NCA Home Construction Volume 3

National Consumer Agency

The Home Construction Industry and the Consumer in Ireland Volume 3

Review of legal issues

November 2008 .

NCA - The Home Construction Industry and the Consumer in Ireland Review of legal issues

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Contents

Page

1. Introduction 2

2. Executive summary 3

3. Methodology 6

4. Legal issues 7

5. Contractual documentation involved in the sale of a property 10

6. Multi-unit developments, management companies and related matters 17

7. Future developments 26

8. Forms of contract 32

9. Unfair contract terms 34

10. Stage payments 40

11. Dispute resolution 45

12. Other issues 53


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1. Introduction

Given the costs to the consumer of purchasing, building or renovating a property in Ireland, the

National Consumer Agency contracted an in depth assessment of the construction sector in Ireland,

to evaluate it from a consumer perspective and to present findings and conclusions as regards its

relative strengths, weaknesses and areas for improvement. The outputs of this study will provide an

overview of the sector from a consumer perspective, highlight issues of consumer detriment in

which the National Consumer Agency may wish to intervene in defence of consumer rights and,

where relevant, pinpoint areas for change.

The primary objectives of the research are to:

• examine, document and evaluate the relationship between the construction industry and the

consumer as a whole and to identify areas (if any) where that relationship results in consumer

detriment.

• establish metrics to quantify the level of such detriment, in each instance. Financial measures of

associated detriment are preferred, however, it is recognised that this may not be possible in each

case. In such instances, proxy metrics are required.

• propose solutions or remedial measures required in each case. All proposed actions should be

attached to executing bodies and categorised on a graduated scale of importance.

The present study is focused specifically on the construction sector in Ireland and all analysis and

recommendations are specific to this market. International benchmarking and comparisons are

used in appropriate parts of the research methodology, but all findings, conclusions and

recommendations will be specific to the particular circumstances of this sector, and of the consumer

environment, in Ireland.

This report examines the legal aspects of the relationships between consumers and the construction

industry, in its widest terms, including before and during the conveyancing process, when

constructing a home or when carrying out renovations.


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2. Executive summary

This report examines the legal aspects of the relationships between consumers and the construction

industry, in its widest terms, including before and during the conveyancing process, when

constructing a home or when carrying out renovations.

Legal issues

This Report considers the balance of power between the parties to a property related transaction.

This includes a review of the standard contracts for purchase and construction of a home,

Objections and Requisitions on Title and additional, non-standard terms sometimes used in such

contracts.

At present, these standard forms of contract are, for the most part, perceived by industry bodies and

the Law Society of Ireland as providing a fair allocation of risk between the parties to the building

and house purchase contract.

Some clauses may present difficulties to consumers, however, it will often be the case that the best

way to limit the adverse effects of these is to ensure that consumers are well-informed, instead of

opting for legislative change or further declaratory court orders, for example.

Above all, in building agreements, consumers must be informed and educated not to enter into oral

contracts, as it makes seeking redress and enforcing its rights against any construction professional

much more difficult.

Key recommendations

Provision of a written contract

A key source of potential consumer detriment is the lack of a written contract being put in place in

relation to certain consumer construction projects. We recommend that the industry parties,

including the Law Society, professional institutes, the building contracting sector and the NCA

should work towards the development of a simple and appropriate form of contract for small

domestic building works. The use of this, or any approved industry standard contract, should be a

requirement of relevant codes of conduct for professional and industry bodies. This

recommendation requires the cooperation of a wide range of parties, but the NCA should lead on

this.


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Unfair terms and conditions

A review of contract terms and conditions identified a number of clauses which appear unfair, and

are potential sources of consumer detriment. We recommend that the NCA should seek their

amendment or removal. Examples of such terms include:

1 a provision in a contract for a unit in an apartment development that the developer is not

obliged to complete the common areas until the sale of the last apartment in a particular block.

2 a building agreement that provides that a purchaser covenants not to lodge objections to any

planning application lodged by the developer for any part of the development, which could

include a new or revised element of that development.

3 a building agreement under which the developer has no obligation to complete the development

or to adhere to the original plans for the development. It is not uncommon for a contract to

include a Special Condition which states that a layout plan is provided for location purposes

only or that the development may be altered in any way during the course of completion.

The NCA should consider how best it might achieve the removal or amendment of such terms.

Guides to standard contracts

We consider that consumers should be educated and informed as to the risks involved when they

seek to contract with industry trades people and professionals. We recommend that a guide or

guides to standard contracts should be developed and published by the NCA, which explain(s) in

clear terms the main risks that consumers take where executing the various standard forms of

contract, and their rights and obligations under these contracts.

Reducing deterrents to seeking redress

A key issue identified is the potential for consumers to be deterred from seeking redress where

detriment occurs. Many claims may exceed the limits for seeking redress via the Small Claims Court

and thereby necessitate a hearing in a higher court. In the first instance, the impact of raising the

Small Claims Court limits should be considered by the Courts Service. We further recommend that

the NCA and the construction industry should work on preparing a new model or standard form

adjudication agreement or introduce a standard dispute resolution clause for a new model building

agreement that takes consumers’ interests into account.

Statute of Limitations - 1

Invoking conciliation processes should stop the clock for the purposes of the Statute of Limitations.

At the moment, only arbitration or instituting court proceedings do so. As the RIAI forms of

building contract require any complaints to proceed through conciliation in the first instance, we

recommend that the NCA seeks to bring about the position whereby the appointment of a

conciliator has the effect of stopping the clock for the purposes of the Statute of Limitations. This

will involve an amendment of the relevant Statute.

Statute of Limitations - 2

There are many examples of decided cases where limitation periods under the Statute of Limitations

have operated in a manner that has contributed to consumer detriment. The Law Reform

Commission (LRC Report 64/2001, “The Statute of Limitations: Claims in Contract and Tort in

Respect of Latent Damage”) suggested that limitation periods be amended. We consider that the


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LRC’s view in this regard would protect consumers in cases where the consumer could not

reasonably have known of a defect in his/her property or building works. The NCA should

advocate the introduction of appropriate amending legislation by the Government.

Stage payments

Given that a decision has been taken by Government not to proceed with legislation outlawing stage

payments; the decision being taken to opt for a voluntary code instead; we recommend that

legislation be introduced which requires that ownership of the relevant site be transferred to the

purchaser once payments exceed the amount covered by the Homebond or equivalent insurance.

The DoEHLG, with the support of the NCA should advance proposals for such legislation.

Privity rule

The Law Reform Commission recommended in February 2008 that the privity rule (which means

that only a person who is a party to a contract can sue in respect of a breach of that contract) should

be amended insofar as it operates within the construction sector. The LRC has proposed draft

legislation that would enable a consumer to proceed against a sub-contractor in the context of

building agreements if appropriate. If enacted, this reform would promote consumers’ ability to

access effective and appropriate remedies, thus reducing the risk of detriment. The NCA should

advocate the introduction of appropriate amending legislation by the Government.


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3. Methodology

Our approach to carrying out this element of the study was designed to ensure the production of a

comprehensive report that covered all of the terms of reference. A four phased approach was

adopted in undertaking the research for this report as follows:

1 A Project Scoping Stage – to ensure that the project team and the NCA had a clear and mutual

understanding of the overall aims of this element of the project. This included agreeing with the

NCA which areas would be included in this report and deciding what information should be

sought from the consultations.

2 Data and Information Collection – all relevant reports and materials were requested and

reviewed at the commencement of the review. Desk research was also completed through

websites and other available documentation including information in relation to national and

international comparisons. A summary of this and other documentation subsequently provided

to us during the consultation process is provided in Appendix 2.

3 Review Findings - this phase of the assignment was concerned with analysing the findings from

the consultation process to identify key issues under the terms of reference for the review. All

information gathered was collated and analysed to ensure that all of the relevant areas were

covered and to cross reference the output from the different information gathering techniques.

4 Report - the final phase of the assignment was concerned with the generation of our draft and

final reports.


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4. Legal issues

4.1 Introduction

The property industry as a whole is governed by what former Minister for the Environment,

Heritage and Local Government Dick Roche described as “a complex interplay of different

legislative codes and differing practical and legal issues”.1 In particular, the transfer of land, known

in legal terms as conveyancing, is a heavily regulated area with many pieces of legislation governing

the terms and conditions of contracts dealing with the sale or transfer of property.

The Law Reform Commission has also noted that the area is complex and involves a number of

areas of law, with various government departments and agencies involved.2 As a result of this, a

substantial number of organisations have an interest in the area, and many have been examining

various aspects of it in recent years. For example, the Law Reform Commission and the

Department of Justice, Equality and Law Reform are currently working at reforming and simplifying

the conveyancing process, which will include the introduction of e-conveyancing. Current legislative

proposals, such as the Land and Conveyancing Reform Bill 2006, have been described by leading

experts as “comprehensive, radical changes” which will ensure that Ireland has “probably the most

up-to-date substantive law in the common law world.”3

In an article on conveyancing remedies,4 James Dwyer SC noted that there are two broad categories

of dispute that arise in relation to conveyancing contracts – those relating to the property and those

relating to the contract. Tellingly, he notes that “[i]n relation to the physical quality of the land the

maxim of caveat emptor reigns supreme.” He continues, “[o]ne would have to say that in the

modern context of consumer protection … the purchaser of a second hand car is often better

protected than the purchaser of a second hand house.”

There are many aspects to the various forms of property transactions and the parties to such

transactions. On the contractual side, at least, it should be noted that building agreements, contracts

of sale, general conditions and leases have evolved over decades of experience in practice and are

formed in the environment of the legislation applicable to construction and housing generally.

Moreover, the standard agreements and documents are generally revised, debated and agreed

between various stakeholders, including the Law Society of Ireland, the Construction Industry

Federation and the Royal Institute of Architects in Ireland, for example. Accordingly, where these

standard documents are used, they will generally reflect a fair balance between the vendor and

purchaser, the individual and the builder or developer. This system appears to work quite well, so

1 Vol. 617 No. 4 Dáil Debates col 1173 (Second Stage). 2 Consultation Paper: Multi-unit Developments (LRC CP 42-2006), p.2. 3 Wylie J, ‘The Changing Face of Land Law’ (Land and Conveyancing Law Reform Conference, 19

October 2006). 4 Dwyer J, ‘Conveyancing Remedies’ (1998) 3(3) CPLJ 50.


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long as the standard documents are regularly revised and updated. As will be discussed elsewhere,

agencies like the NCA have an important role in relation to these documents, as instanced by the

action taken by its predecessor organisation (The Office of the Director of Consumer Affairs

ODCA) in relation to building contracts, which resulted in the ODCA obtaining a High Court order

deeming 15 terms in the standard house building contract as being unfair. This was followed in

2006 by an arrangement between the ODCA and the Law Society under which building contracts

which were allegedly in breach of the order would be referred to the Law Society’s Complaints and

Client Relations Committee for possible disciplinary action against the solicitors involved.

