Bailey and another v Angove’s PTY Limited

This appeal raises two important and controversial questions of commercial law. The first is: in what circumstances will the law treat the authority of an agent as irrevocable. The other is whether the receipt of money at a time when the recipient knows that imminent insolvency will prevent him from performing the corresponding obligation, can give rise to liability to account as a constructive trustee.

Angove’s Pty Ltd is an Australian winemaker, which for many years employed an English company called D&D Wines International Ltd as its agent and distributor in the United Kingdom. D&D acted in both capacities. It bought wines from Angove’s in its own right and it sold wines on Angove’s behalf to UK customers, generally retailers. Both activities were governed at the relevant time by an Agency and Distribution Agreement (or “ADA”) dated 1 December 2011. Under clause 34, the ADA was terminable by either side on six months’ notice, or, under clause 36, by notice with immediate effect in a number of events, including the appointment of an administrator or liquidator.

On 21 April 2012, D&D went into administration, and on 10 July 2012 moved into creditors’ voluntary liquidation. At the commencement of the administration, there were outstanding invoices amounting altogether to A$874,928.81, representing the price of wine which D&D had sold to two UK retailers, but which the latter had not yet paid. On 23 April 2012, Angove’s gave written notice terminating the ADA and any authority of D&D to collect the price from these two customers. The notice declared that Angove’s proposed to collect the price directly from the customers and would account separately to D&D for their commission.

In due course, the liquidators objected to this course. They claimed to be entitled to collect on the outstanding invoices, deduct commission due to D&D, and leave Angove’s to prove in the winding up for the rest of the price. The liquidators have never denied that Angove’s was entitled to terminate the ADA or that their notice of 23 April 2012 had that effect. But they contended that the relationship between D&D and Angove’s in relation to the transactions covered by the invoices was that of buyer and seller, not agent and principal, and that accordingly the company’s liability to Angove’s at the commencement of the administration was a simple debt for goods sold and delivered. Angove’s disputed this contention. They also argued that any moneys held by D&D for their account were held in trust for them. By agreement between the parties, the sums paid to D&D on the invoices after the notice of termination were held by the liquidators in an escrow account pending the resolution of the dispute, and the sums paid directly to Angove’s were held in their solicitors’ client account on the same terms.

The matter came before His Honour Judge Pelling QC, sitting as a judge of the High Court, on an application under section 112 of the Insolvency Act 1986[2013] EWHC 215 (Ch). He held that in the relevant respects the relationship between Angove’s and D&D was that of principal and agent only, and that D&D’s authority to collect the price from customers came to an end upon service of Angove’s termination notice. In the Court of Appeal, the liquidators did not challenge the judge’s finding that D&D acted as agents. Their case was that if D&D acted in the relevant respects as agents, their authority to collect the price of goods which they had sold on Angove’s behalf survived the termination of the ADA because they needed it in order to recover their commission. The Court of Appeal (Patten, Lewison and Sharp LLJJ) accepted this argument and allowed the appeal on that basis [2014] EWCA Civ 215; [2014] 2 BCLC 129; Angove’s alternative case that the proceeds of the invoices were held in trust for them failed at both stages, although for different reasons.

The general rule is that the authority of an agent may be revoked by the principal, even if it is agreed by their contract to be irrevocable. The revocation is effective to terminate the agent’s authority, but gives rise to a claim for damages. Powers of attorney were said by Lord Kenyon to be “revocable from their nature”: Walsh v Whitcomb (1797) 2 Esp 565, 566. In Story’s Law of Agency, 2nd ed (1864), p 598, at para 463, the rule was said to be “so plain a doctrine of common sense and common justice that it requires no illustration or reasoning to support it.” Nonetheless, its basis has never really been in doubt. An agent is empowered to commit his principal within the limits of his authority as if the principal had agreed personally. This is a confidential relationship importing a duty of loyalty, and normally of undivided loyalty, on the part of the agent. As Lord Atkinson observed, delivering the advice of the Privy Council in Frith v Frith[1906] AC 254, 261, to allow the agent to exercise his authority after it has been revoked would amount to the specific enforcement of a relationship which is by its nature not specifically enforceable.

The main exception to the general rule is the case where the agent has a relevant interest of his own in the exercise of his authority. The exception applies if two conditions are satisfied. First, there must be an agreement that the agent’s authority shall be irrevocable. Secondly, the authority must be given to secure an interest of the agent, being either a proprietary interest (for example a power of attorney given to enable the holder of an equitable interest to perfect it) or a liability (generally in debt) owed to him personally. In these cases, the agent’s authority is irrevocable while the interest subsists.

