An Economic Analysis of Law Versus Equity

Henry Smith (Harvard Law School)

Abstract: The distinction between law and equity is usually regarded as an anachronism or as reducible to simple dichotomies between rules versus standards, property rules versus liability rules, or efficiency versus fairness as the goal of private law. Why did courts invoke equity to a murderer from benefiting from the victim’s estate? What does it mean for a court to deny enforcement of contracts on grounds of “unconscionability”? This paper argues that the notion of equity can be given an economic analysis under which it makes sense to have a separate decision making mode like equity (and civil-law doctrines such as abuse of law). Equity in private law is best regarded as a coherent package of features motivated largely by one goal: preventing opportunism. Equity deals with the threat that actors will manipulate the relatively clear rules of private law for unintended purposes by dealing harshly with the open-ended set of opportunistic behaviors as they arise. Seeing the equitable decision making mode as addressing opportunism helps explain a wide range of integral features of equity, including its in personam operation, ex post discretionary decision making, the emphasis on good faith and notice, the employment of moral standards, and equity’s inherent vagueness. Some of these features of equity potentially place limits on the use of equity in order to prevent it from swallowing up the basic structures of the common law.

Download the paper