FAMILIARITY WITH PRINCIPAL AGENT’S INDEPENDENT DISCRETION CRITICAL TO CONSTRUCTION INDUSTRY OPERATORS

Tuesday, July 31, 2012
  • SHARE THIS ARTICLE

It is not unusual in construction contracts for principal agents to be vested with the power and authority to assess the works and to bind the employer to the amounts payable to the contractor.
The Principal Building Agreement of the JBCC 2000 (prepared by the Joint Building Contracts Committee Incorporation) is no exception.
The amount payable to the contractor under the JBCC is triggered by the principal agent issuing a payment certificate to the employer after having assessed the amount in accordance with the value of the completed work.
Clearly, then, the principal agent is permitted a degree of discretion in making that assessment.
Clause 5.6 of the JBCC expressly prohibits the employer from interfering with or preventing the principal agent from exercising his independent discretion when performing his obligations in terms of the agreement.
The question is thereby begged: What constitutes a prevention of or an interference with the principal agent's independent discretion?
In MSC Depots (Pty) Ltd v WK Construction (Pty) Ltd & another (157/10) [2010] ZASCA 115, the court found that the employer's failure to facilitate payment of a duly issued payment certificate constituted interference with the principal agent's independence.
The parties had concluded a construction agreement based on the standard JBCC provisions in terms of which the contractor was appointed to carry out construction works in accordance with the design supplied to it by the employer.
In March 2006, the principal agent issued an interim payment certificate to the employer for R827 392,03, which amount was approved by the employer's director. By the time of issuance, the works had reached practical completion and the employer had taken occupation of the site.
However, before payment of the certified amount could be effected, defects were noticed in the construction works and the director of the employer, who, after having approved payment, instructed the principal agent to stop payment.
He did so on the assumption that the defects were caused by some fault in the construction work.
In May 2006, the principal agent and the contractor convened a site meeting where they agreed a method of remedial work to be undertaken by the contractor.
After commencing the remedial works, the principal agent instructed the contractor to withdraw, ostensibly on the basis that the remedial works executed by the contractor would not offer a long term solution to remedy the defects as indicated by the employer.
After further fruitless discussions and meetings, the contractor gave notice of its intention to cancel the agreement on grounds that the employer, inter alia, had:

failed to pay the amount certified in terms of clause 31.9 of the agreement; and

prevented the principal agent from exercising his independent discretion regarding the performance of his duties and the contractor was prejudiced by such action.

Clause 31 of the JBCC sets out the payment mechanisms and provides for the issuing of monthly interim payment certificates. The principal agent is required to issue an interim payment certificate every month based on a valuation or assessment of work completed by the contractor.
Clause 31.9 calls for the employer to pay the contractor the amount certified in the interim payment certificate within seven calendar days of the principal agent having issued the payment certificate.
If the employer fails to make payment or has made partial payment only of the amount due in the issued payment certificate, the contractor may, in terms of clause 31.16, either:

issue a demand to the employer in terms of the payment guarantee, where such is provided;

exercise a lien prior to practical completion where this has not been waived; or

give notice of suspension of the works.

In agreeing with the court a quo, the Supreme Court of Appeal found that the JBCC vested the principal agent with full authority to act in terms of the agreement. It held that the employer failed to act in accordance with the principal agent's recommendation that payment be effected and, in the circumstances, prevented the principal agent from exercising his independent discretion regarding the performance of his duty.
On the wording of clause 31, it appears that the obligation to effect payment of a duly issued payment certificated is a separate issue from the principal agent's discretion in assessing the value of the works and certifying the amount payable to the contractor.
The principal agent's independent discretion concerned the issuance or non-issuance of the payment certificate and the amounts therein in accordance with the provisions of clause 31.
Upon such issuance, clause 31.9 requires the employer to effect payment of the amount certified. Indeed, once the principal agent has certified an amount, the obligation to effect payment is so unequivocal that the certificate itself gives rise to an entitlement to institute summary judgment proceedings for payment of the certified amount. The fact that the certificate is recognised as a liquidated document demonstrates that the principal agent has fulfilled his obligations.
There may very well have been interference with the principal agent's independent discretion related to some other act of the employer – perhaps, for example, when the employer indicated its displeasure with the arrangements made for remedial works.
For that reason, while we agree that the employer had indeed breached its contractual obligations, such breach would appear to relate to its failure to take the necessary steps to effect payment in terms of such certificate, rather than to any interference with, or prevention of, the principal agent's discretion per se.