Both conditions are now reflected in section 4(1) of the Powers of Attorney Act 1971, as regards authority conferred by a power of attorney. The first condition is perhaps self-evident, but so far as authority is required, it is supplied by the decisions of the Privy Council in Esteban de Comas v Prost and Kohler (1865) 3 Moo PC NS 158 and Frith v Frith[1906] AC 254. The second condition was established in Walsh v Whitcomb, supra, where the exception was said to apply in “every case where a power of attorney is necessary to effectuate any security”. In Smart v Sandars(1848) 2 CB 895, 917-918, commonly regarded as the leading case, Wilde CJ, delivering the judgment of the Court of Common Pleas, declared that:

The ambit of the exception for authority coupled with an interest is more narrowly defined by the editors of Bowstead and Reynolds on Agency, 20th ed (2014), para 10-007. They say that it applies

There are a number of special cases in which the authority of an agent has been held to be irrevocable on what appears to be a wider basis. They include the irrevocable authority conferred on the promoter of a public share offering to subscribe for shares (In re Hannan’s Empress Gold Mining and Development Co (Carmichael’s Case)[1896] 2 Ch 643), the irrevocable authority conferred by a bidder on an auctioneer of land to execute the memorandum of sale if it is knocked down to him (Van Praagh v Everidge[1902] 2 Ch 266, reversed on other grounds [1903] 1 Ch. 434), and the irrevocable authority conferred by a Lloyd’s name on his managing agent to underwrite (Daly v Lime Street Underwriting Agencies[1987] 2 FTLR 277, Society of Lloyd’s v Leighs[1997] CLC 759 decided on other grounds in the Court of Appeal The Times, 11 August 1997). The result in these cases was undoubtedly convenient, but they do not lend themselves to analysis along the lines discussed above. Nothing that I have said should therefore be taken to refer to them.

At this point, it is necessary to look more closely at the terms of the ADA. Clause 10 provided that where D&D took Angove’s products as their agents for sale, the terms of any sale should be the standard terms set out at Annexure A. These were drafted on the footing that the parties to the contract of sale were Angove’s and “the customer”, defined as “the person … who acquires goods from Angove.” They provided for the purchaser to pay the price within 90 days of the bill of lading date.

D&D’s right to commission is governed by clause 21:

Clauses 20 and 22 deal with the procedure for the payment of the price:

Finally, it is necessary to refer to clause 37, which deals with certain of the consequences of termination. This provides, so far as relevant:

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” (para 25). Construing the ADA, they held that a continuing right to collect the price from the customer was implicit in (i) D&D’s right to deduct commission from the price before remitting it to Angove’s, and (ii) D&D’s obligation to account to Angove’s for the price within 90 days of the bill, whether or not it had by then been received from the customer. This was because these features of the agreement gave rise to liabilities of Angove’s to D&D, which could be set off against sale proceeds in D&D’s hands. It will be apparent from this that the Court of Appeal applied only part of the test. The general rule is that an agent’s authority is revocable even if it is agreed to be irrevocable. It cannot therefore be enough to exclude the general rule that the authority is agreed to be irrevocable. What has to be agreed is not just that the authority is to be irrevocable but that it is intended to secure the financial interest of the agent. Both are questions for the construction of the agreement. The Court of Appeal did not address the latter criterion.

It is convenient to deal with both conditions together. In my opinion, neither of them was satisfied, for the following reasons:

D&D had express authority to collect from the customer under clause 22(b), and it would have been simple enough to provide in terms that it was irrevocable. But it is not expressed to be irrevocable or to survive the termination of the agreement. So far as the language offers any indication, it is to the opposite effect. By virtue of the final paragraph of clause 37, authority to collect the price would survive the termination of the agreement only if it constituted an “accrued right or remedy” of the agent. But it is described in clause 22(b) as a responsibility, not a right. I would accept that for the purpose of clause 37 a provision may be “expressed” to survive termination if, although not spelled out in so many words, it is nevertheless a sufficiently clear implication from the express terms. But for the following reasons I consider that no such implication is possible.

