The case of Bailey v Angove’s Pty Ltd  heard in the UK Supreme Court has confirmed the general rule that an irrevocable agency will only be created in exceptional circumstances: there must be a specific agreement that the agent’s authority is irrevocable and the authority must be given with the intention of securing an interest of the agent.

In this case, D&D Wines International Limited (the agent) contracted to sell wines in the UK for Angove’s PTY Limited (the principal), an Australian winemaker. It was agreed that customers would make payment to D&D Wines, who would then pay this on to Angove’s, minus its commission. D&D entered administration on 21 April 2012.  Angove’s lawfully terminated the agency agreement by written notice on 23 April 2012 and purported to terminate D&D’s authority to collect monies from customers. The termination notice declared that Angove’s proposed to collect the price directly from the customers and would account separately to D&D for their commission. D&D proceeded into liquidation on 10 July 2012 and the liquidators of D&D objected to this. They said that they were entitled to collect on the outstanding invoices, deduct the commission due to D&D, and leave Angove’s to prove in the winding up for the rest of the money. They argued that D&D’s authority as agent to collect the price of the goods was irrevocable, because they needed it to recover their commission. Angove’s disputed this. They argued in the alternative that the moneys held by D&D were held on constructive trust for them.

The Supreme Court found for Angove’s and held that D&D Wines’ authority to receive payments from customers ended when Angove’s terminated the contract. The result was that the A$800,000 should go straight to Angove’s. An irrevocable agency had not been created. As a general rule, the Supreme Court confirmed that an agent’s authority can usually be terminated, even where the parties have agreed that the authority is irrevocable (although, in this case, the principal may have to pay damages to the agent). The agent’s authority could not be preserved by a clause which merely referred to `accrued rights or remedies’. The only exception to this rule is where the parties have agreed that an agent’s authority will be irrevocable and the authority is 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 the equitable interest to perfect it) or a liability (generally in debt) owed to him personally. In either case, the agent’s authority will be irrevocable while the interest subsists.

Although Angove’s won the appeal on the first ground, the Supreme Court rejected the second ground of appeal which was whether the receipt of money at a time when the recipient knows that imminent insolvency will prevent him from performing a corresponding obligation, can give rise to liability to account as a constructive trustee. Since the hypothesis was that the agent had the right to receive the payments, none of the elements necessary to establish a constructive trust (such as payment due to mistake, or under a rescinded contract, or the money being the result of fraud, theft, or breach of trust) would have been present. In these circumstances the mere fact that it was received at a time when D&D’s personal liability to account to Angove’s would not be performed could make no difference to the basis on which they held the money. It did not become unconscionable for them to retain it simply because the statutory insolvency regime intervened to require it to be shared pari passuwith other creditors.

This case is helpful to insolvency practitioners as it clarifies the circumstances in which a constructive trust could arise. In the light of this case, commercial lawyers are now likely to be reviewing the drafting of termination clauses in agency agreements, knowing that persuading the court that a constructive trust exists based on imminent insolvency is likely to be difficult.

Click here to read the Supreme Court judgment