It is very important to point out that, at least in relation to the sale and purchase of properties,

contract conditions can be particularly market driven. In a strong market, as has been experienced

in Ireland over the past number of years, contract conditions may be dictated by the developer and

presented to the prospective purchaser on a ‘take-it-or-leave-it’ basis. There may be little scope for

negotiation in such circumstances, such as where there is a waiting list for cancellations in an over-

subscribed new development. By contrast, in a weaker market, such as that which has developed in

Ireland at present, the buyer is in a position to shop around and to be more demanding, whether on

the commercial side in the deal struck or on the legal side in relation to his/her solicitor’s dealings

with the vendor’s solicitor. In a strong market, a purchaser’s solicitor who raises a number of

objections may find that the vendor withdraws from the sale in order to sell to the next person in

the queue.

The two sides of property transaction

When considering consumers we usually look at consumer laws, such as the Consumer Protection

Act 2007; but such laws may not always apply in the case of construction industry transactions. For

example, and as is discussed in Volume 1: Information, Marketing and Communications, the 2007

Act regulates commercial practices engaged in by traders in the course of consumer transactions for

goods or services. A consumer is defined as a person who is acting for purposes unrelated to their

trade, business or profession, while a trader is defined as a person acting for purposes related to

their trade, business or profession.

A unique aspect of real property sales is that in many cases the vendor will not be a commercial

developer or builder but an ordinary individual selling his or her home. The 2007 Act does not

make any allowance for this fact. As the obligations imposed by Act only operate on traders, they

do not bind an individual engaging in a private sale of his or her property. As a result, a consumer

purchasing a second hand property will generally not be entitled to the protections of the 2007 Act

vis-à-vis their dealings with the vendor (though they would enjoy such rights in their dealings with

professionals involved in the property transaction).

In such a transaction, only the professionals involved in the transaction (the estate agent and

solicitors for example) are non-consumers. An important consequence of this is that, when

considering consumer issues in relation to the home construction or home property industry, one

must consider both purchaser and vendor. As such, the interests of both must be protected. In

fact, the Auctioneering/Estate Agency Review Group (“AEARG”) Report devoted a section to

“Protecting Property Sellers”, stating that “Property sellers are affected just as much as property

buyers by several of the issues addressed [by the Group], for instance the other party pulling out of


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sales after a contract has been signed and/or a deposit paid, conveyancing delays, particularly when

the sale eventually falls through, and gazundering.”5

A common theme of studies on the sector is that both vendor and purchaser have rights and

responsibilities – and the latter element is often forgotten in the context of the purchaser. In the

context of consumer interests, the AEARG pointed out that “It is the responsibility of anyone

about to engage in a major transaction to educate themselves as fully as possible about what is

involved in the transaction, the types of things that may go wrong and the consequences of things

going wrong. However, the Group recognises that it is not always so simple for many people to

find accurate, objective, easily understandable information that will help them to educate themselves

as fully as they should. Often they will have to rely on incomplete advice from interested parties or

something they read in the media that may or may not be accurate in the first place and may or may

not apply to their circumstances, or second-hand advice that may be based on poor information in

the first place.”6

On that basis, the Group recommended that the proposed NPSRA (National Property Services

Regulatory Authority) has responsibility for developing a consumer awareness and advisory

programme in this area. It was also recommended that the NPSRA sets up liaison structures with

other relevant regulatory agencies, professional and consumer bodies to that end.

Former Minister for the Environment, Heritage and Local Government Dick Roche pointed out

that “[w]hile the legal framework is an important element, insufficient awareness on the part of

owners as to how apartment complex management arrangements work and a lack of appreciation of

their own responsibilities and powers has contributed to problems. The maintenance and

management of private apartment complexes is ultimately the responsibility of the apartment

owners, just as any house owner has to take responsibility for his or her home.”7

5 AEARG Report, p.37. 6 AEARG Report, p.28. 7 Vol. 617 No. 4 Dáil Debates col 1175 (Second Stage).


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5. Contractual documentation involved in the sale of a property

5.1 Introduction

The language of contracts for the sale of houses or apartments is not entirely that which is readily

understood by a lay person. It has been recommended in the NCA-commissioned report

“Management Fees and Service Charges Levied on Owners of Property in Multi-Unit Dwellings”

(the “DKM Report”) that such contracts be summarised by the vendor’s solicitor and that they be

explained to the purchaser. While there is a desire in many quarters that the conveyancing system

be simplified and reformed, it may be that a degree of legal terminology must be retained so that the

documentation is necessarily clear and precise, given the serious of the transactions. This is not to

say that only solicitors can carry out conveyancing, but merely that it may never be possible to

simplify conveyancing documentation to the degree that the whole of that documentation is

comprehensible to the average consumer. Indeed, Professor Wylie pointed out in the context of the

Land and Conveyancing Reform Bill 2006, that the drafters had made every effort possible to make

new legislation straightforward, in line with the recommendations of the Law Reform Commission

in its Report on Statutory Drafting and Interpretation.8 However, some concepts (Professor Wylie

gives the examples of easements and profits-à-prendre) are such an established part of the law that

any attempt to replace them with more straight-forward language “would cause all sorts of

difficulties … to encompass such [concepts].”9

The General Conditions of Sale (currently the 2001 (Revised) Edition) are published by the Law

Society and set out the default position for the purchase of a property. However, these General

Conditions are usually varied by the Special Conditions of Sale, which amend the General

Conditions to tailor the contract to the particular property being sold. This is a convenience for the

solicitor, who is familiar with the General Conditions and needs only, in effect, to examine in what

way the Special Conditions have altered them. Many of the General Conditions are of interest only

to the conveyancer, such as General Condition 11, which provides that the purchaser’s solicitor is

not required to investigate the title to the property prior to the date of the commencement of title,

which is stated in the Special Conditions. Ultimately this convenience results in a faster conveyance

of the property and a faster transaction for the parties.

One aspect of conveyancing that has been subject to criticism is the payment of the purchaser’s

legal fees by the vendor. This was raised by Deputy Olivia Mitchell during a Dáil debate about

property.

8 LRC 61-2000. 9 Wylie J, ‘The Changing Face of Land Law’.


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“[R]esponsibility for advising buyers of their rights and responsibilities at an early stage falls to their

solicitor. I [previously] pointed out that in many cases solicitors’ fees are paid for by developers.

While this may reduce costs for young couples who regard it as a bonus, there are other ways of

reducing the costs of a solicitor who is dealing with many similar apartments. When I raised this

with the Law Society it neatly avoided the issue by indicating it would be illegal for solicitors to act

for both parties to a purchase, which is not the case. Solicitors act for the unfortunate buyers but

their fees are paid by the seller. This practice creates a clear conflict of interest which does not serve

homebuyers. In addition, it reflects badly on solicitors who should move to change it before it is

changed for them.”10

There is no evidence available as to how widespread the practice is, but it is certainly the case that a

purchaser solicitor who is paid by the vendor may be conflicted and it is questionable whether (s)he

will adequately protect the interests of the purchaser.

While legislation prohibits a solicitor who is acting on behalf of a builder from acting for a buyer in

such a development, there is, however, a problem with inducements to buyers, which are, in the

current market, on the increase. On occasion, inducements to purchase dwellings include the

payment of legal fees by the vendor. Such payment of legal fees is usually conditional on a buyer

going to a particular solicitor, who the Law Society accepts may quite well feel obliged to act for the

benefit of the developer. The Society has advised the profession both against accepting instructions

in such circumstances, or more generally, allowing itself to be put in a position where conflict of

interest may arise. It is noted that a pattern is emerging of a much wider range of inducements now

being offered, such as payment of mortgages for a stated period, guaranteed rental, deferred deposit

payments, and provision of motor cars. While in the overall context, the pressures on the market

being currently experienced will result in lower prices for consumers, consumers’ awareness will

need to be greater as regards the hidden costs or disadvantages of such incentives and indeed to

consider the reasons why they are being offered in the first place.

While all relevant issues discussed in this report are considered in light of other jurisdictions, a

comparative international study on the law of conveyancing and property purchase is not proposed

here as, given that most countries have quite particular laws which vary greatly, such a study is

beyond the scope of this report. However, it should be noted that the Law Reform Commission

has considered the law relating to contracts for the sale of land in its Consultation Paper on Reform

and Modernisation of Land Law and Conveyancing Law.11 Similarly, the DKM Report and the Law

Reform Commission Consultation Paper on Multi-Unit Developments12 include such an analysis.

5.2 The General Conditions

The General Conditions of Sale are drafted by the Conveyancing Committee of the Law Society.

The Conveyancing Committee is representative of the whole legal profession, from small and sole

practitioners to large law firms. The General Conditions are a useful and flexible tool in the

evolution of conveyancing law. For example, previous recommendations by the Law Reform

Commission were implemented by the Law Society by amendment to the General Conditions.13

10 Vol. 617 No. 4 Dáil Debates cols 1163-64 (Second Stage). 11 LRC CP 34-2004. 12 LRC CP 42-2006. 13 Report on Land Law and Conveyancing Law (3): The Passing of Risk from Vendor to Purchaser (LRC

39-1991); Report on Land Law and Conveyancing Law (4): Service of Completion Notices (LRC 40-1991), discussed at LRC CP 34-2004, p.114.


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This demonstrates that an effective change in the law of conveyancing can be accomplished without

requiring the introduction of primary legislation. However, legislation may be necessary for certain

amendments and the Law Reform Commission recommended that the appropriate Minister have

the power to make regulations governing contracts for and conditions of sale (which has been

reflected in the Land and Conveyancing Law Reform Bill 2006, discussed later).

A number of points are made below in relation to particular General Conditions which may be

questionable in their protection of the consumer, but as has already been pointed out, a consumer

may be a purchaser or a vendor. Further, and again as has already been pointed out, property

transactions involve a solicitor on either side of the transaction who acts as agent of, and advisor to,

the consumer. This is not an argument for restricting the conveyancing role to solicitors alone:

while the Competition Authority, in its report on the legal profession, has recommended the

creation of a new role of “qualified conveyancer”, such individuals would be subject to the same

consumer protection regulation as solicitors.14

Selected General Conditions

General Condition 6 provides that a purchaser is on notice of any covenants, conditions, rights,

liabilities or restrictions applying to a property as contained in a Documents Schedule, whether or

not the purchaser has availed of the opportunity of examining these documents. While this may

seem to place a high burden or risk on the purchaser as consumer, such a purchaser is assisted by a

solicitor who takes on the duty of examining the documents schedule and explaining any such

restrictions, etc., to the purchaser. Accordingly, while such a term might be considered potentially

unfair if present in a contract concluded directly between the parties, the presence of a solicitor in

the transaction serves to vindicate the consumer’s rights and also provides an additional layer of

redress, in that the purchaser can take action against his/her solicitor for negligence in the event that

something goes wrong.

