Introduction

This article discusses internal controls and measures of a warehouse. The management of a business has the responsibility for the proper recording of transactions in its books of account, for the safeguarding of its assets, and for the substantial accuracy and adequacy of its financial statements. (AICPA, November,1972).

Reviewing the effectiveness of internal control is an essential part of the Board’s responsibilities while management is accountable to the Board for developing, operating and monitoring the system of internal control and for providing assurance to the Board that it has done so.

The directors are of the responsibilities of maintaining a sound system of internal control and reviewing the effectiveness of such a system.

At the heart of the guidance is the premise that sound internal control is best achieved by a process firmly embedded within a company’s operations. However, the guidance asserts that the Board cannot rely solely on such an embedded process, but should regularly receive and review reports on internal control from management. (KPMG, October, 1999).

A company’s system of internal control commonly comprises:

Control environment; The control environment sets the tone of an organization, influencing the control consciousness of its people. It is the foundation for all other components of internal control, providing discipline and structure.

Identification and evaluation of risks and control objectives; every entity faces a variety of risks from external and internal sources that must be assessed. A precondition to risk assessment is establishment of objectives, linked at different levels and internally consistent. Risk assessment is the identification and analysis of relevant risks to achievement of objectives, forming a basis for determining how the risks should be managed.

Control activities; Control activities are the policies and procedures that help ensure that management directives are carried out. They help ensure that necessary actions are taken to address risks to achievement of the entity’s objectives

Information and communication processes and pertinent information must be identified, captured and communicated in a form and timeframe that enables people to carry out their responsibilities. All personnel must receive a clear message from top management that control responsibilities must be taken seriously. They must understand their own role in the internal control system, as well as how individual activities relate to the work of others. There also needs to be effective communication with external parties, such as customers, suppliers, regulators and shareholders.

Processes for monitoring the effectiveness of the system of internal control; Internal control systems need to be monitored — a process that assesses the quality of the system’s performance over time. This is accomplished through ongoing monitoring activities, separate evaluations or a combination of the two. Internal control deficiencies should be reported upstream, with serious matters reported to top management and the Board.

The warehouse

Warehousing activities are diverse because the warehoused goods are diverse, the purposes of placing goods in custody are varied, and the scope of operations of warehouses is not uniform. A warehouse may be described as a facility operated by a warehouseman whose business is the maintaining of effective custody of goods for others.

Warehouses may be classified functionally as terminal warehouses or field warehouses:

Terminal Warehouse-The principal economic function of a terminal warehouse is to furnish storage. It may, however, perform other functions, including packaging and billing. It may be used to store a wide variety of goods or only a particular type of commodity.

Field Warehouse- A field warehouse is established in space leased by the warehouseman on the premises of the owner of the goods or the premises of a customer of the owner. In most circumstances all or most of the personnel at the warehouse location are employed by the warehouseman from among the employees of the owner (or customer), usually from among those who previously have been responsible for custody and handling of the goods. Field warehousing is essentially a financing arrangement, rather than a storage operation. The warehouse is established to permit the warehouseman to take and maintain custody of goods and issue warehouse receipts to be used as collateral for a loan or other form of credit.

Warehouses may be classified also by types of goods stored. A wide variety of goods, usually not requiring special storage facilities, is stored in general merchandise warehouses. Some warehouses confine their activities to storing furniture, other household goods, and personal effects.

Recommendations of Control Measures

ü Understanding of controls, relating to the accountability for and the custody of all goods placed in the warehouse

ü Perform tests of controls to evaluate their effectiveness.

ü Test the warehouseman’s records relating to accountability for all goods placed in his custody.

ü Test the warehouseman’s accountability under recorded outstanding warehouse receipts.

ü Observe physical counts of the goods in custody, wherever practicable and reasonable, and reconcile warehouseman’s tests of such counts with records of goods stored.

Internal Warehousing Control Procedures

Receiving, Storing, and Delivering Goods

Warehouse operating procedures should be current on file

Receiving documents should be made available at the time shipment is received

Items should be checked for description, quality and condition at the arrival of shipment & before accepting the bill of lading and completing the receiving report.

Appropriate segregation of duties in the performance of the respective operating functions should be emphasized.

Receipts should be issued for all goods admitted into storage.

Receiving clerks should prepare reports as to all goods received.

The receiving report should be compared with quantities shown on bills of lading or other documents received from the owner or other outside sources by an employee independent of receiving, storing, and shipping.

Goods received should be inspected, counted, weighed, measured, or graded in accordance with applicable requirements.

There should be a periodic check of the accuracy of any mechanical facilities used for these purposes.

Goods should be stored so that each lot is segregated and identified with the pertinent warehouse receipt.

Storage methods should be best suited to the characteristics of the storage areas

The storage plan should permit flexibility of operations and provide for adequate small-lot storage space.

Materials of similar categories should be grouped together as much as practicable.

Hazardous and flammable materials should be stored separately.

The warehouse office records should show the location of the goods represented by each outstanding receipt.