The first point to be made is that while D&D assume the “responsibility” of collecting payment from customers to whom they sell as Angove’s agent, there is nothing to stop the customer from paying Angove’s directly. Under the standard terms required to be agreed with the customer the price is payable to “Angove”, which “means Angove Pty Ltd, and includes D&D Wines International Ltd, where it acts as agent for Angove Pty Ltd.” This is consistent with clause 20, which envisages that payment may be made to Angove’s by D&D or directly by the customer. This makes it, as it seems to me, difficult to regard collection from the customer as a right, as opposed to a function of D&D, and even more difficult to regard it as a security.

It is correct that D&D’s right to commission under clause 21 survives the termination of the agreement, because it accrues unconditionally when the sale is made, therefore before termination. But the question is whether the right to deduct it from the price under clause 22(c) is a mere procedural mechanism or a security. It is not the only way of recovering it. If the price is paid directly by the customer to Angove’s, the commission is payable by Angove’s directly. In that event D&D would lose the ability to set off the commission against any sale proceeds in their hands. But the irrevocability of D&D’s authority cannot be inferred from the mere fact that D&D would to some extent and in some circumstances benefit if it was so.

Much the same point may be made about D&D’s obligation under clauses 20 and 22(c) to account to Angove’s for the price within 90 days of the bill of lading date. This was a right of Angove’s. It accrued when the goods were shipped, albeit that payment would not be due until later. It follows, as the Court of Appeal held, that in relation to goods shipped before the termination of the ADA it survived that event, just as it would have done if D&D had bought the goods in their own right. Clause 20 applies in both cases. It does not, however, follow that D&D had the continuing authority of Angove’s to collect the price from the customer. Once they had paid the price to Angove’s, they were entitled at common law to collect it from the customer on the ground that they had compulsorily discharged the customer’s liability for the price: Moule v Garrett(1872) LR 7 Ex 101; Ibrahim v Barclays Bank Plc[2013] Ch 400. The source of this right is the law of unjust enrichment. It is not the authority of Angove’s, who have no further standing in the matter once they have been paid.

It is inherently improbable that the parties should have intended the authority to be irrevocable. They had expressly envisaged the possibility of insolvency and provided for a mutual right of termination in that event. For an exporter in particular, there are particular problems associated with financial dealings with an insolvent agent for sale, which Angove’s clearly wished to avoid. If the agent’s authority to collect money from third parties survives termination the effect would be to secure D&D’s right to 5% commission in the event of the insolvency of Angove’s, but at far greater cost to Angove’s in the event of the insolvency of D&D. They would have to prove as unsecured creditors in the liquidation for the remaining 95%.

I conclude that Angove’s notice of 23 April 2012 was immediately effective to terminate D&D’s authority to collect on the outstanding invoices.

This means that it is strictly speaking unnecessary to deal with the second point, namely whether the funds paid by customers to D&D since the commencement of the administration are held in trust for Angove’s. But since the point is of some general importance and has been fully argued before us, I think it right to deal with it. I do so on the assumption that (contrary to the conclusion that I have reached) Angove’s notice of termination was not effective to terminate D&D’s authority to collect on the invoices.

An agent has a duty to account to his principal for money received on his behalf. It is, however, well established that the duty does not necessarily give rise to a trust of the money in the agent’s hands. That depends on the intentions of the parties derived from the contract, or in some cases from their conduct. As a broad generalisation, the relations between principal and agent must be such that the agent was not at liberty to treat as part of his general assets money for which he was accountable to his principal. This will usually, but not invariably, involve segregating it from his own money. The editors of Bowstead and Reynolds on Agency, 20th ed (2014), 219, para 6-041, put the matter in this way:

In the Court of Appeal matters took a different turn. Before the hearing of the appeal the court wrote to the parties drawing their attention to a passage from the 18th edition of Lewin on Trusts (2006), which suggested that the proceeds of the invoices might be held on a constructive trust for Angove’s even if there was a continuing authority to collect it. In the 19th ed (2015), the corresponding passage reads:

