Legal scholars divide world legal systems into two main types -- civil law and common law. While most of the world uses a civil law system, the United Kingdom and many of its former colonies, including the United States, incorporate common law into their legal systems. Equity is one of the major innovations of the common law system.
In most of the world, civil law is based on the ancient Roman legal system. Under a civil law system, all law is codified within an extensive body of statues enacted by the legislature. When a legal question arises, such as the liability of a defendant in a lawsuit, the judge refers to the relevant statutes to resolve the case. The judge's authority to creatively interpret statutes is minimal, and reliance on legal precedents arising in former cases is uncommon.
Common law originated in England during the Middle Ages. Under a common law system, both courts and legislatures have the ability to create new law. Although legislative statutes exist, they are not comprehensive, and courts often fill in legislative gaps with judge-made case law. The contributory negligence doctrine, for example, is court-made law and is still in use in some states. It asserts that a plaintiff alleging negligence against a defendant who caused an accident cannot recover damages if the defendant can show that the plaintiff was partially at fault. Common law relies heavily on precedent from prior cases to decide new cases and to interpret statutory law.
Equity, like common law, originated in the Middle Ages in England. At the time, courts of law applied strict, formalistic legal rules to resolve cases. Since the application of these rules often resulted in injustice in individual cases with unique facts, the King created "courts of equity," where an aggrieved litigant could appeal to the King to apply general legal principles to achieve a just result, instead of mechanically applying formal legal rules. Although separate courts of equity have been abolished in nearly every common law jurisdiction, the equity principle survives, allowing judges to flexibly interpret legal rules when their strict operation would be unfair to a litigant.
The flexibility that common law offers carries with it the liability of significant uncertainty as to what the law is and how it applies to a given set of facts. The doctrine of "piercing the corporate veil," for example, allows creditors of a corporation to reach the personal assets of shareholders, despite the corporation's limited liability status, if the court determines that the corporate form is merely a sham used to shield the assets of an individual shareholder. A court takes many factors into account when applying this standard including the extent of observance of corporate formalities, the co-mingling of individual and corporate assets, the accuracy of corporate records and prior court precedents. Since every case has its own facts, it is difficult to predict how a court might rule.
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