There are, of course, provisions which may act against a purchaser, such as General Condition 25

which provides for interest due to the vendor where the purchase has not been completed on time.

However, such interest arises only in circumstances where the delay is not attributable to default on

the part of the vendor. Accordingly, the consumer protected in this instance is the vendor.

General Condition 16 provides that the purchaser is deemed to buy the property with full notice of

the actual state and condition of it. However, General Condition 15 requires that the Vendor

disclose to the purchaser, prior to sale, all easements, rights, reservations, exceptions, privileges,

covenants, restrictions, rents, taxes and other liabilities. This requirement excludes such issues

which are already known to the purchaser or which are apparent from inspection. The latter

exclusion may be considered unfair to purchasers, who will be relying on the skills and expertise of

professionals to point out such issues on inspection. On the other hand, where the purchaser opts

not to engage such professionals, it is questionable whether the duty of care on the part of the

vendor should increase in circumstances where the vendor may be no more knowledgeable than the

purchaser in terms of such defects and may therefore be required to engage a professional on

his/her own behalf.

General Condition 33(b) goes on to provide that the purchaser may be entitled to compensation

from the vendor for loss suffered by the purchaser arising out of an error made by or on behalf of

14 Competition Authority, Competition in Professional Services: Solicitors & Barristers (December 2005),

Chapter 4.


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the vendor. However, this does not arise in the case of any matter of which the purchaser is

deemed to have had notice under General Condition 16.

General Condition 36 sets out conditions relating to planning law compliance. General Condition

36(a) and (b) provide warranties from the vendor that the property is in compliance with certain

planning laws and the Building Control Act 1990. General Condition 36(f) provides that where a

vendor furnishes certificates or opinions from an architect or engineer in respect of these

warranties, the vendor has no liability on foot of the warranties in General Condition 36(a) and (b)

unless (s)he was aware at the date of sale that the certificate or opinion contained a material error or

inaccuracy. However, between the date of sale and the date of completion, the purchaser may have

the right to rescind the sale pursuant to General Condition 36(f)(ii).

General Condition 44(b) provides that the vendor is not liable to the purchaser for loss or damage

to the property which occurs during reasonable operations undertaken by the vendor in vacating the

property, provided that these were undertaken with reasonable care. However, General Condition

45(b) provides that this does not affect the purchaser’s right to rescind the sale if the vendor fails to

deliver the property substantially in its condition on the date of sale.

General Condition 51 provides that disputes arising under specific General Conditions are to be

referred to an arbitrator. This merits a more detailed review as it is not certain that it is the most

appropriate approach for a consumer, a view held also by the Law Reform Commission.

In summary, while certain General Conditions may at first sight appear to provide some imbalance

in the rights of the various parties, there are generally other provisions that provide a greater degree

of fairness.

5.3 The Special Conditions

In general, Special Conditions relate to the particular transaction or property and are individually

drafted, unlike the General Conditions. Accordingly, the extent to which they can be analysed is

limited.

The Special Conditions will usually state the purchase price and the closing date for the transaction,

for example. They will also require the purchaser to join a management company, where such a

company is to take charge of common areas, and to pay stamp duty and VAT on the transaction.

A building agreement accompanying the sale of a property off the plans will often provide that the

developer is not obliged to complete the common areas until the sale of the last apartment in a

particular block. This may be for practical reasons, in that until all apartments are sold contractors

may be passing through the common areas with tools and building supplies, inevitably leading to

untidiness and wear and tear. However, it would seem unfair that early purchasers are potentially

left living on a building site and could be waiting for a period of years for the common areas to be

completed. To address this, the DKM Report recommended that the agreement between the

developer and the management company, under which the ownership of the development and its

common areas passes to the management company, should place an obligation on the developer to

complete the management company’s snag list; a recommendation that has also been supported by

the Law Reform Commission.


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A building agreement, accompanying the sale of a new property off-plan, will often provide that the

property cannot be sold without the consent of the developer. However, this restriction only

applies until the sale of the property has closed and operates to restrict the purchaser from ‘flipping’

the property on at a profit. While some consumers might see this as an unfair restriction on their

property rights, it operates as a protection for the developer from aggressive speculation which itself

could affect other purchasers negatively.

It is also common for the building agreement to provide that the purchaser covenants not to lodge

objections to any planning application lodged by the developer for any part of the development,

which could include a new or revised element of that development. This also seems unfair, as a

purchaser should be able to submit observations to such applications where they radically alter the

nature of the development into which the purchaser bought. Whether or not the proposed revision

or new development is substantially different from the initial plan should be a matter for the

planning authorities when considering the planning application and the observations, and it seems

quite unfair that an apartment or unit owner must agree not to submit observations.

The standard building agreement conditions, as issued by the Law Society and the Construction

Industry Federation, provide that the developer cannot sub-contract the completion of the works

without the prior written consent of the purchaser, but it is standard for a specific building

agreement to delete this clause. While this would appear to remove one right of the purchaser, it

does not seem unreasonable as developers should be entitled to use sub-contractors and, moreover,

many purchasers may not want to be consulted about every sub-contractor that the developer

proposes to use.

It is not uncommon for a developer to include a Special Condition which states that a layout plan,

which has been provided to the purchaser outlining an apartment for example, is provided for

location purposes only. It is also common for a Special Condition to be inserted providing that the

vendor is under no obligation to complete a development, and that the development may be altered

in any way during the course of completion. This will be reflected in the building agreement, which

will also provide that the developer is under no obligation to complete the development or to stick

to the original plans for the development. While the developer should have the ability to provide

for flexibility in the completion and further development of a scheme of houses or apartments, such

conditions have obvious potential to operate to the detriment of the purchaser.

Occasionally, a Special Condition will be inserted which deals with a flaw in the title to the property.

For example, it may be that a Vesting Certificate for a registered property was issued, never

registered in the Land Registry and has now been lost. The vendor will usually have applied for a

duplicate and the Special Condition will state that (s)he is not required to lodge it in the Land

Registry.

It should be noted that either side of any contract can seek to have the contract enforced by the

courts. This is done by seeking an order for specific performance against a party to an agreement

who is not performing their side of the bargain. The remedy is equitable and, therefore,

discretionary on the part of the courts.

Consumers should be aware of the fact that they might be able to obtain an order for specific

performance where they have concluded a contract of sale for a property but the vendor has not

completed the sale. However, consumers might be surprised to find that the vendor can similarly

seek an order for specific performance where the consumer has purchased a property and has


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delayed in completing the transaction or has withdrawn. There is anecdotal evidence that this is

now occurring or that the full amount of deposits are being retained where, due to market

conditions and uncertainty, buyers are withdrawing from sales in the hope that a better price can be

obtained in respect of a property.15

5.4 Objections and Requisitions on Title

Requisitions on Title are a list of questions sent to the vendor’s solicitor by the purchaser’s solicitor

after the contract of sale has been entered into. Replies to these Requisitions are required and,

generally, the failure by the vendor to answer a Requisition in a satisfactory manner should give rise

to a right on the part of the purchaser to rescind the contract.

The Law Society publishes standard Objections and Requisitions on Title, drawn up by the

Conveyancing Committee, which the purchaser’s solicitors forward to the vendor and which

constitute questions about the property. They are extensive, covering matters such as whether any

boundary disputes exist. whether any hire purchase agreement applies to fixtures or fittings on the

property, whether the property is serviced for drainage water, electricity, whether any easements or

rights attach to the property and even whether a forestry or dancing licence attaches to the property.

In practice, certainly in the case of a residential dwelling, the answer to many requisitions will be

“No”, and the purchaser’s solicitor will only discuss an issue with the purchaser where an unusual

answer is provided. The replies to requisitions should offer a comprehensive picture of the state of

the property at present.

Generally, the vendor’s solicitor does not owe a duty of care to the purchaser. However, in one

Irish case (Doran v. Delaney, Unreported, Supreme Court, March 9, 1998)16 the Supreme Court

held that the vendors’ solicitors owed a duty of care to the purchasers and were found liable for the

economic loss to the purchasers for their negligence in replying to Requisitions on Title.

In that case, the purchasers bought a property having been shown a map which incorrectly included

in the property land which did not belong to the vendors. When Requisitions on Title were raised,

one of the standard enquiries included asked whether there was any pending or threatened litigation

in relation to the property, or whether any adverse claims were being made against it. A dispute had

arisen over the ownership of the land which had incorrectly been included in the map shown to the

purchasers. The solicitor dealing with the sale of the property asked a colleague dealing with the

dispute what the status of the dispute was, and was told that the vendors had informed the solicitors

that the dispute was “all sorted out”. The vendor solicitor answered the requisition stating “Vendor

says none.”

The lack of this piece of disputed land meant that the purchaser had no access to the site for the

purpose of building a home on it and the validity of planning permission for that home (on which

the purchase had been dependent) was questionable. The purchasers therefore took action against

their own solicitors, the vendors and the vendors’ solicitors.

The Supreme Court found that the vendors’ solicitors owed a duty of care to the purchasers as they

were aware of the boundary dispute and therefore should not have merely passed on the

15 ‘Homebuyers opting out of sales now face losing deposits’, Irish Independent (17 December 2007). 16 For further analysis of this decision see Phelan SM, Doran v. Delaney - A New Duty of Care on

Conveyancers? (1998) 3(2) CPLJ 26.


16

information that this dispute had been resolved without making further enquiries. The vendors’

solicitors were aware that the site was being sold on the basis of particular planning permission. The

Court found that the vendors’ solicitors should have found out and communicated to the

purchasers the terms on which the dispute over the land had been resolved. It was stated that they

should have known that the answer in the form in which it was given was not necessarily the truth

or the whole truth and were under a duty to enquire further.

This does not mean that vendor solicitors are under a general duty of care to a purchaser when

dealing with a property transaction, but it may broaden the scope for aggrieved purchasers to seek

redress when a transaction goes wrong, particularly in the case of properties where the purchaser

relied on replies to requisitions that are incomplete or inaccurate.

5.5 Auction sales

A particular area of concern raised by some commentators is that of properties sold by public

auction. In the context of priority issues for consumers as a whole, it should be noted that only

around 10% of properties in Ireland are sold by public auction.17 Furthermore, residential

properties sold by public auction tend to be significantly at the higher end of the residential market.