Neste Oy v Lloyd’s Bank Plc concerned the right of the bank to combine the accounts of an insolvent shipping agent called Peckston Shipping Ltd (or “PSL”). PSL settled on behalf of their shipowner clients bills payable to harbour authorities, pilots, fuel merchants, and other providers of goods and services. The shipowners sometimes put them in funds in advance and sometimes reimbursed them in arrears. The plaintiff shipowners claimed that the unspent balance of six payments made by them to a general account of PSL were held for them in trust. Their primary case was that the payments were subject to an implied trust to pay the money to the suppliers. This arose either by virtue of the agency relationship or as a special purpose (or Quistclose) trust: see Barclays Bank Ltd v Quistclose Investments Ltd[1970] AC 567. Bingham J rejected this, but held that there was a constructive trust of the sixth payment, which had been received after the directors of PSL had concluded that their company was insolvent. The judge took as his starting point a quotation from Story’s Commentaries on Equity Jurisprudence, 2nd ed (1839), vol 2, para 1255, which had been cited by Goulding J in Chase Manhattan Bank NA v Israel-British Bank (London) Ltd[1981] Ch 105, 117-118 as being “in accord with the general principles of equity as applied in England”:

In re Japan Leasing Europe Plc[1999] BPIR 911 concerned what was in effect a hire purchase agreement for an aircraft between four leasing companies and Olympic Airways. The contract documentation provided for the payment of the price in instalments to designated accounts in various currencies of one of the lessors, Japan Leasing. Japan Leasing was to receive the money on behalf of itself and the other three lessors. Japan Leasing went into administration, and a month later received an instalment into the designated accounts. The issue was whether the money was held in trust to pay their shares to the three other lessors. The deputy judge rejected the primary argument of the three solvent lessors that there was an express trust, but held that the last instalment was held on a constructive trust for the other lessors. The judge referred to an observation of the editors of Bowstead and Reynolds (currently the 20th ed (2014), at p 219) immediately after the passage which I have quoted above:

The distinction which Nicholas Warren QC rejected was, however, accepted by the Court of Appeal in the present case. They justified the result in Neste Oy on the ground that the payments to PSL were “essentially gratuitous”, and that the treatment of the sixth payment as part of the insolvent estate would have been a “real windfall for the creditors”. The position in Japan Leasing, they thought, was different, for the reason unsuccessfully submitted to Nicholas Warren QC. The Court of Appeal therefore doubted whether the decision was right. On the footing that D&D had a contractual right to collect the proceeds of the invoices in order to recover their commission on the sales, they thought that it could not have been unconscionable for D&D to retain the money and that there was no constructive trust.

I agree with the Court of Appeal that there was no constructive trust in this case. But this conclusion does not in my view depend on whether D&D gave consideration for the money. There are, I think, more fundamental objections to the constructive trust proposed by Angove’s.

At the time when the money was paid by the customers to D&D it was not impressed with any trust in favour of Angove’s. If, therefore, a constructive trust came into being, it did so for the first time upon its reaching the hands of the payee. The money would thereafter be traceable for as long as it remained identifiable in the hands of any third party other than a bona fide purchaser for value without notice. It would not form part of the insolvent estate, thereby conferring priority on Angove’s over other creditors, including many whose position would otherwise be no different from theirs. This is elementary, and fundamental. The statutory rules for the distribution of insolvent estates represent an important public policy designed to achieve a pro rata distribution of the company’s estate between its creditors. For that purpose it is necessary to assess claims as at a fixed and common point of time, namely when the company went into liquidation. The arbitrary character of any cut-off date is to some extent mitigated by statutory provisions for adjusting prior transactions prejudicial to creditors, such as preferences and transactions at an undervalue, and imposing liabilities for fraudulent or wrongful trading, but these provisions operate in their current form to restore the insolvent estate for the benefit of creditors as a whole.

It is inherent in the statutory scheme of distribution in an insolvency that apparently arbitrary results may follow from the adventitious timing of the commencement of the liquidation, especially in the case of deferred obligations. In principle, an advance payment to a company made before the commencement of the liquidation for an obligation performable afterwards will form part of the company’s estate, notwithstanding that its supervening insolvency means that the obligation will not be performed, at any rate in specie. The payer must prove in the liquidation for damages for the breach of contract. Likewise, a contractor providing goods or services on credit will have to prove in the liquidation for the price if the other party becomes insolvent before paying. The rule is the same for money received for his principal’s account by an agent who becomes insolvent before accounting for it, unless (contrary to the unchallenged finding of the judge in this case) the relations between the parties were such as to make the agent an express trustee of money in his hands. The money will form part of the agent’s insolvent estate, and the principal must prove in the liquidation. In the nature of things, these consequences involve a detriment for the payer, attributable to the timing of the company’s insolvency; and a windfall for the general creditors, since the estate available for distribution will be increased by the payment without being reduced by the cost of performance. As Professor Goode has remarked,

