Supreme Court decision highlights importance of contract terms in protecting principal from agent's insolvency

The Supreme Court has held that a principal was entitled to recover payments collected by its agent on its behalf following the agent's insolvency: Bailey and another (Respondents) v Angove's PTY Limited (Appellant) [2016] UKSC 47.

The Supreme Court dismissed the principal's argument that the payments were held on a constructive trust, but found that the principal was nevertheless entitled to receive such sums as the agent's authority to collect payments had been revoked.

The decision demonstrates that the courts will be slow to find a constructive trust in favour of a principal whose agent has become insolvent. Whilst this could result in potentially harsh consequences for a principal in this situation, the Supreme Court referred to the important public policy of achieving "a pro rata distribution of the company's estate between its creditors". The judgment appears to indicate that a restrictive approach to constructive trusts will be adopted more generally, rejecting any suggestion that constructive trusts can be used simply to achieve "fairness" in the way that a remedial constructive trust might be in other jurisdictions.

The case also demonstrates the importance of ensuring that agency agreements are carefully drafted so that a principal's right to receive payment is protected in the event of its agent's insolvency. In this case the principal was able to recover the disputed payments because the Supreme Court concluded that the agent's authority to collect payments from customers could be, and had been, revoked. The decision suggests that the courts will be slow to find that an agent's authority is irrevocable – in general, there will need to be not only an (express or implied) agreement that the authority is irrevocable, but the authority must also have been given to secure an interest of the agent. However, principals should be careful to avoid terms which might suggest these criteria are met.

Gareth Keillor and Jade Hu, a senior associate and associate in our dispute resolution team, consider the decision further below.

Background

Angove's Pty Ltd ("Angove"), an Australian winemaker, employed D&D Wines International Ltd ("D&D") as its agent and distributor in the United Kingdom under an agency and distribution agreement dated 1 December 2011 ("ADA"). Pursuant to the ADA, D&D bought wines from Angove in its own right and also sold wines on Angove's behalf to UK customers.

Under the terms of the ADA:

• A commission was payable to D&D in respect of products D&D sold to customers on Angove's behalf. Angove would issue an invoice addressed to D&D for the relevant goods, together with a credit note for the amount of D&D's commission.
• D&D was responsible for collecting payment of the invoiced amount from the customer and then had to pay the amount of Angove's bill of lading, less the amount of the credit note.
• D&D was required to pay Angove within 90 days of the bill of lading, whether or not the price had been received from the customers.
• The ADA was terminable by either party on six months' notice, or by notice with immediate effect in a number of events, including the appointment of an administrator or liquidator.
• Upon termination of the ADA, each party had to pay to the other all money owing up to and including the date of termination in respect of the sale of products. Termination of the ADA did not affect the accrued rights or remedies of either party.

On 21 April 2012, D&D went into administration, and subsequently moved into creditors' voluntary liquidation. At the commencement of the administration, there were outstanding invoices amounting to AUD 874,928.81 in respect of wine which D&D had sold to two retailers who had not yet paid.

On 23 April 2012, Angove terminated the ADA and any authority of D&D to collect payments due from these two customers. In the termination notice, Angove proposed to collect the payments directly from the customers and account to D&D separately for its commission.

D&D's liquidators objected to this course. They claimed they were entitled to collect the outstanding payments, deduct the commission due to D&D, and leave Angove to prove in the winding up for the balance. They argued that D&D and Angove's relationship in relation to the relevant transactions was that of buyer and seller, not agent and principal. Accordingly, D&D's liability to Angove was a simple debt for goods sold and delivered. Angove disputed this and also argued that the payments held by D&D were held on trust for them.

High Court and Court of Appeal decisions

The High Court held that the relationship between D&D and Angove was that of agent and principal and that D&D's authority to collect payments from customers came to an end upon service of Angove's termination notice. Accordingly, the invoiced sums were payable to Angove.

The liquidators appealed that decision. Although they accepted that D&D were Angove's agents, they argued that D&D's authority to collect the price of goods sold on Angove's behalf survived termination of the ADA because they needed it to recover their commission. The Court of Appeal accepted this argument and allowed the appeal.

Both the High Court and Court of Appeal dismissed the argument that the proceeds of the invoices were held on trust for Angove.

