Supreme Court: agency arrangement did not give rise to trust

Bailey and another v Angove’s PTY Limited [2016] UKSC 47

D&D Wines International Ltd acted as agent and distributor for the Australian winemaker Angove’s. Pursuant to an Agency and Distribution Agreement, which was said to terminate automatically upon D&D’s insolvency, D&D was authorised to distribute Angove’s wine to customers and to collect the purchase price, from which it deducted a commission before remitting the balance to Angove’s.

On 21 April 2012 D&D went into administration and later liquidation, and the agreement was terminated leaving outstanding invoices to customers worth A$874,928. The liquidators claimed to be entitled to collect the outstanding invoices, to deduct their commission, and to require Angove’s to prove for the balance in the liquidation. Angove’s claimed that firstly, D&D’s authority to collect money from customers terminated with the Agreement, and secondly that any sums collected by D&D were held on trust for Angove’s as principal.

HHJ Pelling QC at first instance agreed with Angove’s on the first point – the authority had been terminated – but did not find any constructive trust. The Court of Appeal reversed the decision, saying that D&D’s authority survived termination, because it was needed for D&D to recover the commission to which they were entitled.

Lord Sumption (with whom their lordships all agreed) found the Court of Appeal had applied the wrong test. In order for an agent’s authority to become irrevocable, two conditions must be satisfied: First, it must be agreed to be irrevocable, and second, the authority must be given to secure an interest of the agent. It is essential that the authority is intended to support the agent’s interest. Such an ‘interest’ may be proprietary, or may be a liquidated debt, but cannot be a mere speculative interest in future commission which has not yet been earned. Neither part of the test was satisfied in this case.

The judgment goes on to address the issue of constructive trust, which was based on two first instance decisions - Neste Oy v Lloyd’s Bank Plc [1983] 2 Lloyds Rep 658 and In re Japan Leasing Europe Plc [1999] BPIR 911 – both cited favourably in Lewin on Trusts and Bowstead & Reynolds on Agency, to the effect that: “Money received by an agent … may be held on a constructive trust for his principal on the ground that it would be unconscionable for the agent to assert a title to the money having regard to the circumstances of the agent at the time of receipt.” It was suggested that it would be unconscionable for D&D to receive money after entering insolvency, knowing they would be unable to remit it to Angove’s, and so it would be held on constructive trust.

Again, Lord Sumption considered this to be misguided. In order for money paid with the intention of transferring full beneficial interest to the payee to become subject to trust either (a) the there must be a fundamental mistake, or rescission of the contract which vitiates that intention; or (b) the recipient’s conscience must be affected by some fraud, theft or breach of trust against a third party. Neither of these is always sufficient, but each of them is necessary to establishing a constructive trust.

An agent does not become a trustee of funds which he is contractually obliged to remit to his principal simply because he becomes insolvent before remitting it, even if at the time of receipt he knew that insolvency was inevitable. The principal becomes entitled to prove in the bankruptcy. Any other conclusion would be unfair on the other creditors and contrary to the insolvency provisions.

Comment

Lord Sumption’s judgment is a model of clarity on a case which, at the Court of Appeal, had become unnecessarily complex. It restores some intellectual rigour to an area in which earlier (usually 19th century) decisions had introduced some doubt. Most of all, it is a signal from the Supreme Court that trusts should only interfere in ordinary contractual dealings where there is proper justification, such as in the solicitor-client relationship in AIB v Redler [2014] UKSC 58.

Aidan Briggs