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Introduction

On 8 June 2016 the Supreme Court heard the appeal in Bailey & v Angove’s PTY Ltd [2016] UKSC 47, in which it was asked to consider the effect which terminating an agency has on the authority of the agent to collect debts owed to the principal.

Under the general law of agency, a principal may end its agent’s authority at any time. If the principal does so ignoring a contrary provision in the contract between them, then the agent’s authority David_Whitehead_ph[1]generally ends but the principal is in breach of contract.

In a judgment handed down on 27 July 2016, the Court held that the agent’s authority was not irrevocable, and did not survive the termination of the agency agreement by the principal.

Background

In 1990, D&D Wines International Ltd contracted to act as both agent and distributor in the UK for Angove, an Australian wine producer. The most recent terms of D&D and Angove’s relationship were governed by an Agency and Distribution Agreement dated December 2011.

D&D was placed into administration in April 2012. Two days after this, Angove terminated the ADA by written notice, expressly stating that it was terminating D&D’s authority to collect further payments from Angove’s customers. Following the written notice, two customers made payments totalling AUS $874,928.81 to D&D in respect of wine sold during the life of the ADA. These payments were held in escrow pursuant to an agreement with D&D’s administrators.

D&D subsequently entered liquidation, and the liquidators applied under section 112 of the Insolvency Act 1986 for a determination as to who was entitled to the payments.

High Court

The High Court held that the issue of whether D&D had acted as Angove’s agent in relation to the transactions with customers depended on the true construction of the ADA. The terms of the ADA, when taken as a whole, were more consistent with the relationship being intended to be one of principal and agent rather than seller and purchaser. Among other things, D&D was referred to as having “represented” Angove in the UK and it was expressly appointed as Angove’s “agent and distributor”.

Further, both parties had considered that D&D was acting as Angove’s agent in relation to the transactions. There was nothing in the circumstances of the transactions that suggested that either party thought that D&D was buying for its own account. The sum of AUS $874,928.81 was therefore payable to Angove because the sums in question were never collectable by D&D other than as agent for Angove, and D&D’s authority to collect them was terminated before the sums were paid out by the customers. D&D had a duty under the ADA to account to Angove for the payments received from the customers. The existence of such a duty raised the question whether, in relation to the sum of $14,430 (the total of the payments which were paid prior to the termination of the ADA), the obligation to account was a personal obligation or whether the money collected belonged beneficially to Angove.

Overall, the circumstances suggested that the obligation to account was personal rather than proprietary. Among other things, Angove had not structured its relationship with D&D so as to create an express obligation to credit any sums collected to a dedicated interest-bearing bank account and subject any sum so collected to a trust in its favour. Further, to conclude that a beneficial interest had been created when there was no express agreement to that effect would create the possibility of different potential outcomes on insolvency that were illogical.

Court of Appeal

The Court of Appeal allowed the appeal, holding that D&D’s authority to accept payments did not end upon termination of the agency contract. Properly interpreted, the contract preserved D&D’s right after termination to receive payments already due from customers for goods already supplied.

The court also held that Angove’s notice, expressly ending D&D’s authority to receive payments from customers, was ineffective in ending that authority. It followed that D&D had the right to receive these payments, which therefore fell to be distributed to creditors in D&D’s insolvency, not returned to the customers or paid to Angove at the customers’ direction.

The decision made an exception to the general rule that a principal may end its agent’s authority, even if to do so would be a breach of contract, the court confirming that termination of an agency does not necessarily or automatically bring to an end the agent’s right to collect money already due to the principal, citing Triffit Nurseries v Salads Etcetera Ltd [2000] EWCA Civ 134. Termination of the contract did not end the agent’s right (or duty) to collect payments already due for wine already supplied. It was therefore a breach of contract for the principal, when terminating the contract, to tell the agent not to collect this money.

Supreme Court

The Supreme Court granted Angove permission to appeal the Court of Appeal’s decision. The following issues were considered by the Court:

  1. Was the Court of Appeal correct to hold that the general rule that the authority of an agent can be terminated even if that is a breach of contract as between agent and principal, yielded to what the parties agreed should be their respective rights and obligations under the agency agreement?
  1. Was the Court of Appeal correct to hold that a constructive trust did not arise when D&D, as agent, received money from third parties for onwards transmission to its principal in circumstances where D&D was insolvent?

A panel of five justices comprising Lord Neuberger, Lord Clarke, Lord Sumption, Lord Carnwath and Lord Hodge heard the appeal on 8 June 2016, and judgment was handed down on 27 July 2016. Lord Sumption gave the judgment, with which the other justices agreed.

With reference to the first issue, the Court found that the Court of Appeal had applied the wrong test. In order for an agent’s authority to become irrevocable it must first be agreed to be irrevocable, and the authority must be given to secure an interest of the agent. Such an interest may be a proprietary interest or a liability (generally in debt) owed to the agent personally. Lord Sumption pointed out that it was not expressly stated in the ADA that the authority to collect payments was irrevocable, nor was it stated that such an authority should survive termination. Therefore Angove’s termination of the agency agreement had the effect of ending D&D’s authority to collect the outstanding payments.

Although it was not necessary, the court went on to consider obiter the second issue. On this point the justices agreed with the Court of Appeal that no constructive trust arose. The agency relationship between D&D and Angove was in the relevant respects one of debtor and creditor, and the fact that the money was received at a time when the agent’s personal liability to account to the principal would not be performed made no difference to the basis on which it held the money.

Comment

In finding that authority of an agent is inherently terminable even where it is agreed to be irrevocable, unless it is coupled with a relevant interest of the agent, the Court’s decision serves to confirm the general rule of agency; namely that only in limited circumstances will an irrevocable agency have been created. This judgement brings welcome clarity to the law surrounding agency, and illustrates how a 19th century rule should be applied in modern circumstances.

Furthermore, it shows that it will be difficult to establish that constructive trusts will exist in an agency case. Such trusts will only be created where there is sufficient justification.