Equity looks to the spirit and not to the letter, it looks to the intention of parties and not to the words, and it looks to the realities rather than to mere appearances.
Instead of swimming on the surface of mere form, it penetrates through the external form of a transaction to discern and decide the real intention of the parties, because the external form of a transaction cannot be allowed to conceal or throw a cloak on the real object, purpose, and consequences of a transaction.
(b) Application and cases - Unlike Common Law, equity was not impressed by mere form and technicalities and avoided circuitry of action.
Thus a transaction which could lawfully have been affected by two or more separate transactions was held by equity to be valid, though it was unauthorised. The maxim, therefore, contains in itself the equitable rule of construction of documents.
The application and working of this maxim can be examined from the following instances:
(i) Relief against penalties and forfeitures.
(ii) Relief in regard to precatory trusts.
(iii) Relief in regard to mortgages, the doctrine of equity of redemption, and the doctrine of clogs on redemptions.
(i) Relief against penalties and forfeitures - Common Law courts insisted on the rigid and litera scripta performance of all agreements and promises. Equity interpreted the purpose and intent of the contract itself.
The principal object of the contract lies in its performance and not in the imposition of the penalty. The damage sustained maybe therefore compensated, the imposition of penalty, and forfeiture being subsidiary. This it did by applying the maxim.
(ii) Precatory trusts - A trust is created when the author of the trust indicates with reasonable certainty by any words or acts (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.
Equity in such cases ignored the form and looked to the intention which can easily be found out by having a reference to other ingredients of the trust and the conduct of its author. The document as a whole was taken into consideration and not it's part.
(iii) Relief in regard to mortgages - A mortgage is a conveyance of property whereby one person (mortgagor) secures to another (mortgagees) the payment of money whether already owing or advanced at the time or to be advanced (called mortgage debt).
This he does by vesting in him some property or interest in the property. If the mortgagor cannot redeem his property within the time set in the mortgage deed (a contract), his legal right is gone but he can still have, in equity, his right to redeem the property on the principle of this maxim.
The extension of this principle of the right to redeem has found further expression in the well-known doctrine of clog on redemption. A clog is a check, an impediment, or an obstruction which makes the release of security impossible.
Any provision inserted in a mortgage deed preventing redemption is meant to be a clog or fetter on the equity of redemption and is void.
(c) Recognition under Indian Law - The principle has been recognised under Sections 55 and 74, Contract Act and Sections 114 and 114-A, Transfer of Property Act.