Richard McMeeken provides an update on an important commercial law decision in the Supreme Court case of Bailey and another v Angove’s PTY Limited.

The appeal raised two questions. First, when will the law treat the authority of an agent as irrevocable. Secondly, when a recipient of money knows that impending insolvency will prevent him from performing the corresponding obligation, can this give rise to a liability to account on his part as a constructive trustee.

Angove’s is an Australian winemaker and it employed D & D Wines International Limited as its agent and distributor in the UK pursuant to an Agency and Distribution Agreement (“ADA”). On 21 April 2012, D & D went into administration and on 10 July 2012 it moved into liquidation. At the start of the administration there were invoices of A$874,928.81 outstanding which represented the price of wine that D & D had sold in the UK but which the retailers had not yet paid for. On 23 April 2012, Angove’s gave written notice terminating the ADA and any authority that D & D had to collect on these invoices. It determined that it would collect the invoices direct. But the liquidators of D & D objected. They claimed that it was their right to collect, thereafter deducting any commission due to D & D and leaving Angove’s to rank in the liquidation for the outstanding amount.

In a judgement given by Lord Sumption the court started by looking at the general rule that the authority of an agent may be revoked, pointing out that this was the case even if it was agreed by their contract that it was irrevocable. However, there was an exception if two conditions were satisfied. First, there must be agreement that the agent’s authority was irrevocable. Secondly, the authority must be given to secure an interest of the agent or a liability owed to him personally. In such a case, the agent’s authority is truly irrevocable in law as long as the personal interest of the agent subsists.

The Court of Appeal held that D & D’s authority was irrevocable because the general rule that authority can be revoked “must yield to what the parties have agreed should be their respective legal rights and obligations on the termination of the agency”. However, Lord Sumption was critical of their reasoning pointing to the general rule outlined above and explaining that it can never be enough simply to exclude the general rule that authority is agreed to be irrevocable. Rather, what has to be agreed is not just that authority cannot be revoked but also that it is intended to secure the financial interest of the agent. The Court of Appeal failed to address the latter criterion at all and, therefore, its reasoning could not be followed.

Lord Sumption also considered that, when looked at together, neither condition was satisfied. The agreement between the parties was not expressed to be irrevocable. On the contrary, it makes no provision to that effect nor indeed that it survives termination which happens on insolvency. There was also nothing in the agreement which prevented a customer paying Angove’s direct in any case if it wished to do so. Lord Sumption also considered that it was “inherently improbable” that the parties should have intended authority to be irrevocable because they had expressly envisaged the possibility of insolvency and provided for a mutual right of termination in that event. Very difficult issues can arise when dealing with an insolvent agent and Angove’s had clearly wished to avoid them. Accordingly, the court held that Angove’s termination was immediately effective so as to end D & D’s right to collect on the outstanding invoices.

Although it was unnecessary to address Angove’s trust argument, Lord Sumption did so on the basis that it was an important point of law which had been fully argued before the court. He agreed with the Court of Appeal that there was no constructive trust but differed on the reasoning. If there was a trust over money already paid by Angove’s to D & D then it would not form part of the insolvent estate of the company thus conferring priority on Angove’s over other creditors. This would be unfair when many of those creditors would otherwise be in a position no different from their own. The rule is, therefore, that unless the agent is expressly made trustee for the money then it will form part of the agent’s insolvent estate and the principal must prove in the liquidation.