Items should be generally proper packaged and processed prior to receipt.

There should be adequate inspection made of the condition of incoming items.

Access to the storage area should be limited to those employees whose duties require it, and the custody of keys should be controlled.

Periodic statements to customers should identify the goods held and request that discrepancies be reported to a specified employee who is not connected with receiving, storing, and delivery of goods.

Instructions should be issued that goods may be released only on proper authorization which, in the case of negotiable receipts, includes surrender of the receipt.

The stored goods should be physically counted or tested periodically, and quantities agreed to the records by an employee independent of the storage function; the extent to which this is done may depend on the nature of the goods, the rate of turnover, and the effectiveness of other internal control structure policies and procedures.

Where the goods held are perishable, a regular schedule for inspection of condition should be established.

Protective devices such as burglar alarms, fire alarms, sprinkler systems, and temperature and humidity controls should be inspected regularly.

Adequate and proper steps taken to care and preserve storage items.

Goods should be released from the warehouse only on the basis of written instructions received from an authorized employee who does not have access to the goods.

Counts of goods released as made by stock clerks should be independently checked by shipping clerks or others and the two counts should be compared before the goods are released.

Inventory

There should be stock checks conducted to determine the location of the material as reflected on the stock records

Inspectors should be notified when shelf- life items are scheduled for reinspection

Periodic inventories should be made

Periodic spot checks should be conducted to verify the quantity and the condition of material indicated on the stock records

Proper procedure should be used when discrepancies exist

Material in storage should be reviewed periodically to determine the necessity for reprocessing

Shipping

Outbound shipment should properly be manifested

Action should be taken to reconcile a shipment with the order

Carrier tariffs should be observed

Warehouse Receipts

Prenumbered receipt forms should be used, and procedures established for accounting for all forms used and for cancellation of negotiable receipts when goods have been delivered.

Unused forms should be safeguarded against theft or misuse and their custody assigned to a responsible employee who is not authorized to prepare or sign receipts.

Receipt forms should be furnished only to authorized persons, and in a quantity limited to the number required for current use. The signer of receipts should ascertain that the receipts are supported by receiving records or other underlying documents.

Receipts should be prepared and completed in a manner designed to prevent alteration.

Authorized signers should be a limited number of responsible employees.

Supervision

Supervisors should properly plan and schedule work.

There should be daily, weekly and monthly conferences held with key operating personnel to discuss warehouse problems and overall planning of warehousing activities.

There should be balanced of crews and labor used to best advantage.

There should be periodic checks made by supervisory personnel to see if there is idling or lagging on the job

Warehouse staff should be adequately trained for their particular jobs

Administrative personnel should receive adequate training in correct preparation of forms. reports and other clerical duties.

Time and attendance records should accurately and properly maintain.

Labor hours timekeeping should be recorded.

Differences between sick and annual leave should be explained to employees

Material Handling Equipment (MHE)

MHE should be utilized to the maximum and adequate for a balanced operation.

MHE should be centrally controlled and properly distributed for maximum utilization.

MHE should be of high quality, proper size and type for efficient handling of items in storage.

Routine adjustments and minor repairs should be made promptly.

There should be preventative maintenance inspections and lubrications made on each MHE item.

Operators should be instructed in the necessity of preventive maintenance

There should be thorough periodic checkups made of all motorized equipment

MHE records should be maintained so that information is readily available to meet inventory and accounting requirements.

Fire Protection

Firefighting equipment should be conspicuously marked and made readily accessible.

Fire extinguishers, sprinkler systems and other protective equipment should be inspected periodically and a record kept of the inspection date.

Personnel should be instructed about the location and use of available equipment as well as the method of notifying the local fire department when necessary.

There should be scheduled inspection of the premises made to eliminate fire hazards and enforce precautionary measures.

Fire extinguisher recommended by fire safety professionals should be available.

Safety

There should be safety and accidents prevention program in effect.

Management should take active interest and participate in it.

Combustible and flammable materials should be segregated from other materials.

Supervisory personnel should be safety conscious and understand safety and accident prevention methods.

Employees should be instructed in the use of safety methods on their particular jobs and what they are to do in an emergency.

There should be bold written signs of “no smoking”, “no trespassing”, and other safety signs adequately displayed

There should be safety devices provided and employees should adhere to safety clothing

Safety methods should be strictly enforced in handling and storing materials and in housekeeping practices.

Special safety measures should be used in the care and handling of all hazardous materials.

Guard Service

There should be adequate guard service for proper protection of real and personal property.

Contact alarm should provide responsive protection.

Contact alarm should be tested by management before being used at warehouse.

Accident Prevention

First aid facilities should be adequately available at all times

There should be trained first aid personnel available at the facility.

All accidents should be investigated, analyzed and reported promptly and accurately.

Housekeeping

Grounds and structures should be properly maintained and the responsibility should be assign to an individual(s).

There should be periodic inspections made of the storage facility to determine any major repairs or construction needed to protect the real property from abnormal depreciation.

