Equity << EHK wuh tee >>, in law, usually refers to a set of rules that were developed from broad principles of reason and justice. The rules became important in England during the Middle Ages. They were used instead of English common law in cases where basing a judgment on common law would have produced an unfair result. Equity was later adopted in the United States, Canada, and many other countries. The term equity comes from a Latin word meaning even or fair.
Equity allows the law to adjust to the unique circumstances of a case. For example, a person may borrow money and give the lender a mortgage (claim on the borrower’s property) as security. The borrower promises to repay the loan by a specified date. The borrower also agrees that if the loan is not repaid by that date, he or she will forfeit the mortgaged property. Normally, a court would enforce the agreement. Sometimes, however, the property has a value that greatly exceeds that of the loan. In such cases, the court may use principles of equity to order the property sold. If the court orders the property sold, the debt and the court costs are paid from the proceeds and the rest of the money is returned to the borrower. This result is fairer than a forfeiture of the total value of the property by the borrower.
Equity came into use in England because the English courts had applied common law so strictly that injustices were created in many cases. In some cases, a party to the lawsuit asked the king to step in and provide relief by judging the case according to broad principles of justice rather than to the strict letter of the law. A minister of the king called the chancellor reviewed petitions to hear such cases. The chancellor eventually became head of a court of equity called the Court of Chancery.
The Court of Chancery and other courts of equity differed from England’s courts of common law. The courts of common law used juries, but the courts of equity did not. The two kinds of courts also had different powers. Courts of common law could only award compensation for damages after an injury was done. Courts of equity could also issue injunctions, which required one or more persons to do, or not to do, something.
In England, the Court of Chancery was once the highest court next to the House of Lords. But from 1873 to 1875, new laws merged the Court of Chancery with the common law courts to form the High Court of Justice.
Many U.S. states once had courts of equity that were separate from the states’ courts of law. But in most of these states today, the two kinds of courts have been merged into one court called a court of law. Unlike a suit in common law, where the case may be tried before a jury, a suit in equity is tried before a judge. A court of equity will rarely try a criminal case. In some states, an unmerged court of equity is known as a court of chancery, and its presiding judge is called a chancellor. Federal equity courts and federal law courts in the United States have also been merged.
The term equity has special meanings in bookkeeping, taxation, and real estate law. For information on these types of equity, see Bookkeeping; Mortgage; and Taxation (Principles of taxation).
See also Common law; Injunction.
