Agency, insolvency and termination

A recent English case, involving an agent and distributor, dealt with questions in relation to the revocability of an agent’s authority and also what happens when the agent receives money in an insolvency situation (and the insolvency prevents that agent from performing a corresponding obligation).

Bailey v Angove’s Pty Ltd [2016] UKSC 47 (27 July 2016) involved an Australian winemaker (Angove’s), which had appointed a company as its agent and distributor in accordance with an agency and distribution agreement. The agent entered into administration, and shortly thereafter liquidation. Angove’s sent a notice of termination two days after the agent entered into administration. It stated that Angove’s would collect the price from its customers and provide the agent’s commission separately. The liquidators objected to this course of action. Two invoices were also paid to the agent after the notice of termination.

Agent’s authority – irrevocable?

Lord Sumption, who delivered the judgment allowing Angove’s appeal, reviewed the case law in this area. The court determined that, if certain grounds are met, it is possible for an agent’s authority to be irrevocable. These grounds are, first, that there should be an agreement that the agent’s authority is irrevocable and, secondly, that the authority must be given to secure an interest of the agent, being either a proprietary interest or a liability owed to the agent personally. Where these grounds are met, the agent’s authority is irrevocable while the interest exists. The court went on to state that if an agent’s only interest is in relation to obtaining commission, this is not enough to secure an interest.

The court did, though, stress the general rule that an agent’s authority is revocable (even if it is expressed to be irrevocable, unless both of the grounds mentioned above apply).

On the facts of this case, it was held that the agent’s authority was terminated by the termination notice; that the authority of the agent to collect payments was not irrevocable; and that the authority had stopped once the principal had terminated the agreement. The court went on to find there was nothing else in the agreement (particularly in the clauses in relation to payment, collection of payment, commission and termination) which purported to make the agency irrevocable or sufficient to make it a security.

Lord Sumption continued, obiter, to address what the situation might have been if the agent had still been entitled to collect the payments.

Constructive trust?

Assuming that the agent did have the authority to collect the payment, the Supreme Court rejected the concept of a constructive trust applying (though on different grounds to those presented by the Court of Appeal). Given the payments were made without error, on the basis of valid contracts and untainted by any vitiating element such as fraud, theft etc to an agent who (on this theory) had the authority to accept the payments, there was no constructive trust. The court stated that, if a trust had come into being, the monies would not form part of the insolvent estate, thereby conferring a priority for Angove’s claim over other creditors. The court considered that the statutory rules for the distribution of insolvent estates were an important public policy matter, and such a result would have been unfair standing that policy.

Comment

While the case was determined under English law, and Scots law does not usually approach trusts from the principles of equity found in English law, principals, and those acting for them, should take note of the helpful pointers throughout the decision when drafting agency agreements.

As an aside, practitioners and others involved in agency law will be interested to see what will become of commercial agency generally following Brexit – in particular whether or not the Commercial Agents (Council Directive) Regulations 1993, and the rights to payments of indemnity or compensation under those regulations, will be reviewed.