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JAMIE RILEY APPEARS IN THE SUPREME COURT. CONSTRUCTIVE TRUST AND INSOLVENCY: BAILEY V ANGOVE’S PTY

Jamie Riley led for the Respondent in the Supreme Court in Bailey v Angove’s PTY Limited (Re D&D Wines International) [2016] UKSC 47. The case brought before the Supreme Court for the first time the controversial finding in Neste Oy v Lloyds Bank plc [1983] 2 Lloyd’s Rep. 658 that an agent’s receipt of monies from its principal in circumstances where, by reason of insolvency, there was bound to be an inevitable total failure of consideration was sufficient to create a constructive trust of the monies. The case also clarified a significant point in the law of agency.

Background

Angove is a winemaker.  Angove appointed D&D as its agent and distributor in the UK.  When acting as Angove’s agent, D&D was entitled to commission on concluded sales.  Commission was not paid by Angove to D&D directly.  Rather, the contractual machinery for payment of commission involved a system of invoicing under which Angove invoiced D&D for the full price of the goods but issued a credit note for the amount of the commission. D&D would then obtain payment from the customer (which it would invoice for that purpose) and then pay to Angove the sum due under Angove's invoice less the amount of the credit note.

The payment of D&D's commission under this system therefore depended upon it getting in the monies from the customer and deducting its commission from those monies before accounting to Angove for the balance.  D&D collected from customers as Angove’s agent; D&D did not have direct contractual relationships with the customers.

Under the terms of the agency agreement, Angove was entitled to terminate the agreement with immediate effect on the occurrence of various events, which included D&D’s entry into administration.

On 21 April 2012, D&D went into administration, and Angove terminated the agency agreement.  By its notice of termination, Angove expressly revoked D&D’s authority to act as its agent.

Just prior to its entry into administration (and subsequently liquidation), D&D had concluded certain sales as Angove’s agent, but was yet to be paid commission.  The court’s directions were sought as to whether, notwithstanding the revocation of its authority, D&D remained entitled to collect monies from these customers, being the contractually agreed way in which D&D was to receive its commission.

Issues for the Supreme Court

Two issues arose for determination:

  1. What was the effect of Angove’s notice of termination, was the said notice effective to terminate D&D’s authority to collect the moneys owed to Angove by the customers? (the Revocation of Authority Issue)
  2. If the notice of termination was not effective to terminate D&D’s authority to collect the moneys owed by the customers, would such moneys be held by D&D on constructive trust for Angove on the basis of the decisions in Neste Oy v Lloyds Bank plc [1983] 2 Lloyd’s Rep. 658 and Re Japan Leasing Europe plc [1999] B.P.I.R. 911 (the Constructive Trust Issue).

The main arguments advanced

The Revocation of Authority issue
It was common ground that, as a general rule, a principal is entitled to revoke the authority of its agent, even if such revocation amounts to a breach of contract as between principal and agent.  For example, where a principal agrees that his agent should (for valuable consideration) collect the principal’s debts for a period of 5 years, the principal is entitled to revoke the agent’s authority to act on his behalf before the end of the contract term, even though such revocation would constitute a breach sounding in contractual damages.

The parties’ arguments instead focused on one of the established, but little known, exceptions to the general rule known as the “authority coupled with an interest” exception. This provides that where an agreement is entered into for consideration and is given for the purpose of securing some benefit to the donee of authority, the authority vested in the agent is irrevocable pending satisfaction of the benefit in question.

D&D’s liquidators argued that this exception applied, for D&D’s authority to collect was given for the purpose of enabling it to receive commission on the wine sales.  Accordingly, it was submitted that the authority to act on Angove’s behalf was irrevocable pending collection of the monies from the customers.

The Constructive Trust Issue
This issue only arose if the liquidators were successful on the Revocation of Authority Issue.  In those circumstances, Angove argued that any monies collected by D&D would be held on constructive trust for the benefit of Angove.  The basis of the constructive trust, applying the decisions in Neste Oy and Japan Leasing, was said to be that the agent’s receipt of funds in circumstances where, by reason of insolvency, the agent is unable to perform its contractual duties, gave rise to a constructive trust.