Reports should be made to management of any overtaxing of existing facilities that may require additional construction, repairs or possible change in operating procedure.

There should be performance of general maintenance

Metal receptacles should be provided and emptied at night.

There should be a neat sanitary condition

Warehouse Layout

There should be storage areas designated on the plan and clearly marked.

Bay areas should broken down into sufficiently small areas so that materials can be located easily.

Maximum storage space should be utilized considering type of commodities, cube, floor load capacity,

aisle space and accessibility.

Space used for non-storage activity should be kept to the minimum.

Receiving and shipping bays should be located and sized so that loading and unloading, “in and out checking”, and moving materials can be done efficiently.

Insurance

Warehouse legal liability insurance is insurance for warehouse storage operations. It helps cover a business as a “Bailee” or in other words, a business entrusted with the property of another, for directing physical loss or damage of property that happens during storage, cross-docking, packaging, labeling or other services provided by the Bailee. (TheHartFord, n.d.)

The adequacy, as to both type and amount, of insurance coverage carried by the warehouseman should be reviewed at appropriate intervals.

Protecting your building and what is inside are the ultimate goals for any warehouse owner. The precise type and amount of coverage you need depend on the type of structure you own, the kind of items you store inside and the way you handle those items. (TrustedChoice, n.d.)

Warehouse owners may want to consider these business insurance policies;

1. Warehouse business property insurance

2. Warehouse legal liability insurance

3. Commercial general liability coverage

4. Workers’ compensation

5. Employment practices liability

6. Cyber Liability

7. Employee theft and crime coverage

8. Commercial Auto Insurance

Warehouse liability claims can result from the following;

Ø Theft

Ø Fire

Ø Flood

Ø Temperature Variations

Ø Roof collapse

Ø Missing items

Ø Shipping and Handling

Ø Improper facility maintenance

Ø Infestations

Ø Windstorms

Legal Statues behind Warehouse Insurance Policies

As a warehouse operator’s warehouse legal liability policy only pays a customer if the warehouse operator has been negligent in caring for a customer’s goods, the customer is still responsible for insuring its goods against other types of losses. (e.g., fire, windstorm, etc.).

It is also important to note that virtually every warehouse legal liability policy excludes liability for loss or damage in instances where the warehouse operator has agreed to take on a higher degree of responsibility for the customer’s goods beyond what is legally required (i.e., “reasonable care” ).

This exclusion is necessary because warehouse legal liability policies are underwritten by insurance carriers on the basis of insuring the risks associated with the warehouse operator’s negligence. If a warehouse operator has agreed to assume greater liability for a customer’s goods, then the risk are obviously much more extensive than what the insurance carrier took into account when setting its premium.

In the event of significant loss or damage to the customer’s goods attributable to the warehouse operator’s failure to take reasonable care of the customer’s goods, both the warehouse operator and the customer depend on the warehouse operator’s insurance legal liability policy to respond to the claim. (Wowlogistics, n.d.)

As such, if the warehouse services agreement contains any provision that requires the warehouse operator to assume liability for a customer’s goods beyond the standard of “reasonable care”, then such a provision may void the warehouse operator’s legal liability coverage thereby putting both parties I an unfavorable position.

Controls in field warehousing and terminal warehousing

As indicated earlier, the purpose of field warehousing differs from terminal warehousing. Operating requirements also may differ because a field warehouseman may operate at a large number of locations.

In field warehousing, controls are applied at two points:

The field location

At the field location, the controls as to receipt, storage, and delivery of goods and issuance of warehouse receipts generally will comprise the controls suggested above, with such variations as may be appropriate in light of the requirements, and available personnel, at the respective locations. Only non-negotiable warehouse receipts should be issued from field locations, and the receipt forms should be furnished to the field.

The warehouseman’s central office

The central office should investigate and approve the field warehousing arrangements, and exercise control as to custody and release of goods and issuance of receipts at the field locations. Controls suggested for the central office are the following:

a) Consideration of the business reputation and financial standing of the depositor.

b) Preparation of a field warehouse contract in accordance with the particular requirements of the depositor and the lender.

c) Determination that the leased warehouse premises meet the physical requirements for segregation and effective custody of goods.

d) Satisfaction as to legal matters relative to the lease of the warehouse premises.

e) Investigation and bonding of the employees at the field locations.

f) Providing employees at field locations with written instructions covering their duties and responsibilities.

g) Maintenance of inventory records at the central office showing the quantity (and stated value, where applicable) of goods represented by each outstanding warehouse receipt.

h) Examination of the field warehouse by representatives of the central office. These examinations would include inspection of the facilities, observation as to adherence to prescribed procedures, physical counts or tests of goods in custody and reconcilement of quantities to records at the central office and at field locations, accounting for all receipt forms furnished to the field locations, and confirmation (on a test basis, where appropriate) of outstanding warehouse receipts with the registered holders.

