Bailey & Anor v Angove’s PTY Ltd [2016] UKSC 47

Australian winemaker Angove's terminated its UK agent D&D's authority to collect customer payments after D&D entered administration. The Supreme Court held the termination was effective, the agent's authority was not irrevocable, and no constructive trust arose over funds received by the insolvent agent.

Facts

Angove’s Pty Ltd, an Australian winemaker, had for many years used D&D Wines International Ltd as its UK agent and distributor under an Agency and Distribution Agreement (ADA) dated 1 December 2011. D&D both purchased wines in its own right and sold wines on Angove’s behalf to UK retailers. The ADA was terminable on six months’ notice, or with immediate effect on events including the appointment of an administrator.

On 21 April 2012, D&D entered administration, later moving into creditors’ voluntary liquidation. At that point, A$874,928.81 in invoices remained outstanding from two UK retailers for wines D&D had sold on Angove’s behalf. On 23 April 2012, Angove’s gave written notice terminating the ADA and any authority of D&D to collect the price from the customers, proposing to collect directly and account separately for D&D’s commission.

The liquidators objected, claiming entitlement to collect the invoices, deduct commission, and leave Angove’s to prove in the winding up for the balance. The sums were held in escrow pending resolution.

Issues

The appeal raised two questions:

• Whether D&D’s authority to collect payment from customers was irrevocable, surviving termination of the ADA.
• Whether funds received by D&D after the commencement of administration were held on constructive trust for Angove’s because D&D knew, at the time of receipt, that its imminent insolvency would prevent performance of its corresponding obligation to account.

Arguments

The liquidators contended that D&D’s authority to collect the price survived termination because it was necessary to enable D&D to recover commission, and that the contractual structure (deduction of commission from price, and obligation to account within 90 days of bill of lading) implicitly preserved this authority.

Angove’s contended that its notice of 23 April 2012 effectively revoked D&D’s authority, and that, alternatively, any sums received by D&D after administration were held on constructive trust for Angove’s on the basis adopted in Neste Oy v Lloyd’s Bank Plc and In re Japan Leasing Europe Plc.

Judgment

Revocability of authority

Lord Sumption (with whom Lord Neuberger, Lord Clarke, Lord Carnwath and Lord Hodge agreed) held that the general rule is that an agent’s authority is revocable by the principal, even where agreed to be irrevocable, with revocation sounding in damages. The main exception is authority coupled with an interest, requiring two conditions: (i) an agreement that the authority shall be irrevocable; and (ii) that the authority is given to secure either a proprietary interest of the agent or a liability owed to the agent personally.

The Court of Appeal had erred by addressing only whether the authority was agreed to be irrevocable, without addressing whether it was intended to secure the agent’s financial interest. Lord Sumption held that neither condition was satisfied:

• Clause 22(b) described collection as a ‘responsibility’, not a right, and was not expressed to be irrevocable or to survive termination.
• The standard terms permitted the customer to pay Angove’s directly, making collection a function rather than a right or security.
• D&D’s right to commission survived termination as it accrued on sale, but the right to deduct commission from price was a procedural mechanism, not a security.
• The 90-day obligation to account did not import authority to collect from customers; once D&D had paid the price, it could recover from the customer under the law of unjust enrichment (Moule v Garrett; Ibrahim v Barclays Bank Plc), independently of Angove’s authority.
• Commercially, it was inherently improbable that the parties intended irrevocability, given the express provision for termination on insolvency and the disproportionate effect on Angove’s if D&D became insolvent.

Angove’s notice was therefore immediately effective to terminate D&D’s authority.

Constructive trust

Although strictly unnecessary, the Court addressed the trust question on the assumption that authority had not been terminated. Lord Sumption held there was no constructive trust over the funds received by D&D.

He examined Neste Oy v Lloyd’s Bank Plc [1983] 2 Lloyds Rep 658, in which Bingham J had found a constructive trust over a payment received when the agent’s directors knew the company was insolvent, and In re Japan Leasing Europe Plc [1999] BPIR 911, which extended that reasoning even where the agent had a contractual right to the money. The Court of Appeal had doubted Japan Leasing, distinguishing Neste Oy on the basis that there the payment was ‘essentially gratuitous’.

Lord Sumption went further, holding that the reasoning in Neste Oy could not be justified. The essential objections were:

• Recognising a constructive trust upon receipt would confer priority on the payer over other unsecured creditors, undermining the statutory scheme for pari passu distribution. He cited Professor Goode’s observation that according a proprietary right in such circumstances ‘seems completely wrong, both in principle and in policy’.
• English law recognises only the institutional constructive trust, not the remedial constructive trust (Westdeutsche; FHR European Ventures). Whether a trust arises depends on settled principles, not the relative moral merits of the parties.
• Identifiable trust property not forming part of the recipient’s general assets is required. In Neste Oy, the funds were not segregated and were treated as the agent’s general assets, intending the entire beneficial interest to pass.
• For a constructive trust to arise where money is paid intending to transfer the entire beneficial interest, the payer’s intention must have been vitiated (e.g. by mistake or rescission) or the money must have come into the wrong hands in equity (e.g. fruits of fraud, theft or breach of fiduciary duty). Neither was satisfied in Neste Oy. A prospective total failure of consideration does not vitiate the intention to part with the money.

Japan Leasing was wrongly decided, both for that reason and because, having a contractual right to receive the money, the recipient could not be acting unconscionably in doing so. The appeal was allowed.

Implications

The decision provides important clarification on two areas of commercial law.

On agency, the Supreme Court reaffirmed that an agent’s authority is revocable absent both an agreement of irrevocability and the purpose of securing the agent’s proprietary interest or personal liability. A mere commercial interest in earning commission is insufficient; though an interest in recovering commission already earned may suffice if clearly intended to be secured. Parties wishing to confer irrevocable authority on an agent must do so expressly and clearly link it to the securing of an identified interest.

On constructive trusts, the decision substantially curtails the reasoning in Neste Oy and rejects Japan Leasing. Where money is paid to an agent intending to transfer the entire beneficial interest, the agent’s knowledge of imminent insolvency does not, without more, give rise to a constructive trust over the funds received. The decision reinforces the primacy of the statutory insolvency regime and rejects the remedial constructive trust as a feature of English law.

The decision matters particularly to commercial parties dealing through agents, to insolvency practitioners, and to those advising on structures intended to protect principals against agent insolvency. It signals that, absent express trust arrangements (typically involving segregation) or one of the established categories of vitiated transfer, principals will rank as unsecured creditors in the agent’s insolvency.

Verdict: Appeal allowed. The Supreme Court declared that the fund representing the proceeds of the invoices is payable to Angove’s. The notice of 23 April 2012 was effective to terminate D&D’s authority to collect, and no constructive trust would in any event have arisen over funds received by D&D after administration.

Source: Bailey & Anor v Angove's PTY Ltd [2016] UKSC 47