The liquidators argued that no constructive trust would arise by reason of D&D’s receipt of monies from the customers since (assuming they were right on the Revocation of Authority Issue) D&D was contractually entitled to collect the same, such that the receipt could not be said to be unconscionable.

What did the court decide, and why?

The Supreme Court found in favour of Angove in respect of the Revocation of Authority Issue and in favour of the liquidators in respect of the Constructive Trust Issue.

Revocation of Authority Issue
The Court clarified the scope of the authority coupled with an interest exception, particularly where the relevant ‘interest’ was the payment of commission:

There is no principled reason why a true agent employed on his principal's affairs should not also be regarded as having a personal interest in the exercise of his authority sufficient to make it irrevocable. Thus although, as I have said, the agent's commercial interest in continuing to act in order to earn commission is not enough to make his authority irrevocable, his interest in recovering a debt in respect of commission already earned may well be. There is no reason to distinguish a debt arising in this way from any other debt, provided that it is sufficiently clear that the parties intended that the agent's authority should secure it.” (at [9] per Lord Sumption JSC)

The Court concluded that the exception did not apply in the present case for two reasons.  First, on its proper construction (and contrary to the construction applied by the Court of Appeal), the agency agreement did not provide for D&D’s authority to collect monies from customers to survive termination of that agreement.  Second, D&D’s right to collect monies from the customers as a means of receiving its commission was merely a procedural mechanism.  It did not afford D&D the security of ensuring that the monies passed through its hands before transmitting the balance to Angove; the customers were entitled, under the contractual matrix, to make payment to Angove directly, in which case commission would have to be paid by Angove to D&D.  Accordingly, D&D’s right to collect from the customers did not constitute a relevant ‘interest’ to engage the application of the authority coupled with an interest exception.

The Constructive Trust Issue
The Court concluded that, assuming it was wrong on the Revocation of Authority Issue, no constructive trust would arise by reason of D&D’s receipt of funds from the customers following its entry into administration.  Two reasons were given.

First, D&D having a contractual right to the money, it could not be unconscionable for it to receive the customers’ funds into its account, notwithstanding its inability to perform by reason of the advent of insolvency.  The Court concluded that Japan Leasing had thus been wrongly decided.

Second, and more fundamentally, the Court clarified the circumstances in which a restitutionary proprietary claim (i.e., as a beneficiary under a constructive trust) may exist:

For present purposes it is enough to point out that where money is paid with the intention of transferring the entire beneficial interest to the payee, the least that must be shown in order to establish a constructive trust is (i) that that 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 or fiduciary duty against a third party. One or other of these is a necessary condition, although it may not be a sufficient one.” (at [30])

The Court found that the decision in Neste Oy could not be justified on the ground on which it had been decided.  An agent’s receipt of monies from its principal in circumstances where, by reason of insolvency, there was bound to be an inevitable total failure of consideration was insufficient to vitiate the principal’s intention to part with its entire interest in the monies.  Something more, which was absent in both the present case and Neste Oy, was required for a constructive trust to arise.

What should practitioners take from the judgment?

The Supreme Court’s treatment of the Constructive Trust Issue will have significant ramifications in this controversial area of the law.  After much academic and judicial criticism, Neste Oy and Japan Leasing have been overruled.  It is now clear that an agent’s receipt of funds either from his principal, or to be accounted to his principal, will not give rise to a constructive trust where the agent is unable to perform his obligations because of the occurrence of an insolvency event.  Instead, the important issue will be whether the circumstances of payment were such that it may fairly be said that the payer’s intention to part with his entire interest in the funds was vitiated.  In this respect, the Court expressly left open the issue of whether the result in Neste Oy may be justified because the principal paid the monies to the agent under a mistake as to the agent’s continuing ability to perform.

The judgment also serves as a reminder of the general rule that a principal may always revoke his agent’s authority notwithstanding the terms of the agency agreement, and offers modern clarification of an important exception to that rule. In view of the Court’s approach to the relevant contractual terms, it is plain that those entering into agency agreements that seek to protect permanently benefits conferred on agents will need to inspect the boilerplate of their terms with particular care. 

 

 

Posted: 12.06.2017 at 12:29
Tags:  Cases  Commercial Law  Insolvency  Dispute Resolution
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