Supreme Court considers the irrevocability of an agent’s authority

In Bailey and Anor (Respondents) v Angove’s PTY Limited (Appellant) [2016] UKSC 47 the Supreme Court considered two important issues of agency law.

• The circumstances in which the law will treat the authority of an agent as irrevocable
• Whether there is a liability to account as constructive trustee when a recipient of money knows that its imminent insolvency will prevent it from performing a corresponding obligation to account to a principal.

The Court confirmed that the authority of an agent is inherently terminable; and it is only in limited circumstances that the authority will be irrevocable. An agency may be held to be irrevocable where: (i) there is an agreement to that effect; and (ii) the authority has been given to secure an interest of the agent.¹ In this case, the Court held that the agent’s authority had been revoked – and that the principal was entitled to recover sums collected by the agent after its insolvency. The Court stated obiter that there was no constructive trust.

Principals will invariably want to ensure that an agent’s authority is revocable, particularly in the event of an agent’s insolvency. Whether certain rights and obligations survive termination of a contract of agency depends on the interpretation of the contract’s express and implied terms. The judgment shows the importance of drafting agency agreements to ensure that a principal’s interests are fully protected (particularly as the decision indicates that the courts will be reluctant to impose a constructive trust upon an agent in favour of its principal where the agent has become insolvent). A principal should also consider what practical steps it can take to divert payments from an end customer when an intermediary enters into an insolvency process.

Angove’s PTY Limited (Angove’s) is an Australian winemaker. D & D Wines International Limited (D & D) acted as Angove’s agent and distributor in the United Kingdom. D & D bought wine from Angove’s and sold wine on its behalf. Angove’s and D & D had entered into an Agency and Distribution Agreement (ADA) dated December 1, 2011.

The ADA was terminable by either party on six months’ notice or immediately on the appointment of an administrator or liquidator. D & D entered into administration on April 21, 2012 and into creditors’ voluntary liquidation on July 10, 2012. A$874,928.81 remained owing to D & D for wine sold to two retailers.

On April 23, 2012, Angove’s terminated the ADA. The termination notice stated that Angove’s would collect the unpaid sums and pay D & D its commission separately. However, the liquidators of D & D wanted to collect the sums, deduct D & D’s commission and leave Angove’s to prove for repayment of the balance in the winding up. The outstanding sums were received by D & D and Angove’s after D & D received the termination notice. They were, therefore, held by the liquidators in an escrow account (and Angove’s’ solicitors’ client account on the same terms), pending the outcome of the litigation. This meant that the sums could not be used by either party until the issue of beneficial ownership and contractual entitlement was resolved and the customers had received good receipt for the payments that they had made.

Angove’s applied pursuant to section 112 of the Insolvency Act 1986 for an order that the sums be paid over to it on the basis that: (i) the liquidators’ right to collect the moneys had been revoked by the termination notice; and/or (ii) the sums were held by D & D on constructive trust for Angove’s. The liquidators argued that D & D’s liability to Angove’s as at the commencement of the administration was a simple debt obligation to remit the purchase price for goods sold and delivered, net of D & D’s commission.

It was held at first instance in 2013 that the relationship between D & D and Angove’s was one of principal and agent only (rather than buyer and seller) and the termination of the ADA revoked D & D’s authority to collect the sums from the customers. The liquidators of D & D appealed but did not challenge the Judge’s finding that D & D acted as agent. Angove’s constructive trust argument failed.

In 2014, the Court of Appeal allowed the liquidators’ appeal and held that D & D’s authority to accept payments was not revoked by the termination of the ADA. The Court of Appeal confirmed that termination of an agency does not necessarily bring to an end the agent’s right to collect money already due to the principal (Triffit Nurseries v Salads Etcetera Ltd²). The Court of Appeal’s view was that D & D had a continuing implicit right to collect the unpaid sums from the customers under the terms of the contract. The sums therefore fell to be distributed to D & D’s creditors. With regard to the constructive trust argument, the Court considered that the result of Angove’s only receiving a dividend in the insolvency was not an unconscionable outcome and was not enough to justify imposing a constructive trust.

Summary

The Supreme Court held that the agency was revoked by the termination of the ADA (and therefore Angove’s did not have to prove in the liquidation). The Court added that the constructive trust argument would have failed had it been relevant. Lord Sumption delivered the leading judgment.  

Revocation of authority

Lord Sumption’s reasoning can be summarised as follows

• It is well established that the authority of an agent may be revoked by the principal at any time, even where it is agreed that the authority is irrevocable. The revocation may give rise to a claim for damages.
• The exception to the general rule on revocation is where the agent has “a relevant interest of his own in the exercise of his authority”. There must be: (i) an agreement that the authority is irrevocable; and (ii) a subsisting proprietary interest or personal liability of the agent which the authority was given to secure. These conditions are reflected in the Powers of Attorney Act 1971 in relation to authority conferred by a power of attorney.

The Court held that neither of these conditions were satisfied on the facts of the case. The reasons for this included that the ADA did not state that the authority was irrevocable and there was no implied term to that effect either. Customers could pay Angove’s directly, which made it difficult for the Court to regard the collection as a right or security of D & D and the deduction of commission was a mechanism not a security. An agent’s interest in recovering a debt for already earned commission could be irrevocable, if the parties intended that the agent’s authority would secure that interest. The Court also thought that it was “inherently improbable” that the parties intended the authority to be irrevocable as they had provided for a mutual right of termination in the event of insolvency. If D & D’s authority survived termination, it would be entitled to five per cent commission in the event of Angove’s insolvency but Angove’s would have to prove as unsecured creditor in D & D’s liquidation for the 95 per cent of the purchase price.

Constructive trust

It was not necessary to deal with this point but the Supreme Court did so because of its general importance. The Supreme Court stated that it is well established that an agent’s duty does not necessarily give rise to a trust of money in the agent’s hands in respect of which it is obliged to account to its principal. Generally, the relationship must be such that the agent is not able to treat money for the principal as part of the agent’s general assets. This will usually involve segregation. The Supreme Court thought that there was no constructive trust in this case, because of the following factors.

• A constructive trust would result in the sums not forming part of the insolvent estate. This would give Angove’s priority over similar creditors (the Court referred to the public policy behind the statutory insolvency rules).
• Where money is paid with the intention of transferring the entire beneficial interest to the payee, the least that must be shown for a constructive trust to arise is: (i) that intention was vitiated (e.g. payment by fundamental mistake); or (ii) irrespective of the intentions of the payer, in the eyes of equity it was paid into the wrong hands (e.g. as the result of fraud/theft).

Lord Sumption stated that the agency relationship between D & D and Angove’s was one of debtor and creditor. D & D’s inability to perform its obligation to Angove’s made no difference to the basis on which the sums were held and the customers had not made a mistake. It was not unconscionable for D & D to retain the money just because the statutory insolvency regime intervened to require it to be shared in accordance with the insolvency rules. Therefore, a principal wishing to recover monies which its agent is obliged to pay will generally have to prove in the agent’s liquidation unless the relationship was such as to make the agent an express trustee. The Court also considered and overruled Neste Oy v Lloyd’s Bank Plc³  and In re Japan Leasing Europe Plc⁴, cases in which a constructive trust had been held to have arisen.