In those circumstances, it must be considered relevant that the purchaser will have the means to

protect his or her interests to some extent. The Auctioneering/Estate Agency Review Group

reported in 2005 that “for the most part, property sellers appear to be happy with the auction

process. Property buyers on the other hand are somewhat less so. The most common problems

cited by property buyers related to auctions are inaccurate/misleading Guide Prices and the real or

imagined existence of ‘phantom’ bidders who drive up the price.”18

However, it must be recognised that the purpose of an auction is to obtain the highest price possible

for the seller, and thus is not aimed to get the best deal for the buyer. There is a view that the buyer

is a voluntary participant in the process, and if he or she is unhappy with the bidding, they do not

have to continue their participation in an auction. Where houses are sold under auction, there is

generally an underbidder, who normally has bid an amount close to the successful bid. This is

perceived by some as validating the auction price as a true reflection of the market price.

The NPSRA Bill proposes to prohibit bidding at public auction by a vendor or any person acting on

his/her behalf. It would further prohibit a property services provider, i.e. the auctioneer, from

accepting such a bid. To do so would be an offence, punishable by a fine of up to €3,000 or

imprisonment for a term of up to 12 months. Importantly, from the purchaser’s perspective, a sale

is voidable by the purchaser if the vendor bids at the auction. At present, General Condition 4(c)(i)

of the Law Society General Conditions of Sale (2001 Edition) provides that the vendor may “bid

himself or by an agent up to the reserve price” – a practice which would be outlawed by the NPSRA

Bill.

Without this measure the NPSRA Bill would only offer the hope that the threat of an offence acts

as a preventative measure. With such a sale being voidable, the purchaser can withdraw from the

contract once it has been established that the vendor entered bids at the auction. Auctioneers would

also be required to keep records of auction sales, including records of all offers received on a

property.

17 Report of the Auctioneering/Estate Agency Review Group (July 2005) (the “AEARG Report”), p.15. 18 AEARG Report, p.15.


17

6. Multi-unit developments, management companies and related matters

6.1 Multi-unit developments and management companies

Multi-unit developments have been a frequent source of complaint over recent years, as such

developments have become a more familiar aspect of the housing market. The issue of consumers

and multi-unit developments has already been considered by a wide range of organizations,

including the Law Reform Commission, the Company Law Review Group, the Office of the

Director of Corporate Enforcement, Dublin City Council and the NCA. Further, reports have been

published by the Housing Unit (now the Centre for Housing Research)19 and Dublin City Council’s

Housing Department. 20

While serious grievances have been aired by owners of properties in multi-unit developments, a

frequent complaint is that the purchaser of such a property was surprised to discover that a

management company existed, that service charges would have to be paid and that ongoing

obligations arise on the part of the owner. Critics of management companies and the construction

industry have often cited the high cost of housing in the context of such issues, on the basis that

consumers should not be exposed to further cost having paid a substantial amount to purchase a

property. However, both the NCA’s DKM Report and the Law Reform Commission’s

Consultation Paper point out that such obligations do arise in multi-unit developments. The Law

Reform Commission refers to this as “interdependence”, and the fact that rights in common areas,

etc., also give rise to obligations.

“[P]urchasers of units in multi-unit developments often do not appreciate the distinction between

ownership of a unit in [a multi-unit] development and ownership of a more traditional housing unit.

Furthermore, there is much confusion about the nature and purpose of service charges and reserve

or sinking funds and the extent to which the local authority should be involved in such

developments. As others have pointed out, this “understanding deficit” is a matter which requires

urgent attention. As a result of this, it seems that more information and perhaps even regulation

should be introduced in order to ensure that consumers are fully aware of matters concerning

sinking funds, service charges, and the unit owner’s rights and responsibilities in being a member of

a management company.”21

19 Mixed Tenure Housing Estates: Development, Design, Management and Outcomes. 20 Private and Mixed Tenure Multi Unit Developments – Management and Role of Local Authority. 21 Consultation Paper: Multi-unit Developments (LRC CP 42-2006), p.16.


18

Discussing this interdependence and the nature of apartment living, Dublin City Council stated that

as well as regulation of management companies and management agents, it is necessary to train and

educate owners in relation to the management of multi-unit developments.22

The Law Reform Commission has noted that the law “has not kept pace with the sudden ubiquity

of residential multi-unit developments and that, as a result, there is scope for mismanagement and

abuse.”23 The Commission concluded that a proactive Government approach was necessary to deal

with current problems. In particular, and despite the paper being a Consultation Paper and not a

full Report of the Commission, the Commission recommended that legislation be enacted to

prohibit demands by developers for more than a one year advance on service charges, in the

absence of a legitimate reason for requesting such.

6.2 Long leases for multi-unit properties

The most important document for the consumer purchasing a house or apartment in a multi-unit

development is the lease. All multi-unit properties are “sold” subject to a lease, which differs from

the usual landlord/tenant relationship in that the lease will usually be for a considerable duration,

such as 999 years. The effect is that the purchaser effectively “owns” the property, but the

developer (or, at least, the management company) is able to maintain certain restrictions on the

property which would not otherwise be possible in the case of a full transfer of title. This is logical,

as the restrictions should reflect the common good in the development. These restrictions apply to

all purchasers, and one purchaser may be able to enforce them against a neighbour in the case of

breach.

Typical covenants

A long lease will contain a number of covenants under which the purchaser promises to do or not

to do certain things, or to seek permission before so doing. These will usually require that the

property be properly maintained, that workmen hired by the management company can have

reasonable access to the property when necessary, that taxes and rates will be paid and that

applicable laws will be complied with.

The covenants will sometimes include an extensive indemnity from the purchaser to the

management company covering a wide range of liabilities arising out injury, death or damage to any

property, for example. While it is not necessarily unreasonable to include such an indemnity, any

person seeking damages for such loss should bring their action primarily against the property owner

rather than the management company. In practice, the management company may be joined in

such an action, leading to the desire for such an indemnity.

As sometimes happens in the case of building agreements, a covenant may be included in a lease

whereby the purchaser undertakes not to make any observations in respect of planning applications

lodged by the developer in relation to the estate. However, the covenant will usually go on to

provide that any such proposed works on the development will cause as little inconvenience to the

purchaser as possible and that no damage will be caused to the property. It still seems unbalanced

that the developer has free reign to redevelop or alter the nature of the development after the

purchaser has bought in to it, as the purchaser will have made his or her decision to purchase on the

basis of the plans provided to him/her. While the purchaser might expect or anticipate some degree

22 Private Housing Unit (Dublin City Council), Successful Apartment Living (Part 1) June 2006, p.3. 23 LRC CP 42-2006, p.21.


19

of departure from those plans, (s)he should not be denied the opportunity to make an observation

to the planning authority in relation to the development. Occasionally, for example, the purchaser

may buy an apartment and move in, to discover two years later that the developer has applied for

planning permission to build an additional block adjacent to the existing properties, which was not

contemplated in the original plans.

While restrictions such as those outlined above are significant, they do not necessarily represent an

imbalance in the position of the developer and the purchaser, rather they attempt to balance the

position of the purchaser and his/her neighbours. It is in the interests of all owners of property in a

development, for instance, that each property is similarly decorated throughout the development

and that satellite dishes do not appear on each balcony. While this may be a source of annoyance or

disappointment for some purchasers, the greater good of the development, particularly the resale

value of the properties, is protected by these restrictions.

While the management company will usually covenant to build up a reserve or “sinking” fund, little

detail of the fund is provided to the purchaser and there is no firm target set for the management

company in this regard. The DKM Report recommended that sinking funds be mandatory for

management companies, and that the NPSRA should consult with the Financial Regulator in

relation to the adequacy and management of the sinking fund and the insurance taken out by the

management company.

Many consumers might be unaware that it is normal for the owner of the estate (i.e. the

management company for completed developments) to retain ownership of balconies in apartment

blocks, while the lease grants the purchaser with a licence to use the balcony. Such a licence is, in

effect, a permission to use the balcony. This might come as quite a surprise to most purchasers, but

again ties in with the common interests of all apartment owners that balconies and the external

appearance of the buildings be consistent across the development.

6.3 Management companies

Management companies are usually incorporated as companies limited by guarantee and, when the

development is complete and all units sold, the development will be transferred to the management

company. The memorandum and articles of association (the “M&A”) of the management company

are its constitutional documents, which all companies are required to have. Such companies are

formed under the Companies Acts, and are subject to Irish company law like any other type of

company.

The M&A of a management company will often provide that where a property is owned by more

than one person, the owners together shall constitute one member, and the first name appearing in

the Register of Members will exercise the voting rights of that member. This is an interesting

provision which might not be obvious to a purchaser and might not be highlighted to them. While

it should be uncontroversial in the case of purchasers who are a married couple, issues may arise

where the purchasers are unmarried cohabittees or mere friends, for example. In such

circumstances, a co-ownership agreement between the purchasers is advisable, and should provide

for voting, etc., in the management company.

The M&A will set out the procedures by which Annual and Extraordinary General Meetings of the

management company will be called, and what notice will be given to members. It will also set out

the conduct of the meeting, quorum requirements and the proposing and voting on resolutions. It


20

is common for the M&A to provide that a member cannot vote at a meeting of the management

company unless all monies due to the management company from that member have been paid.

While this restriction may often be valid, it seems unduly harsh on an occupant who has withheld

payment of service charges due to poor service or no service, for example, and who wishes to

propose a resolution or vote on a resolution which is aimed at remedying the situation.

Accordingly, this restriction is something which buyers of new properties should be particularly

conscious of where the development may not be completed for a number of years after they take

possession of the property.

For an overview of the background to and functions of management companies in the case of

multi-unit developments, the reader is referred to the DKM Report. In that report, it was

recommended that the National Property Services Regulatory Authority (the “NPSRA”) should

liaise closely with the NCA in carrying out its consumer information functions. Such inter-

organisational co-operation will be essential to the proper protection of consumers and property

owners. It must be borne in mind that this topic is under review by the Law Reform Commission

(the “LRC”), which is better placed to make legislative suggestions. The Company Law Review

Group also published a position paper on management companies and has made recommendations

relating to company legislation in this regard.

The DKM Report recommended that the NCA prepare and publish a “comprehensive booklet of

essential consumer information”. This is certainly a worthwhile proposal, though the extent to

which an individual might think of consulting the NCA or its website in advance of purchasing a

property is unknown, given the traditional tendency not to think of the purchase of a dwelling as a

transaction within the realm of consumer rights. Integration of NCA publications and information

with the Citizens Information website and service should extend the reach of such a booklet.

Moreover, the idea of developing a form of home information pack should be considered. This

would differ from the UK model in that it would provide general information on the purchase of

property rather than information and reports specific to the property in question. Importantly, this

pack could identify to whom complaints should be taken when particular problems arise.