Guidance on the controls for the owner of the goods

After the goods are placed in the warehouse, suggested controls that may be applied periodically by the owner in evaluating the warehouseman’s performance in maintaining custody of goods include the following:

1. Review and update the information developed from the investigation described above.

2. Physical counts (or test counts) of the goods, wherever practicable and reasonable (may not be practicable in the case of fungible goods).

3. Reconcilement of quantities shown on statements received from the warehouseman with the owner’s records.

4. In addition, he should review his own insurance, if any, on goods in the custody of the warehouseman.

Among the suggested controls that may be comprehended in an investigation of the warehouseman before the goods are placed in his custody are the following:

1. Consideration of the business reputation and financial standing of the warehouseman.

2. Inspection of the physical facilities.

3. Inquiries as to the warehouseman’s controls and whether the warehouseman holds goods for his own account.

4. Inquiries as to type and adequacy of the warehouseman’s insurance.

5. Inquiries as to government or other licensing and bonding requirements and the nature, extent, and results of any inspection by government or other agencies.

6. Review of the warehouseman’s financial statements and related reports of independent

Summary

Internal controls serve as the first line of defense in safeguarding assets and preventing and detecting errors, fraud, and violations of laws. Inventory controls, management oversight, and physical security should be comparable to the best industry practices. (Schornagel, 2006)

Recommendations

According to the library of congress of the United Sates, Attestation Report №2005-AT-904 June 2006, The Landover Warehouse Internal Controls suggest these overall control measures to be put in place in a warehouse internal controls;

The Logistics Section should maintain physical accountability of its Inventory

Performance of inventories of assets stored at the warehouse and maintaining a perpetual inventory of the assets. Conduction of periodic confirmation counts of the highly susceptible assets and compare the count against the inventory records. Limiting access to the Inventory system, to the extent possible, and assigning the Assistant Head of Logistics or a designated alternate responsibility for performing inventory adjustments.

Security measures should address the threat of employee theft

Overall security including infrastructure, security procedures, and guard forces needed to be better targeted to address the threat of employee theft. Infrastructure security weaknesses should be addressed. Management should consider assigning the guards exit or leave inspection duties at the main door.

Better Separation of Duties and Reconciliations Should Improve the Receiving and Shipping Functions

There should be separation of duties necessary to ensure inventory integrity. Separating the functions of inputting information into the inventory system and performing the custodial activities such as receiving, shipping, and storing physical assets. Also there should be logistics periodically to reconcile all back orders with the service units to determine if the vendors filled the orders.

Separation of Duties is Necessary to Ensure Integrity of Computers for Learning Program Greater

The warehouse staff should be responsible for both processing the application form and for surplusing the property. A surplus property may be out of date or no longer working. (businessdictionary, n.d.) To provide better separation of duties, management should assign someone not working at the warehouse.

References

AICPA. (November,1972). Research standards and Audittest. Retrieved from AICPA.ORG: https://www.aicpa.org/Research/Standards/AuditAttest/DownloadableDocuments/AU-00901.pdf

businessdictionary. (n.d.). businessdictionary. Retrieved from businessdictionary.com: http://www.businessdictionary.com/definition/surplus-property.html

KPMG. (October, 1999). KPMG internal control practical guide. Retrieved from ECGI: http://www.ecgi.org/codes/documents/kpmg_internal_control_practical_guide.pdf

Schornagel, K. W. (2006, June 19, ). Office of the Inspector General of Library Congress. Retrieved from www.loc.gov: https://www.loc.gov/portals/static/about/office-of-the-inspector-general/documents/rpt2006junelandover.pdf

TheHartFord. (n.d.). Marine-Insurance/warehouse-logistics. Retrieved from TheHartFord: https://www.thehartford.com/marine-insurance/warehouse-logistics

TrustedChoice. (n.d.). Warehouse Insurance. Retrieved from trustedchoice.com: https://www.trustedchoice.com/n/48/warehouse-insurance/

Wowlogistics. (n.d.). warehousing insuarnce. Retrieved from Wowlogistics.com: http://wowlogistics.com/warehousing_insurance_faq.aspx

Maxims of equity are principles developed by the English Court of Chancery and other courts who have administered equity jurisdiction, including the law of trusts. They were often expressed in Latin but are translated into English.

The twelve equitable maxims are:

1. Equity Will Not Suffer A Wrong To Be Without A Remedy

2. Equity Follows the Law

3. He Who Seeks Equity Must Do Equity

4. He Who Comes Into Equity Must Come With Clean Hands

5. Delay Defeats Equities

6. Equality Is Equity

7. Equity Looks to the Intent Rather Than the Form

8. Equity Looks On That As Done Which Ought To Be Done

9. Equity Imputes an Intention to Fulfill an Obligation

10. Where The Equities Are Equal, The First In Time Shall Prevail.

11. Where There Is Equal Equity, The Law Shall Prevail.

12. Equity Acts In Personam.

1. EQUITY WILL NOT SUFFER A WRONG TO BE WITHOUT A REMEDY

Meaning

Where there is a right there is a remedy. This idea is expressed in the Latin Maxim ubi jus ibi remedium. It means that no wrong should go unredressed if it is capable of being remedied by courts. This maxim indicates the width of the scope and the basis of on which the structure of equity rests. This maxim imports that where the common law confers a right, it gives also a remedy or right of action for interference with or infringement of that right.