English law is generally averse to the discretionary adjustment of property rights, and has not recognised the remedial constructive trust favoured in some other jurisdictions, notably the United States and Canada. It has recognised only the institutional constructive trust: Westdeutsche Landesbank Girozentrale v Islington London Borough Council[1996] AC 669, 714-715 (Lord Browne-Wilkinson), FHR European Ventures LLP v Cedar Capital Partners LLC[2015] AC 250, at para 47. In the former case, the difference was explained by Lord Browne-Wilkinson in the following terms:

Bingham J’s point of departure in Neste Oy was that the recipient of money may be liable to account for it as a constructive trustee if he cannot in good conscience assert his own beneficial interest in the money as against some other person of whose rights he is aware. As a general proposition this is plainly right. But it is not a sufficient statement of the test, because it begs the question what good conscience requires. Property rights are fixed and ascertainable rights. Whether they exist in a given case depends on settled principles, even in equity. Good conscience therefore involves more than a judgment of the relative moral merits of the parties. For that reason it seems to me, with respect, that Bingham J’s observation in Neste Oy that any reasonable and honest director would have returned the sixth payment upon its receipt begs the essential question whether he should have returned it. It cannot be a sufficient answer to that question to say that it would be “contrary to any ordinary notion of fairness” for the general creditors to benefit by the payment. Reasoning of this kind might be relevant to the existence of a remedial constructive trust, but not an institutional one. The observation of the editors of Bowstead and Reynolds and of Nicholas Warren QC in Japan Leasing that a proprietary claim should be recognised whenever the claim is “sufficiently strong and differentiable from other claims” to warrant giving it priority over other claims in an insolvency, seems to me to be open to the same objection.

In English law, one of the essential requisites for a trust of whatever kind is that there must be identifiable trust property (or its traceable proceeds) in the hands of the recipient which are not available to him as part of his general assets: see Westdeutsche Landesbank Girozentrale v Islington London Borough Council[1996] AC 669, 705. The only true exception to this (which did not arise in Neste Oy) is the case of a person liable to account as a constructive trustee on the ground of his dishonest assistance in a breach of trust. The difficulty about the decision in Neste Oy concerning the sixth payment is that Bingham J had rejected the argument that the agency relationship between the shipowners and PSL was such as to impose the status of a trustee on the agents, and had declined to find that the payments were subject to a special purpose trust. He had rejected these submissions mainly because the agent was not expected to keep the funds remitted to it by the shipowners separate from its own, but was entitled to treat them as part of its general assets: see pp 664-665. It follows that in paying money to PSL the shipowners intended to part with any interest in the money, subject only to a purely personal obligation of PSL to account to them for what they had done with it and to repay any balance due as a debt. The judge made a similar finding in the present case.

The exact circumstances in which a restitutionary proprietary claim may exist is a controversial question which has given rise to a considerable body of judicial comment and academic literature. 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. Neither of them was satisfied in Neste Oy. In particular, the prospect of a total failure of consideration, however inevitable, is not a circumstance which could have vitiated the intention of the shipowner to part with its entire interest in the money. The right to the restitution of money paid on a consideration which has wholly failed is simply a process of contractual readjustment, giving rise like the contract itself to purely personal obligations. If an actual total failure of consideration does not give rise to a proprietary restitutionary right, I do not see how a prospective one can do so.

In my view, the decision in Neste Oy cannot be justified, at any rate on the ground on which it was decided. Japan Leasing was in my view wrongly decided, not just for that reason, but for the reason given by the Court of Appeal, namely that the recipient having a contractual right to the money, it could not be unconscionable for them to receive it into their account.

Mistake was not argued in Neste Oy. Bingham J had refused to allow the shipowners to rely on it because they took the point too late. But it has subsequently been suggested that since the shipowners presumably paid the money in the belief that PSL was in a position to disburse it to the service-providers, mistake would have been a better basis for the decision: In re Farepak Food and Gifts Ltd[2008] BCC 22, at paras 39-40 (Mann J). Whether that is correct is not a question which arises on this appeal. The money was paid to D&D by the customers, not by Angove’s. They no doubt paid it in the belief that D&D was authorised to collect it, or at least that payment to them would discharge their liability for the price. The question of trust arises on the hypothesis that D&D was authorised to collect the proceeds of the invoices, and on that hypothesis their belief was not mistaken.

I would allow the appeal and declare that the fund representing the proceeds of the invoices is payable to Angove’s.