The DKM Report also recommended that the purchasers’ solicitor should have a responsibility to

his/her client to ensure that the purchaser is fully aware of, and understands, the contents of the

type of booklet suggested above. The Report also pointed out that a lease agreement for a multi-

unit property is typically a dense and legalistic document, and recommended that the solicitor for

the developer or the management company should provide the purchaser with a plain English

summary of the lease, along with an explanation of how the development is expected to operate.

This is a common-sense suggestion, but one that could meet with opposition on the basis that the

developer or management company may fear the legal status of such a document and the potential

for unforeseen liability to arise on foot of it.

Similarly, the DKM Report strongly recommended that the NCA develop a checklist to guide

consumers through various stages of the process of buying a multi-unit development property and a

booklet of relevant information, which could be contributed to by the Society of Chartered

Surveyors, the NPSRA and various interested bodies. The Report also stated that it should be the

responsibility of the purchaser’s solicitor to ensure that the buyer is aware of the implications of

purchasing in a multi-unit development and the relationship between the relative entities, i.e. the

owners, developers, management company and management agents. The DKM Report considered

this to be an information service provided to the purchaser.


21

While there are definitely merits to this approach, it may raise concerns on the part of solicitors that

the purchaser might rely on certain aspects of that information and, at a later date, expect that the

solicitor be held liable for misinforming the purchaser where the development is not appropriately

maintained, for example. The solicitor in these circumstances may have been merely passing on

information in relation to the development and multi-unit developments generally and, aside from

carrying out all steps of the conveyancing process diligently, is not necessarily competent to advise

as to the adequacy of management structures in multi-unit development. The solicitor will be able

to comment on the legal issues involved and legal aspects of the management structures, but may

have difficulty, for example, identifying shortcomings in the common areas or similar issues which

could lead to higher service charges or a liability to contribute to a sinking fund in future.

Accordingly, the mechanics of implementing such a recommendation on a statutory basis may be

difficult to formulate, and resistance from solicitors to such a move is likely – this may particularly

be the case where increasing competition on conveyancing fees drives costs down, making it

uneconomical for solicitors to take on a role which may more properly lie with estate agents and/or

auctioneers. However, it should be part of the purchasing solicitor’s role to ensure that where the

property being purchased is a second hand multi-unit property which is more than a certain number

of years old, that an adequate sinking fund is available to meet any likely or expected items of

expenditure. Additionally, certain items listed on the checklist included in the DKM Report could

be added to standard Requisitions of Title used when purchasing in an existing multi-unit

development.

The DKM Report summarised the difficulties with the operation of management companies under

Irish company law,24 in particular that such companies are quite liable to be struck off for failure to

file returns with the Companies Registration Office, thereby meaning that the property held by the

management company vests in the Minister for Finance. The harsh consequences of non-

compliance by a management company, such as strike-off or criminal liability on behalf of the

directors of the company, were also highlighted by the Law Reform Commission in 2002.25

An example of such an instance is the recent case of Heidelstone which was decided upon by the High

Court in late 2006.26 In that case, the vendor development company and the management company

responsible for a multi-unit development in Clontarf were struck off for failing to file returns. A

number of individuals who owned properties in the development sought to have the interest of the

struck off companies vested in a new company on the basis of the Trustee Act 1893. Laffoy J.

agreed, as the vendor company (effectively the developer) merely held the development as a trustee

on behalf of the management company once the sale of all units had completed.

While the dispute was ultimately resolved to the benefit of the owners, a complicated legal process

had to be engaged to achieve this result. When the property of a company which has been struck

off vests in the Minister for Finance, the Minister has the power under the State Property Act 1954

to waive the property in favour of such person as the Minister deems appropriate. In the Heidelstone

case, the Minister was of the view that the arrangements between the vendor company and the

management company were such that a trust arose over the property, and where property is held by

a dissolved company on trust for another person it does not automatically vest in the Minister for

24 DKM Report, pp.47-52. 25 Proposal to the Company Law Review Group regarding Management Entities of Multi-Unit

Developments, Law Reform Commission 16 December 2002. 26 In the matter of Heidelstone Company Limited and Courtview Management Limited [2006] IEHC 408.


22

Finance (therefore precluding the Minister from waiving the property in favour of the plaintiffs).

Accordingly, the application under the Trustee Act 1893 was necessary. In effect, the conclusion of

the Minister for Finance that the Trustee Act applied and the decision by Laffoy J. in transferring

the land to the new management company was a commonsense approach and which demonstrates

that the law, as it exists, does provide the means by which the individual’s interests will be protected

in such circumstances.

Indeed, the Law Reform Commission had suggested as far back as 2002 that prudent solicitors

might ensure that the memorandum and articles of association of management companies specify

that the company holds the estate on trust for its members.27 However, it is of course not

acceptable that such situations arise frequently and, indeed, Laffoy J. commented that the problem

which arose in Heidelstone was likely “to be encountered with increasing frequency in relation to the

sale of apartments and townhouses in developments carried out during the last four decades.” It

should also be noted that the costs involved in obtaining the order in Heidelstone are likely to have

been significant and not every group of unit owners will be willing to engage in such expensive

litigation.

Company Law reform

Since the publication of the DKM Report, the Company Law Reform Group has published its

Report on the General Scheme of the Companies Consolidation and Reform Bill, which defines a

“management company” as “a company that is wholly and exclusively formed and operated to

manage a building or series of buildings and whose members are the owners of a freehold or

leasehold estate or interest in a part of such building or buildings.” Part A2 Head 2 of the General

Scheme provides that the number of members of a management company is limited to persons who

are the owners of a freehold or leasehold estate or interest in the land that is managed by that

company. This is in contrast to other forms of private company, in respect of which the General

Scheme proposes that the number of members be limited to 99 persons, in addition to current

and/or former employees of the Company.

Part A3 Head 33 of the General Scheme provides that the deed of transfer for a unit in a

development which involves a management company can also transfer the corresponding share in

the management company.28

Dublin City Council is of the opinion that the limited liability company is not suited to the needs of

a residential management company,29 on the basis that limited liability is not really required, strike

off is a disproportionate effect of failure to file returns and the returns themselves are not tailored to

the management company’s operations or the information which an apartment owner (or

prospective purchaser) might want to know.

Regulation of management companies

As already mentioned, multi-unit developments have been a frequent source of issues in recent

years, leading to regular calls for their regulation. In 2006, Fergus O’Dowd TD (Fine Gael)

proposed the Residential Tenancies (Amendment) Bill 2006, which was aimed at giving additional

functions to the Private Residential Tenancies Board (“PRTB”) to regulate apartment complex

27 Proposal to the Company Law Review Group regarding Management Entities of Multi-Unit

Developments, Law Reform Commission 16 December 2002, Part C. 28 Part A4 Head 43 is also relevant here. 29 Successful Apartment Living (Part 1), p.17.


23

management companies and agents. It also proposed that the PRTB ensure that the initial

appointment of a management agent is in the best interests of residents, that the PRTB would

mediate and adjudicate on disputes between management companies and agents and that the PRTB

would draw up a code of conduct for managing agents. A legal requirement that a sinking fund be

maintained was also included. During the Second Stage of that Bill, Deputy O’Dowd argued that

the agreed building contract was deficient in that it was tailored to the traditional one-off house and

did not take into account the peculiarities arising in multi-unit developments. He recommended

that the issue could be dealt with by negotiation between the Law Society and the CIF to produce a

new building contract for apartments.30

The Bill attempted to create a regulatory framework for management companies and agents, albeit

by tagging on responsibility for such regulation to the PRTB which does not necessarily have the

competence to deal with that area – nor is the PRTB necessarily the appropriate organization to do

so. Indeed, at the time the Bill was introduced, the AEARG had already recommended that the

NPSRA have responsibility for regulating the area. Accordingly, the Bill was not supported by the

government parties and was defeated.

While it is often noted that developers of multi-unit developments often maintain effective control

or a large influence in a management company by maintaining ownership of a number of units for

rental purposes, it should be noted that minority shareholders who feel they are being oppressed by

a majority of shareholders have a remedy under section 205 of the Companies Acts. Furthermore,

where a majority is in favour, the management company can request that the local authority take an

estate in charge. If successful, this will apply only to the roads and open spaces, for example, but

not the internal common areas of an apartment block. Both these options were highlighted by the

Labour Party in a guide to management companies.31 These might not always be practical solutions

to residents as a section 205 action is a significant undertaking which could prove very costly, and a

request to take an estate in charge will be of little use to apartment owners. Nevertheless, they

should be borne in mind as remedies present in existing law.

6.4 Service charges and sinking funds

Service charges are widely regarded as unpopular in Ireland, though it would seem from media and

anecdotal reports that lack of appropriate service is often the root of the complaint, rather than the

existence of the charges themselves. Nevertheless, the LRC refer to an “understanding deficit” in

relation to service charges,32 and purchasers of units in multi-unit developments must accept that

such charges will be necessary in the common interest of all owners. The LRC also noted the lack

of regulation and transparency with service charges and provisionally recommended that statutory

regulations be put in place for the calculation of service charges and the information which must be

provided to consumers in relation to same.33 In France, for example, regulations now apply which

require statements of the factors considered when calculating service charges. However, the

regulations do not provide for non-compliance penalties, making their utility to consumers

questionable.

30 Vol. 617 No. 4 Dáil Debates col 1159 (Second Stage). 31 “Know Your Rights: Labour Party Guide to Management Companies and Taking in Charge”. 32 LRC CP 42-2006, p.80. 33 LRC CP 42-2006, p.84.


24

Service charges are a common feature of multi-unit developments internationally, though it is clear

that the regulation of such charges or the extent of what is covered by them can vary.34 One

important element to the experience abroad is that while unit owners in Ireland generally pay a

service charge calculated on the size of their unit, in England the directors of a management

company may vary charges depending on how much a particular facility will be used by the unit

owner. For example, owners of ground floor apartments arguably should not be expected to pay

for the maintenance of lifts. In South Africa, the calculation is made on the basis of floor space.

It is clear that some form of regulation of management company service charges is necessary, but as

has been pointed out by one academic commentator, if management companies are subjected to

detailed regulations governing the calculation of service charges and transparency surrounding them,

the compliance burden on that management company will increase.35 This could lead to delays if

the management company is unable to deal with such regulations effectively, as could easily arise in

the case of a small development of five apartments, for example.

