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Who is liable for breach of contract – Principal or Agent?

In the recent NSW Supreme Court (the ‘Court’) case Cincotta v Russo [2019] NSWSC 272 the question of agency when executing contracts was back in the spotlight.

What happened

In January 2014, Mr and Mrs Cincotta (Owners) engaged Mr Russo (Russo) for $610,000 of additions and alterations to their property in Concord West (Property).

The parties entered into an MB4 Construction Contract (Contract) that fell under the jurisdiction of the Home Building Act 1989 (NSW) (Act). Russo was a 50% shareholder and building supervisor for Bespeak 3 Pty Ltd (Bespeak), a licensed building company for the application of the Act. Russo’s supervisor certificate detailed that he could not personally enter into a contract. The Contract named Russo as the Builder despite listing Bespeak’s ABN.

The Owners had obtained a quote from Russo and the Owners believed that Russo was a licensed Builder. However, Russo understood the work was through Bespeak.

Throughout the works, the Owners were under the impression that Russo was acting in his own capacity as the licensed builder and that they had entered into an agreement directly with Russo. The quote and invoices came from S.E.R Constructions (S.E.R were Russo’s initials), a construction company that Russo was the director.

After the completion of the works, the Owners found a number of defects and non-compliances with the implied warranties of the Act. Bespeak shortly thereafter went into liquidation. The Owners commenced proceedings against Russo as they were still under the assumption that he was the Builder.

What was the legal question?

During the proceedings, it was put forward that Russo was actually an agent for Bespeak in the contract.

The legal issue arising was, can a party be wholly protected from liability under a contract if they sign as an agent?

This raised the question: with Russo acting as an agent, could the Owners recover costs for rectification against Russo?

What’s the law of agency?

Agency in the broadest sense is when one party (the principal) grants another party (the agent) authority to act on behalf of the principal to deal with a third party. The actions of the agent bind the principal, not the agent to the third party.  More detail on the law of agency is contained here.

Court’s decision

The Court held that terms of the contract are to be what a reasonable and objective person with knowledge of the parties’ relationship and the factors surrounding the contract would conclude the terms were intended to be. [1]

Accordingly, the court ruled that because Russo did not disclose, he was the agent for Bespeak prior to signing the contract he was responsible for the obligations under the Contract. This was because of the long held principle established in Cooke v Wilson (1856) that a party that signs the contract is considered the contracting party unless it is clear they were executing the contract as an agent. Russo therefore breached the statutory warranties as provided under Section 18B of the Act and was liable to pay the costs for rectification of the defects.

Take Away

The take away is twofold for both contractors and owners.

For contractors, if you intend to sign a contract as an agent, this case highlights the importance of explicitly stating that you are acting as an agent on behalf of another party. This means when populating the contract ensure that the contract contains an agency clause.

For an owner, it is crucial to understand whom you are being bound to before entering into a contract, including checking all relevant details such as the building licence, ABN, ACN and that other details are correctly stated.

If you have any questions around the law of agency, construction contracting, or home building disputes, please contact Morrissey Law + Advisory.

[1] Cincotta v Russo (2019) NSWSC 272 at [304].

Disclaimer: This publication by Morrissey Law & Advisory is for general information and commentary only and should not be considered or relied upon as legal advice. Formal legal advice should be sought in relation to any matters or transactions that may arise in relation with communication.