Application and cases

In Ashby v. White, wherein a qualified voter was not allowed to vote and who therefore sued the returning officer, it was held that if the law gives a man a right, he must have a means to maintain it, and a remedy, if he is injured in the enjoyment of it.

In cases where some document was with the defendant and it was necessary for the plaintiff to obtain its discovery or production, a recourse to the Chancery Courts had to be made for the Common Law becoming ‘wrongs without remedies’.

Limitation

a) If there is a breach of a moral right only.

b) If the right and remedy both were in within the jurisdiction of the Common Law Courts.

c) Where due to his own negligence a party either destroyed or allowed to be destroyed, the evidence in his own favour or waived his right to an equitable remedy.

Recognition

i) The Trust Act

ii) Section 9 of CPC- entitles a civil court to entertain all kinds of suits unless they are prohibited.

iii) The Specific Relief Act- provides for equitable remedies like specific performance of contracts, injunction, and declaratory suits.

2. EQUITY FOLLOWS THE LAW

Meaning

The maxim indicates the discipline which the Chancery Courts observed while administering justice according to conscience. As has been observed by Jekyll. M.R: ‘The discretion of the court is governed by the rules of law and equity, which are not to oppose, but each, in turn, to be subservient to the other.” Maitland said, “Thus equity came not to destroy the law but to fulfill it, to supplement it, to explain it.” The goal of equity and law is the same, but due to their nature and due to historic accident they chose different paths. Equity respected every word of law and every right at law but where the law was defective, in those instances, these Common Law rights were controlled by recognition of equitable Rights. Snell therefore explained this maxim in slightly different way: “Equity follows the law, but not slavishly, nor always.”

Application and cases

At common law, where a person died intestate who owned an estate in fee-simple, leaving sons and daughters, the eldest son was entitled to the whole of the land to the exclusion of his younger brothers and sisters. This was unfair, yet no relief was granted by Equity Courts. But in this case it was held that if the son had induced his father not to make a will by agreeing to divide the estate with his brothers and sisters, equity would have interfered and compelled him to carry out his promise, because it would have been against conscience to allow the son to keep the benefit of a legal estate which he obtained by reason of his promise. This decision was held in Stickland v. Aldridge.

Equity follows the law and even if by analogy law can be followed, it should be followed.

Limitation

i) Where a rule of law did not specifically and clearly apply

ii) Where even by analogy the rule of law did not apply

Recognition

Bangladesh has not recognized the well-known distinction between legal and equitable interests. Equity rules in Bangladesh, therefore, cannot override the specific provisions of law. As for example, every suit in Bangladesh has to be brought within the limitation period and no judge can create an exception to this or can prolong the time-limit or stop the rule from taking effect on principles of equity. Such a decision was held in Indian Appa Narsappa Magdum case.

3. HE WHO SEEKS EQUITY MUST DO EQUITY

Meaning

The maxim means that to obtain an equitable relief the plaintiff must himself be prepared to do ‘equity’, that is, a plaintiff must recognize and submit to the right of his adversary. Scriptures of Islam also inform us to be conscientious:

“Woe to those who stint the measure:

Who when they take by measure from others, exact the full;

But when they mete to them or weigh to them, minish…”

Application and cases

This maxim has application in the following doctrines-

i) Illegal loans

ii) Doctrine of Election

iii) Consolidation of mortgages

iv) Notice to redeem mortgage

v) Wife’s equity to settlement

vi) Equitable estoppel

vii) Restitution of benefits on cancellation of transaction

viii) Set-off

i) Illegal loans: In Lodge v. National Union Investment Co. Ltd., the facts were as follows. One B borrowed money from M by mortgaging certain securities to him. M was a unregistered money-lender. Under the Money-lenders’ Act, 1900, the contract was illegal and therefore void. B sued M for return of the securities. The court refused to make an order except upon the terms that B should repay the money which had been advanced to him.

ii) Doctrine of election: Where a donor A gives his own property to B and in the same instrument purports to give B’s property to C, B will be put to an election, either accept the benefit granted to him by the donor and give away his own property to C or retain his own property and refuse to accept the property of A on condition. But B cannot retain his property and at the same time take the property of A.

iii) Consolidation of mortgages: Where a person has become entitled to two mortgages from the same mortgagor, he may consolidate these mortgages and refuse to permit the mortgagee to exercise his equitable right to redeem one mortgage unless the other is redeemed. The right of consolidation now exists in England but after the enactment of the Law of Property Act, 1925, it can exist only by express reservation in one of the mortgage deeds.

iv) Notice to redeem mortgage: Notice to a mortgagor to redeem one’s mortgage is an equitable right of the mortgagor.