Sinking funds are outlined generally at section 4.6 (page 59) of the DKM Report. That Report

noted the lack of any legal requirement for a sinking fund and the fact that some developments do

not have one. For those developments that do, the relevant provisions in the leases are “hopelessly

inadequate”.36 Certainly, most leases for properties in multi-unit developments will tend to provide

only that the management company undertakes to build up a reserve fund to meet contingencies for

major repairs and capital replacement as are deemed appropriate. Often, no further details will be

specified, such as the amount or operation of that fund. The DKM Report strongly recommended

that legislation specify the means of calculation of the sinking fund, as had already been

recommended by the County Manager of Fingal County Council.

As with service charges, some form of regulation of sinking funds is advisable. In the UK, the

Commonhold and Leasehold Reform Act 2002 provides that regulations can be enacted requiring

management companies to establish sinking funds. It also provides that owners can be required to

make payments into the fund. The LRC has recommended that management companies be

required by law to establish sinking funds, and that regulations govern their operation.37

Significant problems are likely to arise where a sinking fund is not properly managed. The situation

is outlined by Dublin City Council in its Successful Apartment Living report:

“At least, if apartment developments have realistic sinking funds then apartment owners are

protected against roof repairs, external repainting and landscaping in ways that house owners are

not. A major concern is that the contributions to the sinking funds are not adequate, or have been

used up on routine work that should be funded from other parts of the budget. When this happens,

apartment owners are doubly exposed. They have paid money into a sinking fund, and then they

need to use savings or borrow money, to finance work, that should have been paid for, from the

sinking fund … It is worrying that the evidence of realistic and robust sinking funds is so sketchy.

From the information available they appear to be pitched at affordability rather than a realistic,

professional estimates [sic] if the expected useful life and likely replacement costs. While there is

34 For an overview of certain countries, see Smith PF, ‘Apartment ownership: from background law to

efficient management?’ [2007] 29 Dublin University Law Journal 1. 35 Smith PF [2007] 29 DULJ 1, 14. 36 DKM Report, p. 60. 37 LRC CP 42-2006, p.86.


25

universal agreement that they are a good idea, like pensions people want to postpone setting money

aside for them for as long as possible.”38

It is clear that there is a significant possibility, in the case of some if not all developments, that an

adequately funded sinking fund would require contributions on the part of owners that would be

additional to the payment of service charges. However, such funds are of evident protection value

to existing and prospective owners. Part of the reluctance that might exist to greater contributions

to a sinking fund is that, in the case of new developments at least, the first purchaser or a unit may

make contributions toward the sinking fund for, say, five years before selling the property. The

vendor is not provided with a reimbursement of any contributions to the sinking fund, but the

purchaser benefits from the contributions already made by the previous owner. On the other hand,

a poorly managed development which does not have an adequate sinking fund is unlikely to be

attractive to purchasers.

6.5 Taking in charge of multi-unit developments

The practice of some local authorities of making planning permission for multi-unit developments

conditional on the creation of a management company has arguably assisted consumers since it

causes developers to address the multi-unit management issues at an early stage. However, former

Minister for the Environment, Heritage and Local Government Dick Roche appeared to have

begun a shift back to management companies being required only where common areas needed to

be maintained (such as internal areas or external landscaped areas).39

Owners of private accommodation may apply to their local authority to take the development in

charge pursuant to section 180 of the Planning and Development Act 2000, but the applicability of

section 180 to apartment developments is questionable, as indeed is the appropriateness of a local

authority taking such a development in charge.40 It would seem that, if this were to take place, the

development would have to be designed with this in mind from the outset. The Law Reform

Commission has also voiced doubts as to the applicability of section 180 to apartment complexes.41

38 Successful Apartment Living (Part 1), p.20. 39 DKM Report, pp.64-65. 40 Successful Apartment Living (Part 1), p.35. 41 LRC CP 42-2006, pp.25-7.


26

7. Future developments

7.1 Imminent developments

A recurring theme when considering the interface between consumers and the construction or

home-buying industries is that a number of areas of the law are involved and, inevitably, a number

of government departments and agencies have responsibility for the area. The Housing (Stage

Payments) Bill 2006 was introduced by Senator Paul Coghlan (Fine Gael) out of apparent frustration

that the then Government had not made the practice of charging stage payments illegal. The Bill

was ultimately defeated in the Seanad, with the Government arguing that stage payments would be

eliminated by consultation and co-operation with the construction industry and that, if that was not

successful in fully eliminating the practice, the Minister for Justice, Equality and Law Reform would

have the power to do so by introducing regulations under the Land and Conveyancing Law Reform

Bill 2006, when passed. According to the then Minister of State, Noel Ahern, that Bill provided the

Minister with “a general power … to make regulations in the area of contracts.”42 However,

Senator Joe O’Toole stated in the Seanad that he had contacted the Minister for Justice and that this

statement was not correct. The Minister of State was likely referring to section 85 of the Bill, which

provides that the Minister for Justice may, with a view to facilitating e-conveyancing or “providing

further protection for the interest of vendors and purchasers of land”, prescribe the general

conditions of sale applicable to a contract for the sale or other disposition of an estate or interest in

land. It is not clear from the Seanad debates relating to the Housing (Stage Payments) Bill 2006

where the confusion exists, but it does seem that the Bill envisages a reasonably wide power for the

Minister to make regulations affecting the sale of properties. Evidently, the NCA will be in a

position to inform the Minister of any areas in which additional protection of purchasers is required

and on the basis of which regulations might be made.

The proposed Property Services Regulatory Authority Bill 2006

Following on from the Report of the AEARG, the General Scheme of the Property Services

Regulatory Authority Bill 2006 (the “NPSRA Bill”) was published for consultation purposes. The

NPSRA Bill provides for, among other matters, the establishment of the NPSRA, the creation of a

regulatory framework for the provision of property services, the operation of client accounts for

property services, the creation of a compensation fund, the provision of property services from

other EU Member States and the sale of land.

It is expected that the NPSRA Bill will be published as a formal bill by the Government in early

2008. Meanwhile, the Minister for Justice, Equality and Law established an Implementation Group

to assist with the establishment of the NPSRA and has also established the NPSRA on an interim

basis. The interim NPSRA has already published a website, on which a complaint form and Code

42 Letter from Minister Ahern to Senator Coghlan, quoted by Senator Coghlan. Seanad Vol. 184 No. 7 cols

578-9 (28 June 2006).


27

of Practice for Property Service Providers (Auctioneers and Estate Agents) have been made

available. The interim NPSRA has also compiled a public register of property services providers,

which will eventually become a register of licensed providers once legislation has been enacted. The

current register lists around 2,800 estate agents and auctioneers which are currently licensed by the

courts (the NPSRA will take over responsibility for licensing once the legislation has been

introduced).

Property services and providers

It is worth noting the definitions proposed by the NPSRA Bill which would affect the regulatory

structure.

A “property service” is defined as meaning any of the following services provided in Ireland by a

property services employer or in the course of an employment or as an independent contractor:

a the auction or private property other than land;

b the purchase or sale, by whatever means, of any estate or interest in land wherever situated;

c the letting of any estate or interest in land wherever situated;

d the provision of property management services.

“Property management services” are defined as meaning services “related to the management of an

apartment complex, housing estate or other estate containing houses carried out on behalf of a

management company, including administrative services and the procurement of the maintenance,

repair, improvement and insurance of the areas of the complex or estate in relation to which

responsibility for maintenance, repair, improvement and insurance has been vested in the

management company.”

Accordingly, it is clear that the NPSRA Bill aims to catch the wide scope of property services, from

auctioneering and estate agency to lettings and property management. The main point to note about

the NPSRA Bill is that it proposes to create an offence of carrying on a property service, or for

example advertising oneself as providing property services, unless in possession of a licence from

the NPSRA.

The NPSRA

The NPSRA Bill provides that the NPSRA will deal with the licensing of property service providers,

the specification and enforcement of standards to be observed in the industry (including

qualification requirements) and the provision of information in relation to those matters. The

NPSRA will have additional functions, including investigatory and adjudicatory roles and will

establish a compensation fund.

The NPSRA will, specifically, be able to prepare codes of practice for the industry or to approve

codes of practice which have been prepared by another body. This is to be done following

consultation with the Minister and any other interested parties. However, the NPSRA Bill currently

provides that the failure by a licensed entity to observe the code of practice which has been

published or approved by the NPSRA does not, of itself, render that entity liable to civil or criminal

proceedings.


28

The NPSRA will have the power to investigate property services being carried on by any person,

and to investigate compliance by licensees. The NPSRA will have the power to require the supply

of information by persons who the NPSRA believes have information relevant to the investigation

and to require such a person to appear before it. Failure to comply with such a request by the

NPSRA could result in an application by the NPSRA to the District Court for an order requiring

compliance. Failure to adhere to an order made by the District Court could then be treated as a

contempt of court. Inspectors of the NPSRA will be provided with the power to enter, inspect,

examine and search premises at which a property service is being provided, to require the

production of documentation relevant to the investigation and can require that a licensee authorise

inspection of any bank account opened by that licensee. It will be an offence to withhold, destroy

or conceal anything required by the NPSRA during an investigation or to fail to comply with a

requirement of an inspector.

Importantly, the NPSRA Bill provides that the NPSRA will have the ability to bring and prosecute

summary proceedings for offences under the legislation.

Licensing by the NPSRA

The NPSRA Bill requires that a licence application must be accompanied by references which may

be required by the NPSRA, by certification that proper financial and control systems are in place for

the collection of clients’ money, by evidence of adequate professional indemnity insurance and by

the prescribed fee. The NPSRA may also require further information from the applicant and

require an affidavit to be sworn in relation to any submissions made. The NPSRA could even

require the applicant to submit a certificate from a member of An Garda Síochána containing such

particulars as the NPSRA will specify. Requirements that information is provided about the

applicant’s character, financial position and competence includes such information relating to the

directors, partners, managers, secretaries or officers of a property service provider.

The NPRSA will be able to suspend, revoke or refuse to renew a licence where the licensee has

supplied information which was false or misleading, has contravened the provisions of the NPSRA

Bill or is no longer fit and proper to provide a property service. The NPSRA will also be able to

take such action where the licensee is guilty of misconduct in providing a property service and the

NPSRA could also reprimand, warn, caution or advise the property service provider in such

circumstances.

Licensed property services providers will be required to display their licence in a conspicuous place

at their registered office. While this is a sensible measure, in that it will allow consumers to be aware

as to whether the provider is licensed or not, it would be preferable if the requirement were to

display the license at each place of business operated by the provider, as the registered office may be

that of a solicitor or auditor, and not the location from which the business is carried on. However,

the NPSRA will also maintain a register of licensees which the public can inspect.

The NPSRA Bill proposes that the NPSRA will be required to publish details of the Authority’s

decisions relating to refusals to renew licenses, revoking or suspending licences, convictions secured

under the legislation and certain other actions taken by the NPSRA.