Supreme Court decision

On appeal to the Supreme Court, two questions fell to be determined:

1. In what circumstances will the law treat the authority of an agent as irrevocable?
2. Will the receipt of money at a time when the recipient knows that imminent insolvency will prevent him from performing the corresponding obligation give rise to liability to account as a constructive trustee?

Agency

The Supreme Court confirmed the general rule that an agent's authority may be revoked by the principal, even if it is agreed by the contract to be irrevocable (although in that case there might be a damages claim by the agent).

The main exception is where the agent has an interest of his own in the exercise of his authority, in which case the agent's authority is irrevocable whilst the interest exists. The exception applies where: (i) there is an agreement that the agent's authority shall be irrevocable; and (ii) the authority is given to secure an interest of the agent. The Supreme Court held that an agent's interest in recovering a debt in respect of commission already earned could be a relevant interest (although an agent's commercial interest in continuing to act in order to earn a commission would not).

However, in the present case, the Supreme Court overturned the Court of Appeal and held that neither of the conditions above was satisfied. As a starting point, the ADA did not expressly state that D&D's authority to collect from the customer was irrevocable and nor could this be implied. Whilst, under the ADA, "accrued rights and remedies" survived termination of the ADA, D&D's "responsibility" for collecting payments from customers could not be regarded as such a right of D&D, particularly as there was nothing to prevent customers paying Angove directly. As for D&D's right to commission under the ADA, this could survive termination of the ADA. However, D&D's authority to collect payments could not be regarded as securing D&D's interest under such right. This is because there were other ways in which the commission could be recovered, for instance, if the customer paid the price directly to Angove in which case the commission would be payable by Angove directly. Similarly, if D&D paid Angove the price on the bill of lading, it could not be regarded as having a continuing authority from Angove to collect the price from the customer. At that point, D&D's right to collect payment from the customer derived from the law of unjust enrichment and not the authority of Angove (who would have no further standing in the matter after receiving payment from D&D).

The result of this was that D&D's authority to collect the payments was terminated upon service of Angove's notice. The monies were therefore held for the benefit of Angove, and not D&D's creditors.

Constructive trust

It was not strictly necessary for the Supreme Court to address the issue of constructive trust, given its decision on the agency point. However, Lord Sumption noted that the point was of general importance and therefore addressed the issue (as obiter dicta).

Angove had sought to argue that monies paid by customers after the commencement of the administration of D&D were held on constructive trust for Angove. The Supreme Court rejected this argument and held that no constructive trust arose.

The Court referred to two earlier decisions (Neste Oy v Lloyd's Bank Plc [1983] 2 Lloyds Rep 658 and In re Japan Leasing Europe Plc [1999] BPIR 911) in which it was held that a constructive trust could arise if, at the time of receipt of money, an agent could not retain the payment in good conscience, for example because the agent knew it could not account for it to its principal, or because the payee knew there was bound to be a total failure of consideration.

The Supreme Court doubted such a broad approach was correct and held that where money is paid with the intention of transferring it to the payee, the least that must be shown to establish a constructive trust is:

"(i) that the intention was vitiated, for example, because the money was paid as a result of a fundamental mistake or pursuant to a contract which has been rescinded, or (ii) that irrespective of the intentions of the payer, in the eyes of equity the money has come into the wrong hands, as where it represents the fruits of a fraud, theft or breach of trust of fiduciary duty against a third party".

None of these conditions were present in the instant case so no constructive trust arose.

The fact money was being paid in circumstances in which there was a prospect of a total failure of consideration, was not sufficient to mean that there was no intention on the part of the payer to transfer the entire legal and beneficial interest in the monies.

Lord Sumption rejected any suggestion of a flexible approach allowing the imposition of constructive trust simply because it would be "contrary to any ordinary notion of fairness" to allow the general pool of creditors to keep the monies, rather than Angove. Lord Sumption stated that "[p]roperty rights are fixed and ascertainable rights. Whether they exist in a given case depends on settled principles, even in equity." He also went on to emphasise that English law does not recognise the concept of a remedial constructive trust (ie a trust imposed retrospectively) and only recognises institutional constructive trusts (ie a trust that arises as a matter of law at the outset).