v) Wife’s equity to a settlement: There was a time when woman’s property was merged with that of her husband. She had no property of her own. Equity court imposed on the husband that he must make a reasonable provision for his wife and her children. But, now, Under the Law Reform (Married Women and Tortfeasors) Act, 1935, married women has full right on her property and it is not consolidated with her husband’s property.

vi) Equitable estoppel: A promissory estoppel arises where a party has expressly or impliedly, by conduct or by negligence, made a statement of fact, or so conducted himself, that another would reasonably understand that he made a promise thereon, then the party who made such promise has to carry out his promise.

vii) Restitution of benefits on cancellation of transaction: It is proper justice to return the benefits of a contract which was voidable, and, equity enforced this principles in cases where it granted relief of rescission of a contract. A party can not be allowed to take advantage of his own wrong.

viii) Set-off: Where there have been mutual credits, mutual debts or other natural dealings between the debtor and any creditor, the sum due from one party is to be set-off against any sum due from the other party, and only the balance of the account is to be claimed or paid on either side respectively.

Limitation

i) The demand for an equitable relief must arise from a suit that is pending.

ii) This maxim is applicable to a party who seeks an equitable relief.

Recognition

i) Under sec 19-A of the Contract Act, 1872 if a contract becomes voidable and the party who entered into the contract voids the contract, he has return the benefit of the contract.

ii) sec 35 of the Transfer of Property Act embodies the principle of election.

iii) Sec 51 and 54 of the Transfer of Property Act.

iv) In Order 8, Rule 6 of the CPC, the doctrine of Set-off is recognized.

4. HE WHO COMES INTO EQUITY MUST COME WITH CLEAN HANDS

Meaning

Equity demands fairness not only from the defendant but also from the plaintiff. It is therefore said that “he that hath committed an inequity, shall not have equity.” While applying this maxim the court believed that the behavior of the plaintiff was not against conscience before he came to the court.

Application and cases

In Highwaymen case, two robbers were partners in their own way. Due to a disagreement in shares one of them filed a bill against another for accounts of the profits of robbery. Courts of equity do grant relief in case of partnership but here was a case where the cause of action arose from an illegal occupation. So, the court refused to help them.

The working of this maxim could be seen while giving the relief of specific performance, injunction, rescission or cancellation.

Limitation

General or total conduct of the plaintiff is not to be considered. It will be seen whether he was of clean hands in the same suit he brought or not. Brandies J. in Loughran v. Loughran said that “Equity does not demand that its suitors shall have led blameless lives.”

Exception

i) If the transaction is a against public policy

ii) if the party repents for his conduct before his unjust plans are carried out.

Recognition

i) Section 23 of the Indian Trust Act- An infant can not setup a defence of the invalidity of the receipt given by him.

ii) Section 17, 18 and 20 of the Specific Relief Act, 1877- Plaintiff’s unfair conduct will disentitle him to an equitable relief of specific performance of the contract.

Distinction between maxim no. 3 and 4-

He who seeks equity must do equity

He who comes into equity must come with clean hands

i) It is applicable when both the plaintiff and the defendant have claims of equitable relief against each other.

i) It is applicable when the defendant has no separate claim to relief and the plaintiff’s conduct is unfair.

ii) It exposes the condition subsequent to the relief sought.

ii) It is a condition precedent to seeking equitable relief.

iii) It refers to the plaintiff’s conduct as the court thinks it ought to be, after he comes to the court.

iii) It refers to the plaitiff’s conduct before he approaches the court.

iv) The plaintiff has to mould his behavior according to the impositions by the court.

iv) If the plaintiff’s conduct is unfair, it would not entitle him to the relief sought.

v) The plaintiff has an option or a choice before him either to submit to the conditions put by the court, or to get out of the court.

v) The conduct of the plaintiff snatched his choice from him. His equitable right therefore neither be recognized nor enforced.

vi) This maxim looks to the future.

vi) This maxim looks at the past.

5. DELAY DEFEATS EQUITIES

Meaning

A Latin term in this regard is “Vigilantibus, non dormentibus, jura subvenient.” which means “Equity aids the vigilant and not the indolent”. So, if one sleeps on his rights, his rights will slip away from him. Legal claims are barred by statutes of limitation and equitable claims may be barred not only by limitation law but also by unreasonable delay, called laches.

Application and cases

To cases which are governed by statutes of limitation either expressly or by analogy the maxim will not apply. Such cases fall into three categories-

i) Those equitable claims to which the statute applies expressly.

ii) to which the statute applies by analogy.

iii) Equitable claims which are covered by ordinary rules of laches.

Doctrine of laches- Plaintiff’s unreasonable delay is a weapon of defence by the defendant against the plaintiff.

In a Bombay case, the plaintiff allowed his land to be occupied by the defendant and this was acquiesced by him even beyond the period of limitation. On a suit of the land it was decided that as the period of limitation to recover possession had expired, no relief could be granted. Also the case of Allcard v. Skinner is worth mentioning here.

