a dispute. All principles will be weighed and assessed against the facts at hand in a given dispute to determine an appropriate remedy based on the circumstances.
The Clean Hands Doctrine
The clean hands doctrine states that “those who come to equity must come with clean hands”. This broad statement of principle which prevents anyone guilty of improper conduct in a dispute from obtaining relief. It requires the individual seeking equitable relief to establish that his or her past record in a transaction or interaction is clean.
The improper conduct that is prohibited by the clean hand doctrine must be a part of the transaction that is the subject of the legal dispute, it does not necessarily have to have directly harmed the other party.
The argument that a party to a dispute has “unclean hands” often arises in contracts disputes where both parties to an agreement have acted in bad faith but one of the parties wants the court to order the other party to do something (or cease doing something).
Even where one party to a contact reaches the terms of the mutual agreement, the other party continues to have an obligation to uphold their end of the agreement to the best of their ability. If that party decides that they will not do so because the breaching party did not do so, he or she may subsequently find that the clean hands doctrine prevents them from enforcing the contract.
Similarly, an illegal contract will never be enforced, since an individual cannot profit from committing a wrong. As such, where a person sues for something arising from an illegal contract, there will be no equitable relief available to the individual seeking to enforce that agreement.
In addition, relief will always be denied in cases where both parties have worked to circumvent the law.
A Case Study
A good case study to review the clean hands doctrine in detail is the Court of Appeal case discussed in last week’s blog.
In that decision, several minority shareholders in a family owned company sued the company’s director claiming that he had diverted interests in properties held by the company to his benefit, and that these diversions were oppressive to shareholder interests.
The original trial judge found that two of the minority shareholders who had sued had actually precipitated some of these transactions by refusing to agree to certain financing arrangements in a previous attempt to gain leverage over the director so that they could act in their own interests and extract a benefit to themselves. As a result of this conduct, the director’s hand had been forced
When the minority shareholders appealed the original decision, the Court of Appeal found that since the shareholders were making an equitable claim (in their case, they were seeking an oppression remedy) the original trial judge had been entitled to consider and make findings based on their conduct, which had, in this case, been deemed to be misconduct.
Other examples of misconduct that can be considered to lead to “unclean hands” would be:
- An employee who threatens their employer with blackmail, and then seeks to enforce the terms of their employment contract;
- An individual who requests an injunction, but it is shown that the person has previously violated a previous injunction.
Eli Karp is an experienced commercial litigator with a focus on the financial elements of various legal disputes. Eli continually strives to minimize the impact of commercial disputes on our client’s financial security, and resolve litigation as quickly as possible, so they can get back to business. Schedule your consultation online, or by calling us at 416-769-4107 x1.