Complaints

The NPSRA Bill provides that any person can make a complaint in relation to a property service, on

foot of which the NPSRA may investigate the complaint and then take appropriate action (including


29

those actions outlined in the preceding sub-section). A Property Services Appeal Board will also be

established, a decision of which may be appealed to the High Court on a point of law.

Client accounts

An important aspect of the NPSRA Bill is the extension of the regulations applicable to client

monies held by auctioneers to all property service licensees. The Minister will be able to introduce

regulations setting out the types of accounts which can be opened by licensees and all aspects of the

operation of those accounts, such as the rights, duties and responsibilities of licensees in relation to

client monies, the statements to be issued to clients in relation to such monies and accounting

records. The NPSRA Bill provides for offences where such regulations have been breached, up to a

maximum of a fine not exceeding €30,000. It is interesting that the penalties on summary

conviction are to a maximum of €3,000 or a term of 12 months imprisonment, whereas the

maximum penalty on indictment is €30,000, without any mention of imprisonment. It would seem

that, given property contemporary property values, such a ceiling may be too low.

The NPSRA Bill provides for an important protection on the part of the client – where a licensee

holds money on account for a client, neither the State nor any other person has recourse to such

monies in respect of a claim against a licensee until all proper claims of the licensee’s clients against

those monies have been fully satisfied.

This is similar to the regulation of solicitors under the Solicitors Acts 1954 to 2002 (the “Solicitors

Acts”), which require the Law Society to make such regulations governing, amongst other things,

the opening and maintenance of accounts by solicitors and transactions relating to such accounts.

This has been done by the introduction of a series of statutory instruments, most recently the

Solicitors Accounts Regulations 2001 and the Solicitors (Interest on Clients’ Moneys) Regulations

2004. It would appear entirely sensible that property services providers be subject to similar

obligations as solicitors when dealing with their clients’ monies.

Compensation Fund

The NPSRA Bill requires the NPSRA to establish a Compensation Fund, to which licensees are

required to contribute on an annual basis. This would allow the NPSRA to compensate individuals

who have suffered a monetary loss due to the misappropriation of their funds by a licensee, as well

as for reasonable costs incurred in attempting to recover such money. This Compensation Fund is

described in the NPSRA Bill as being “along with lines of the Solicitors Compensation Fund”. It

should be remembered that the Compensation Fund forms a separate layer of consumer protection

for misappropriation of funds, as the requirement that property services licensees have professional

indemnity insurance in place will cover professional negligence claims by clients.

Advised Minimum Values

Advised Minimum Values (“AMVs”) were introduced voluntarily by the property sector around the

time of the publication of the AEARG Report, which recommended that the concept be introduced

in legislation to replace to practice of issuing guide prices. The NPSRA Bill provides that a property

services licensee must provide a prospective vendor with a statement in a prescribed form setting

out the advised value of the property within 7 days of its valuation for sale. This “advised value” is

defined as “the licensee’s reasonable estimate at the time the land is valued for sale, on the basis of

his or her experience, skills and knowledge, of the amount that a willing but not anxious buyer

would pay for the land, or in the case of a price range, the range within which that amount is likely

to fall, with the difference between the upper and lower limits of the range not exceeding 10% of

the amount of the lower limit of the range.”


30

While guide prices were a frequent source of consumer and media complaint, the AEARG Report

acknowledged that the seller has a right to obtain the highest possible price for the property, and

that auctions in particular may be unpredictable by their nature. Accordingly, the AEARG

recommended that the NPSRA have a role such as that described above and that, given the

difficulty of legislating precisely for the setting of advised values, the NPSRA should monitor

repeated discrepancies in advised prices and actual prices in the case of particular property services

licensees, and should then use its licensing regulatory function to take action.

The NPSRA Bill proposes to prohibit licensees from stating, in any way, that the selling price of a

property is less than the advised value which was provided to the vendor, or less than the lower limit

of the price range specified. Contravention of this prohibition will be an offence. The NPSRA will

have the power to require licensees to provide evidence of the reasonableness of any advised value

stated by the licensee and, having considered such evidence, can reprimand, warn, caution or advise

the licensee.

Letter of engagement

The NPSRA Bill proposes a mandatory requirement that property services licensees issue a letter of

engagement to prospective clients, following a specific format. This is similar to the existing

requirement in the case of solicitors that an engagement letter (commonly referred to as a “section

68 letter”) be provided to clients at the outset of a new matter outlining the charges which will be

incurred or, where it is not possible to state the actual charges, an estimate (as near as may be) of the

changes or the basis on which charges will be made.

Making of regulations

An important proposed provision in the NPSRA Bill, which will provide scope for future

protections and the evolution of the regulatory structure, is that the NPSRA will be able to

introduce regulations, following consultation with the relevant Minister, to protect the interests of

both purchasers and vendors, in relation to:

• the content of advertisements for the sale of property;

• booking deposits for the purchase of property (including the form and content of receipts and

conditions relating to refunds);

• the terms of contracts for the sale of land and building contracts, including stage payments under

such contracts;

• standards for the measurement of residential property offered for sale;

• terms of sales by auction or by tender;

• costs of, or other matters relating to, surveys of land for sale.

It remains to be seen whether the above proposed provision or section 85 of the Land and

Conveyancing Law Reform Bill 2006, discussed above, will both be introduced as law or whether

either or both will be amended. Both provisions appear to allow for the introduction of regulations

governing contracts for the sale of land and both provisions could become important tools for the

enactment of laws to protect consumers in property transactions.


31

Code of Practice for Auctioneers and Estate Agents

The Code of Practice for Property Services Providers (Auctioneers and Estate Agents) (the

“Code”) has been published by the interim NPSRA. It includes a complaints mechanism which can

be used by consumers in respect of auctioneers and estate agents who have subscribed to the Code.

The Code addresses, amongst other matters, conflicts of interest, confidentiality, competence and

professional development, insurance, records of offers made at public auction, advertising and

marketing. Many of the requirements of the Code are reflected in the NPSRA Bill which, if enacted,

will be binding on all property services providers. The Code will be useful, however, in the interim,

if a significant number of auctioneers and estate agents subscribe to its provisions.


32

8. Forms of contract

8.1 Forms of building contracts used by consumers

In Ireland, it is often the case that in practice, formal building agreements are not entered into by

the relevant parties. For example, with small scale renovations and extensions or even in cases of

construction of new one-off houses, the consumer will occasionally proceed to engage contractors

without entering into a formal written agreement.

However, where a funding institution is providing monies for the construction/purchase, the funder

will often insist on certain formalities being adhered to prior to release of any funds, which in turn

may cause parties to formalise their arrangements.

Where building agreements are used, the following standard forms of contract will usually be used,

namely:

RIAI forms of contract

The Royal Institute of Architects Ireland (RIAI) forms of contract are prepared in conjunction with

the Construction Industry Federation (the “CIF”) and Society of Chartered Surveyors (SCS). The

RIAI forms of contract provide for the Architect to administer the contract, however, the architect

is not a party to the contract. The Architect will have wide powers under the contract.

The parties under the contracts will be the building contractor (i.e. the “contractor”) and the

employer, the latter being the consumer under the building contract.

Articles of Agreement - Without quantities (Blue). 2002 edition, revision 1

(Amendments 1st Nov 2007)

This form of building contract may be used in the construction of new build one-off houses and

large extensions and renovations. This form is quite detailed and would also, for the most part, be

used in the context of larger commercial developments.

This “without quantities” form of contract means that the contractor will price the construction of

the building which is shown on the plans. Therefore, if the plan shows doors, the contractor’s price

will include for hinges and handles.

The alternative is that the contract is “with quantities”, which would mean that the employer would

arrange to have a bill of quantities drawn up which would set out everything the contractor would

need to carry out the works. Therefore, if the bill of quantities insufficiently quotes what is needed,

for example – 6 hinges are needed, rather than the 5 hinges that were quoted for, the Contractor will


33

be entitled to receive the price for 6 hinges. In other words, the contractor will be entitled to receive

payment for any extras required.

SF 88. Form of contract for small works or less complex projects (pink) 1999

edition

This form of building contract is generally used in the construction of new build one-off houses and

extensions and renovations. Its terms are not as detailed as the blue form above, and it is much

easier for a consumer to understand the parties’ respective obligations. The initials “SF” mean

“Short Form” and it is intended for small or simple contracts, which includes the construction of

domestic houses.

Building contract. August 2002, revised January 2004. A plain language form

suitable for all contracts

In 1997, the RIAI produced what is described as a plain language contract. This form is intended to

have the same legal effect as the standard form, but is written in a simple style and has the clauses

arranged in a more logical sequence. This form of building contract may be used in the construction

of new build one-off houses, large extensions and renovations. As with the pink form above, this

form of contract is not as detailed as the blue form and will therefore be easier for the consumer to

understand the parties’ respective obligations under the contract.

Law Society of Ireland form of building contract

Building Agreement - 2001 edition

This form of building contract is generally used in the construction of new build one-off houses and

the purchase of a new build from plans. It is the form of contract approved between the Law

Society and the CIF. Where this form of contract is used, a solicitor will generally advise the

employer, and the contractor will generally own the land on which the house is to be built and sold

to the employer.

The building agreement sets out in detail how, when and in what manner the contractor must build

the house, and how much, when and in what manner the purchaser must pay for the house.

The agreement comprises of 17 general conditions, which may be amended or deleted by agreement

between the consumer and the contractor.

Perception of the standard forms of contract

The perception amongst construction industry bodies, for example, RIAI, CIF, Society of Chartered

Surveyors and other bodies such as the Law Society, is that the terms of the standard forms of

construction contracts, in general, allow for a fair allocation of risk as between the consumer and the

contractor. We set out later a number of unfair terms which the Law Society and formerly the

Director of Consumer Affairs have lobbied against over the years and some which other

jurisdictions have deemed or considered to be unfair. Ireland has made good progress in recent

years in this regard. In addition, there are a number of contractual provisions which we discuss in

general terms, such as privity of contract, solvency, latent defects etc. which can often adversely

affect the consumer.

While it is arguable that in certain circumstances the forms of contracts or the law of contracts can

operate adversely to consumers, it is important to recognise that the law must also seek to balance

the interests of the consumer with that of the contractor, and ensure that a fair allocation of risk

occurs.


34

9. Unfair contract terms

9.1 Unfair terms – the approach in Ireland

In 2001, the then Director of Consumer Affairs took proceedings to the High Court under

Regulation 8(1) of the European Communities (Unfair Terms in Consumer Contracts) Regulations

1995 and 200343 (the “Unfair Terms Regulations”) to tackle the issue of unfair conditions in

building contracts being inserted by solicitors for building contractors.