Limitation

This maxim does not apply when-

i) where the law of limitation expressly applies

ii) where it applies by analogy, and

iii) where the law of limitation does not apply but the cases are governed by ordinary rules of laches.

Recognition

The English doctrine of delay and laches showing negligence in seeking relief in a court of equity can not be imported into the Bangladeshi law in view of Article 113 of the Limitation Act, 1908, which fixes a period of one year (previously three years) within which a suit for specific performance should be brought.

Section 51 of the Transfer of Property Act embodies this doctrine but with a difference.

6. EQUALITY IS EQUITY

Meaning

Plato defined that “If you cannot find any other, equality is the proper basis.” This maxim is also explained as “equity delighteth in equality”, which means that as far as possible equity would put the litigating parties on an equal level so far as their rights and responsibilities are concerned.

Justice Fry said, “When I say equality, I do not mean equality in its simplest form, but which has been sometimes called proportionate equity.”

Application and cases

Application of this maxim can be understood from the following:

i) Equity’s dislike for joint tenancy and presumption of tenancy-in-common

ii) Equal distribution of joint funds and joint purchases

iii) Contribution between co-trustees, co-sureties and co-contractors

iv) Ratable distribution of legacies

v) Marshalling of assets

7. EQUITY LOOKS TO THE INTENT RATHER THAN THE FORM

Meaning

Common law was very rigid and inflexible. It could not respond favourably to the demand of time. It regarded the form of a transaction to be more important than its substance. It looked to the very letter of the agreement and not the intention behind it. On the other hand, Equity looks to the spirit not to the letter, it looks to the intention of parties and not to the words.

Application and cases

In case of sale of land, if a party fails to complete it within the fixed for it, he is at Common Law, in breach of the contract, but equity does not take this rigid attitude. It allows a reasonable time to the party to complete it.

The application can be seen in the following instances-

i) Relief against penalties and forfeitures

ii) Relief in regard to precatory trust

iii) Relief in regard to mortgages, the doctrine of equity of redemption and the doctrine of clogs on redemptions

iv) Attitude in regard to statute of frauds.

i) Relief against penalties and forfeitures- Common Law courts insisted on the literal form of the contract that if the contract is breached, certain amount must be given as compensation, though the actual loss is not that much. Equity interpret the purpose and intent of the contract itself. The principal object of the contract is to perform it and not the compensation. The compensation is a subsidiary matter.

ii) Precatory trust- A trust is created with- (1) an intention on his part to create a trust thereby, (2) the purpose of the trust, (3) the beneficiary, and (4) the trust property. Where an author uses words such as ‘I hope’, ‘I request’ or ‘I recommend’ the first condition is missing. In cases where subsequent ingredients are found, in early days, it was held by the equity courts that he had the intention. This view is in use now but not as liberally as before.

iii) Relief in regard to mortgages- The mortgagor has a right to obtain his property back by payment of the debt and that is his right of redemption. The mortgagor’s right of redemption is guarded by courts and this has been expressed in a well-known legal maxim, “Once a mortgage, always a mortgage, and nothing but a mortgage”.

iv) Attitude in regard to statute of frauds-

Recognition

i) Sec 55 of the Contract Act- If time is the essence of the contract, and it is not performed within the stipulated time, the contract or part of it which is unperformed would be voidable. If time is not the essence, the contract will not be voidable but entitles the promisee to damages.

ii) Section 74 of the Contract Act- only a reasonable compensation can be claimed.

iii) Sec 114-A of the Transfer of Property Act- Forfeiture clauses in a lease.

8. EQUITY LOOKS ON THAT AS DONE WHICH OUGHT TO BE DONE

Meaning

If someone undertakes an obligation for the other, equity courts look on it as done and as producing the same results as if the obligation had been actually performed. Equity courts therefore look to the acts of the person bound by his conscience and interpret and construe them in such a way that they amount to what ought to be done.

Application and cases

If A makes T trustee leaving 50,000 Taka to purchase a land for the use of B. T does not purchase the land and by the time, B dies leaving all immovable property to X and all movable property to Y. Now, who should get the 50,000 Taka? Equity in such cases would definitely regard the purchase of land which ought to have been made as made. The money thus goes to X.

The working of this maxim can be seen-

i) the doctrine of conversion

ii) Executory contracts

iii) doctrine of part performance

i) Doctrine of conversion- In the case of Lachmere v. Lady Lachmere, money was taken as land. Doctrine of conversion can convert the money into immovable property and immovable property into money.

ii) Executory contracts-

(a) Assignment of future property: When an assignment of property was made for consideration equity treated it as a contract to assign. When the property came into existence in such a contract it was treated as a complete assignment. As a leading case on this point, Holroyd v. Marshall can be cited.

(b) Agreement for a transfer: In Walsh v. Lonsdale, it was decided that an agreement for lease could be treated as a lease in equity.

iii) Doctrine of part performance: Under the equitable doctrine of part performance contracts pertaining to land were allowed to be formed by oral evidence where one of the parties did acts of pats performance. Maddison v. Alderson is a leading case on this point.

