In the construction industry, and particularly the oil and gas, energy and mining sectors, it is common for principals to appoint a third party EPCM Contractor carry out engineering, procurement and manage construction of their major projects.

EPCM Contractors represent the principal in most aspects of the project. This commonly includes undertaking engineering for the project, negotiating the relevant contract packages with third party contractors, and performing the day to day management and contract administration functions for these contracts. These EPCM contractors are agents in their truest sense.

The recent Federal Court Decision of Consolo v Bennett [2012] FCAFC 120 provides an overview on the laws of agency and highlights the circumstances in which an agent’s actions can bind the principal. Whilst not a construction related case, it discusses the liability of a principal to third parties arising from the misleading conduct of its agents.

Facts

The case involved two holding companies (Consolo Pty Ltd (“Consolo”) and Pearson Property Group Ltd (“Pearson”) entering into an unincorporated joint venture for a property development project called Elysium Noosa Development (“Development”). Consolo was the ultimate owner of Elysium Noosa Pty Ltd (“Elysium”), the owner of the land on which the Development was being undertaken. Consolo provided administrative support and was responsible for obtaining finance for the Development. Persons’s role was the promjotion, advertising and marketing of the Development.

Elysium entered into a marketing consultancy services agreement with PRD Consulting Services Pty Ltd (“PRD”), which employed two sales agents.

Pearson appointed Mr Pearson as a joint project manager with a Consolo project manager. Mr Pearson dealt closely with the sale agents and had a close relationship with them by reason of his responsibility for the promotion, advertising and marketing of Elysium. Mr Pearson involved the sales agents in training sessions and Q&A sessions. In contrast, Consolo’s project managers had very little contact with PRD and the sales agents and were predominantly focused on the feasibility study and obtaining finance.

The respondent, Dr Bennett, signed a contract with Elysoium for the purchase of a lot in the Develpoment after sales agents at PRD represented to him that a community centre would be completed at the same time as settlement of his lot.

The community centre was never built and Dr Bennett sought to recover damages for the reduced value of the lot on the basis that he was induced into the contract of sale by PRD’s misleading and deceptive conduct. Dr Bennet also alleged that Consolo and Pearson were liable for PRD’s conduct.

One of the questions before the court was whether Consolo and Pearson were liable for the misleading statements made to Dr Bennett by PRD by virtue of section 84(2) of the Trade Practices Act 1974 (Cth) (“TPA”).

Section 84(2) of the TPA provides that:

“Any conduct engaged in on behalf of a body corporate … by any other person at the direction or with the consent or agreement (whether express or implied) of a director, employee or agent of the body corporate, where the giving of the direction, consent or agreement is within the scope of the actual or apparent authority of the director, employee or agent, shall be deemed, for the purposes of this Act, to have been engaged in also by the body corporate”

The courts findings

The primary judge found that both Consolo and Pearson were liable for the misleading representations made by PRD (via its sales agents) to Dr Bennett. This was on the basis that Mr Pearson (as agent for both Pearson and Consolo) had given “authoritative guidance” to PRD in relation to the Development and this consitituted a “direction” for the purposes of section 84(2)(b) of the TPA.

On appeal, the court held that there was no evidence to suggest that Mr Pearson had authority to give directions on behalf of Consolo (the financial arm of the venture) or act as its agent. As such, Consolo was not deemed to have provided the authoritative guidance and was not liable for the misleading statements. However Pearson (the marketing arm) did not challenge the primary judge’s decision and as such, remained liable for the sales agents’ misleading statements.

A refresher on authority and agency

An agent’s actions can be binding on a principal even though the principal has not given the agent express authority to carry out such actions. An agent may have apparent authority where a principal, by words or conduct, holds out an agent as having authority to do something. Where a third party relies on the holding out, the principal may be precluded from later denying that the agent was authorised to make such representations.

EPCM Contracting and Agency

Whilst the Consolo case involved a complex corporate structure (interestingly, Elysium has subsequently been wound up), it involves a number of issues that are relevant to the relationship between a principal, its EPCM contractor, and the contractors managed by the EPCM contractor on behalf of the principal.

Whilst an EPCM Contract may place specific restrictions on the authority of an EPCM Contractor (for example, monetary limits on approval or restrictions on waiver of the principal’s rights under the managed contracts), these limitations are unlikely to be visible to third parties. Such limitations may therefore not prevent a third party from asserting legal rights against the principal arising from acts by the EPCM Contractor which exceed its actual authority.

Where an EPCM Contractor is responsible for the day-to-day administration and management of a contract on behalf of a principal, the line between the EPCM Contractor’s actual or apparent authority is blurred. Third party contractors on large scale resources and construction projects often seek to rely upon the apparent authority of the EPCM Contractor to:

  • enforce its rights against the principal (ie to be paid additional amounts based on assertions or undertakings from the EPCM Contractor to the contractor which are contrary to the EPCM Contractor’s actual authority); or
  • seek to escape its own liabilities and obligations (ie by maintaining that there has been a waiver by the EPCM Contractor regarding the application of notice provisions under the managed contract, even though the EPCM Contractor may not have actual authority to waive provisions on behalf of the principal).

Takeaway message

A principal should always ensure that:

  • the powers of the EPCM Contractor are clearly set out in the EPCM Contract;
  • the power and authority of the EPCM Contractor to interface with third parties, particularly the contractors it is managing on behalf of the principal are limited; and
  • contracts between the principal and the managed contractors provide clear statements about the limitations of the EPCM Contractor’s authority.