Liability of principal agents in construction agreements – in particular JBCC agreements

In the matter of Hyde Construction CC v Blue Cloud Investments 40 (Pty) Ltd the court dealt with the potential liability of a person appointed as a principal agent of the owner of a property for damages to a construction industry or environment.

Background
It is alleged by the Contractor that on or about 25th July 2005 a written agreement was concluded between itself and Blue Cloud investments 40 (Pty) Ltd.
This building contract was contained in a standard form agreement prepared by the Joint Building Contracts Committee (JBCC 2000).
The JBCC 2000 makes provision, inter alia, for the appointment by Blue Cloud Investments of a so–called ‘principal agent’. Blue Cloud Investments then appointed a registered professional architect from Durban.
In terms of the contract, the Contractor would undertake certain building work at the Blue Cloud Investment’s premises in Knysna, including alterations and additions to an existing shopping Centre.

The role of the principle agent
In terms of the JBCC 2000 series contract, the principal agent will be the only person who will be have the authority to bind the employer, that is, its principal.
Where more than one agent is employed, the principal agent shall oversee such agents and even delegate some of his or her authority to them.
The principal agent receives notices on behalf of the principal or employer.

Duties of the principal agent
The employer surrenders many of its contractual rights to his principal agent inter alia:

  • the issuing of contractual instructions;
  • delegation of authority to other agents, if any, to issue contractual instructions;
  • approve work and/or order additional work;
  • to determine the nature and extent of the work;
  • to extend the construction period in appropriate circumstances;
  • determine the amounts of payments to be made; and
  • issue interim and final payment certificates.

By virtue of the role the principal agent plays he or she binds the employer or principal and is thus liable to them with regards to any negligence on his part which may result in financial loss.

The dispute
The dispute arose from alleged non–payment of money due to Hyde Construction by Blue Cloud Investments after Hyde Construction has allegedly discharged its obligations under the JBCC contract. Hyde Construction alleged that Blue Cloud Investments is indebted to it in various amounts exceeding R7 million (to be precise the amount comprise of R4,4m together with compensatory and default interest amounting to R2 642 826 in the sum of R7 042 828).
The “compensatory interest” is according to the JBCC contract, an interest that the owner or principal or employer is obliged to pay the Contractor on the netto amount certified by the principal agent in the final payment certificate, calculated according to an agreed formula.

The exception
It was common cause that the Contractor’s claim against the architect was founded on a delict and subsequent damages entailed pure economic loss.
The claim in the alternative by the Hyde Construction alleged that in terms of the contract, Blue Cloud Investments owed a legal duty of fulfillment of contractual obligations to Hyde Construction.
The architect breached such legal duty by negligently failing to comply with its alleged contractual obligations.
As a result of this negligent omission, Hyde Construction suffered damages as a result of the alleged loss of the compensatory interest and default interest.
However, the architect in his capacity as Blue Cloud Investment’s principal agent, does not have locus standi in judicio to be sued in his own name.

Locus standi of the principal agent
The Court described the term “locus standi in judicio” as generally used to refer to the capacity or ability of a party to litigate, and in particular to initiate proceedings. It is not often used in relation to the capacity of a party to be sued.
The Court therefore decided that the challenge on locus standi must accordingly fail.

Liability for pure economic loss
The Court concluded that Hyde Construction’s claim that the architect owed it a legal duty was an attempt by Hyde Construction to extend liability beyond Hyde Construction.
For many years the Aquilian action for damages for pure economic loss has been recognised in our law.
Fundamental to a delictual claim for pure economic loss is the necessity to plea and prove wrongfulness.

Finding
The Court found that the principal agent may be held liable to his employer, Hyde Construction, either in terms of their contractual arrangement embodied in the JBCC 2000 or in delict. It further found that the architect was unnecessary burdened to expose him to potential liability in respect of a further delictual claim by the Contractor as the Contractor had adequate other legal redress.
The claim against the architect was found to be bad in law to the extent that it was alleged that the architect bore a legal duty towards Hyde Construction as prayed in the particulars of claim. The exception to Hyde Construction’s particulars of claim was accordingly upheld with costs.
The potential delictual liability of a person appointed as an agent under a building contract for damages raises a lot of concern regarding our law of contract.

There is a gray area regarding the contractor’s claim against its principal agent in delict and for pure economic loss. In my view, the aforementioned provisions of the JBCC contract clearly cloak the principal agent with quasi-arbitral powers in circumstances where he or she is required by the contractor under clause 40.1 to determine the correctness of the final account issued under clause 34.3, or the final payment certificate under clause 34.5. However, where the principal agent acts, for example, under clause 31 the function is similar to that of a “certifier”, a role in which he or she draws on professional skill, expertise and/or experience.
Clearly the contractor is not without legal recourse to recover the lost interest and has a contractual claim (which it has sought to enforce) against the owner under the JBCC 2000. This factor mitigates against the necessity to impose a general liability on the principal agent vis-a-vis the contractor. There does not appear to be any compelling social need or legal policy consideration which demands the extension of such liability.
Furthermore, there is the consideration that by imposing liability on the principal agent vis-a-vis the contracting parties to the JBCC 2000 with whom he has no contractual privacy, such an extension may lead to principal agents either refusing to accept appointments under the JBCC 2000, or to them having to take special professional insurance cover to deal with that eventuality. Such consequences could hamper the efficiency of the implementation of JBCC 2000 contracts and also effects the cost parameters thereof.
The court found that Hyde Construction has advanced no cogent grounds for the extension of delictual liability to the architect in the circumstances under consideration. The principal agent herein was successful in its exception against the contractor’s particulars of claim.
This case failed to certify whether or not principal agents could be liable for the employer, what this case set out is that cogent reasons must exist for the contractor to hold the principal agent liable, the aquilian claim must be drafted properly and the absence thereof will only nullify the contractor’s claim in respect of the principal agent not to the employer. It remain to be seen whether our law will in future determine this conundrum.

By Abi Matjila and John Letsoalo
abious@dyason.co.za  |  johnl@dyason.co.za