Recognition

Many of the doctrines of English equity have taken statutory form in Bangladesh. Insofar as equitable assignments are concerned no equitable estate is recognized in Bangladesh. A transfer of future property for consideration operates as a contract to be performed in future.

i) The Transfer of Property Act- A Contracts to sell Sultanpur to B. While the contract is still in force, he sells Sultanpur to C, who has notice of the contract. B may enforce the contract against C to the same extent as against A.

ii) The Specific Relief Act- Section 12 relating to the specific performance of part of a contract also illustrates the application of the maxim.

iii) The Trust Act- Where a person acquires property with notice that another person has entered into an existing contract affecting that property, the former must hold the property for the benefit of the latter.

9. EQUITY IMPUTES AN INTENTION TO FULFILL AN OBLIGATION

Meaning

Equity considered and estimated acts of parties. Thus where a person is under an obligation to do a certain act, and he does some other act which is capable of being regarded as an act in fulfillment of his obligation. In other words a person is presumed to do what he is bound to do.

In Sowden v. Sowden, a husband covenanted with the trustee of his marriage settlement to pay to them £50,000 to be laid out by them in purchase of land in a particular area D. He, in fact, never paid the sum, but after marriage purchased the land at D in his own name, for £50,000. He died and could not bring the land into settlement. Equity courts construed that he purchased land to fulfill his obligation.

Application and cases

i) Doctrine of performance and satisfaction

ii) Ademption

iii) Doctrine of presumption of advancement

iv) Relief against defective execution of power of appointment.

i) Doctrine of performance and satisfaction- Sowden v. Sowden and Lachmere v. Lady Lachmere cases are examples of performance. Satisfaction is the donation of a thing with it is to be taken in extinguishment of some prior claim of donee. This maxim is helpful where the presumed intention of the testator is to be found out; where the intention is express the maxim has no application.

ii) Ademption- Ademption is a transfer of property which operates as a complete or pro tanto substitution for a gift previously made by the will of the donor.

e.g. X by his will leaves his daughter Y one-third of his residuary estate. Thereafter on Y’s marriage X gives Y 20,000 Taka. X dies. 20,000 Taka is an ademption -complete or proportionately to the gift of one-third share of the residuary estate of X.

iii) Presumption of advancement- When a purchase or transfer of property without consideration is made by a father or a person in loco parentis, to or in the name of a child, a presumption arises. And the presumption is that it was for the benefit of the child. Such presumption, is known as ‘advancement’. The doctrine applies to cases of parent and child, husband and wife, of mother and child and even to illegitimate child, but not to a man and his mistress.

iv) Relief against defective execution of power of appointment- A power is an authority vested in a person to deal with or dispose of property not his own. A power may be legal or equitable but after 1925 all powers of appointment are necessarily equitable.

e.g. A holds 50,000 Taka upon trust to divide among a certain class of persons. A has no option is this matter He is bound to carry out the trust. On his failing to do so, the court will see that the property is duly divided.

A defective execution will always be aided in equity under the circumstances mentioned, it being the duty of every man to pay his debts, and a husband or a father to provide for child.

Recognition

i) The Succession Act- Presumption against satisfaction is mentioned here. In Hasanali v. Popatal, a testator, who had a sum of Rs 9000 as deposit from his brother, gave to is brother a legacy of Rs 9000 and it was held that the brother was entitled to both, the legacy and his deposit. But as decided in Rajmanuar case where a will contained a clear indication that the legacy was meant as a satisfaction of the debt due to X, X could not claim both as the section explains.

ii) The Trust Act- Where a person contracts to buy property to be held on trust for certain beneficiaries and buys the property accordingly, he must hold the property for their benefit to the extent necessary to give effect to the contract. Equity thus imputes an intention to fulfill an obligation.

10. WHERE THE EQUITIES ARE EQUAL, THE FIRST IN TIME SHALL PREVAIL.

This maxim operates that where there are two or more competing equitable interests; when two equities are equal the original interest (i.e., the first in time) will succeed.

11. WHERE THERE IS EQUAL EQUITY, THE LAW SHALL PREVAIL.

Equity will provide no specific remedies where the parties are equal, or where neither has been wronged. The significance of this maxim is that applicants to the chancellors often did so because of the formal pleading of the law courts, and the lack of flexibility they offered to litigants. Law courts and legislature, as lawmakers, through the limits of the substantive law they had created, thus inculcated a certain status quo that affected private conduct, and private ordering of disputes. Equity, in theory, had the power to alter that status quo, ignoring the limits of legal relief, or legal defenses. But courts of equity were hesitant to do so. This maxim reflects the hesitancy to upset the legal status quo. If in such a case, the law created no cause of action, equity would provide no relief; if the law did provide relief, and then the applicant would be obligated to bring a legal, rather than equitable action. This maxim overlaps with the previously mentioned “equity follows the law.”

12. EQUITY ACTS IN PERSONAM.

In personam is a Latin phrase meaning “directed toward a particular person”