On 5 December 2001, proceedings were heard in the High Court and a Declaratory Order was

issued such that 15 terms outlined in the proceedings, or terms that had like effect, were prohibited

in future building contracts because they were unfair.

Many of the provisions that were deemed to be unfair would generally only arise in the context of

the purchase of a new build from plans, as the purchase of a second hand property is generally a

governed by a contract between two consumers. The Unfair Terms Regulations govern conduct

between the suppliers of goods and services and consumers where the terms of the contract have

not been individually negotiated.

Generally, unfair terms are severable and will not result in termination of the contract. In other

words, the unfair term can be severed from the contract, and the rest of the contract will remain

effective.

Those terms that were considered unfair may be summarised as follows:

1 Any clause which has the effect of limiting the contractor’s obligation to the employer in respect

of warranties or representations undertaken by him prior to the contract.

2 Where the consumer fails to pay a stage payment or balance due on the contract price within a

certain period, the contractor shall be entitled to sell on the house at any price, on serving notice

to the consumer. Any profit realised shall be the contractors, while any loss on such sale shall be

recoverable from the consumer as liquidated damages. This term gave rise to an imbalance of

rights, as no profit made on the resale was to be paid to the consumer, and was particularly

unfair where only one stage payment had been missed.

3 Any term that entitles a contractor to terminate a contract where no event has occurred which

goes to the root of the contract. For example, a term permitting the contractor to rescind the

contract where the consumer makes any demand in respect of materials/workmanship which

43 These regulations, as amended by S.I. 27/1997 implement Council Directive No. 93/13/EEC, of 5 April

1993 on unfair terms in consumer contracts.


35

may result in the contractor being delayed in the completion of the works will be considered

unfair.

4 Any term that excludes from the liability of the contractor any defect which occurs prior to

either the employer taking possession or paying the balance of the purchase price, whichever is

the earlier, unless the contractor acknowledges this defect in writing. Here, the contractor’s

liability is dependant on the contractor carrying out a particular formality (i.e. the execution of

an acknowledgment).

5 Any term which seeks to limit the liability of the contractor in an unfair and unbalanced way by

requiring that only one snag list be submitted within a short time period.

6 A difficulty may arise here as the contractor will know that the completion date cannot be

delayed for his failure to fix any minor defects that are listed in the snag list. Under the Law

Society form of building contract, the contractor has 6 months from the completion date to

remedy any minor defects and 18 months to remedy any major defects.

7 Any term that seeks to reduce time limits to pay the contract price after the contractor serves

written notice. If the consumer failed to pay, the contractor was entitled to terminate the

agreement. Some contractors had sought to reduce the time limit in condition 4 from 14 days to

7 days.

8 Any term that allows the contractor to terminate without reasonable cause and allows the

contractor to be doubly compensated. Any interest rate applicable to such compensation which

is penal is also unfair.

9 Any term providing that if payment is not received on the closing date, the contractor may then

serve a completion notice on the consumer to complete the sale within 14 days, without

prejudice to the contractor’s other rights. If the consumer fails to comply, his deposit is

forfeited and any loss suffered by the contractor on a resale shall be payable by the consumer as

liquidated damages. Such a clause would be unfair as it allows the contractor to be enriched at

the expense of the consumer and consumer must pay disproportionately high price in

compensation.

10 Any terms that purports to make it the responsibility of the consumer to ensure that the house

is constructed in accordance with the terms of the building contract (e.g. within 18 months) – as

it is the contractor who has control over this. Any term that provides that the agreement is

binding on the consumer at the will of the contractor, or that the agreement can be arbitrarily

ended by the contractor, but not the consumer. In addition, where the contractor terminates the

contract, it would be unfair to require that the consumer only receives 25% of all monies already

paid to the contractor, after which the consumer might then be required to sell the benefit of

the building contract to the contractor.

11 Any term that prohibits the consumer selling its interest in the contract, while providing that the

contractor may do so. Such a term would prevent the consumer from minimising its loss.


36

12 Any term that allows the contractor to modify material specifications and dimensions on site, as

the standard form of contract only allows for minor deviations. Otherwise, the consumer would

not get what it contracted for.

13 Any term that excludes the contractor’s liability to the consumer for any delays in completing

the work as it allows the contractor to undermine the provisions in the contract relating to the

completion dates.

14 Any term that requires that any delays by the contractor in completing the work shall not result

in extending the completion dates. This is unfair as it would require the consumer to fulfil its

obligations where the contractor has not.

15 Any terms that attempts to exclude the contractor’s liability for damages caused to extras (in

terms of works and materials) ordered by the consumer, as such exclusion attempts to treat such

extras differently to the main works and materials supplied. Ultimately, this is unfair as the

consumer is paying for both.

16 Any term that requires the consumer to pay a disproportionate amount of interest on a daily

basis where the contractor makes a demand for payment for extras ordered by the consumer.

Other possibly unfair conditions

There has been extensive commentary on the above unfair provisions, some of which have

suggested that the Order may not have gone far enough.

One commentator44 has noted that the following conditions could also have been deemed to be

unfair:

• That the contra proferentum rule will not apply. This means that a general rule of contract

interpretation will not be allowed to apply. In other words, the rule that any ambiguity in the

contract will be construed against the drafter (or the party seeking to rely on the term’s inclusion)

will not apply. This would mean that if the contractor inserted an ambiguous clause into the

building contract that he would later seek to rely on, the clause would not be interpreted in a

manner which would be contrary to the contractor’s interest.

• That any site layout or plan is for identification purposes only, and does not necessarily show the

correct location, size, or area of the site.

• That the contractor will be entitled to vary or alter the development in any manner, subject to

planning permission.

In addition, arbitration clauses that preclude the consumer access to the courts may also be deemed

to be unfair.

Enforcement of the Order

The former Director of Consumer Affairs launched a follow up investigation in 2005 into house

contractors reinserting unfair terms into building contracts, notwithstanding the High Court Order.

In 2006, 35 complaints relating to unfair terms being inserted into housing and telecommunications

44 Igoe, P., “Unfair Conditions: has the penny dropped yet?” Law Society Gazette, December 2002, at 6.


37

contracts were made to the ODCA.45 In most cases the then Director found that there was no

breach and where a breach was found, the terms were amended and withdrawn by the businesses in

question. In 2006, the ODCA made an agreement with the Law Society to refer any Solicitors

engaged in drafting building contracts which breached the Order to be referred to the Law Society

Complaints and Client Relations Committee for possible disciplinary procedures. No referrals were

made in 2006 as solicitors amended any contracts where unfair terms were deemed to exist.

9.2 The approach in England and Wales

English and Welsh law in relation to unfair terms in construction contracts is similar to Irish law.

There is no specific legislation protecting consumers who contract for the purchase of a house. The

UK’s Unfair Terms Regulations are applicable to such contracts. Nevertheless, consumer groups

feel that there is not enough being done to protect consumers when entering into contracts with

contractors.

The Barker Review46 published its report in March 2004. It was set up to review a number of

housing issues in the UK. It was acknowledged by the Review that there was a lack of consumer

protection which included wide ranging exclusions of liability.47 The Review recommended that the

House Builders Federation should develop a code of conduct by the end of 2004 for new house

sales that would comply with the Office of Fair Trading’s Consumer Codes Approval Scheme. This

code of conduct should require fair contracts to comply with the Unfair Terms in Consumer

Contracts Regulations 1999.

The House Builders Federation has since developed a voluntary a code of conduct on customer

service for its members. There are no indications that this code of conduct will become mandatory

in the near future. The code of conduct refers to the Unfair Terms in Consumer Contracts

Regulations 1999 stating that the contractor shall “seek to give customers clear and fair contract of

sale”. The code explains that the aim of this clause is for the contractor to give customers clear and

fair contractual terms and conditions that take account of the Unfair Terms in Consumer Contracts

Regulations 1999.

The Office of Fair Trading (the “OFT”) in London has recently commenced a market study into the

home building market. This survey will include an analysis of homebuyers’ levels of satisfaction

with the new houses that they purchase. This element of the survey is included because the Barker

Review called on the OFT to carry out a review of the market if customer satisfaction levels in

relation to house sales did not improve substantially within three years.

The National Consumer Council (the “NCC”) in the UK has issued a detailed submission to the

OFT market study and mentions a number of relevant points in relation to certain terms it regards

as unfair and certain actions that could be taken to remedy any imbalance in the bargaining power

between the consumer and the contractor.

The NCC has stated that a form of statutory protection, similar to the English Sale of Goods Act

1979 should be introduced. That Act, in general terms, provides protection for consumers who

45 Office of the Director of Consumer Affairs Annual Report 2006, page 11. 46 Review of Housing Supply. Delivering Stability: Securing our Future Housing Needs, March 2004. 47 Ibid, at page 112.


38

purchase moveable goods (i.e. not property). The main protections provided for by this legislation

are that goods sold to consumers must be of satisfactory quality.

The NCC is also calling for a standard fair contract to be introduced. This contract must address

two issues that the current English and Welsh system does not address; providing for a minimum

period for fixing snagging problems and providing for specified completion dates.

The NCC is also calling for an OFT-approved code of conduct to be adopted by all contractors.

The OFT operates a Consumer Codes Approval Scheme. The aim of this scheme is to promote

and safeguard consumers' interests by helping consumers identify better businesses and to

encourage businesses to raise their standards of customer service. A requirement to use ‘clear and

fair contracts’ is a necessity for any business that wishes to become a member of this scheme.

The primary legislation governing construction contracts in England and Wales; the Housing

Grants, Construction and Regeneration Act, 1996 does not apply to construction contracts

involving residential occupiers i.e., consumers. However, there has been a surprising amount of

judicial comment on one particular element of this Act and how it applies to such consumers.

The 1996 Act provides for mandatory adjudication in construction contracts as detailed below. This

does not apply to contract with consumers. However, certain standard form contracts used by

contractors for agreements with consumers provide for adjudication. A number of consumers have

challenged the right of the developer to use adjudication as it is outside the scope of the 1996 Act.

The main basis of these challenges has generally been the UK implementation of the Unfair Terms

Regulations.

The 1996 Act has a number of mandatory provisions which must be expressly incorporated into the

contract. If they are not incorporated, a default procedure will govern how the adjudication process

will apply. This default procedure is known as ‘the Scheme’ (Scheme for Construction Contracts

(England and Wales) Regulations 1998). The parties can agree the terms of the contract but if they

are inconsistent with the Act, the Scheme will apply.

Under the Act the contract shall contain provisions which:

• enable a party to give notice at any time of his intention to refer a dispute to adjudication;

• provide a timetable to secure the appointment of the adjudicator and referral of the dispute to

him within 7 days of such notice;

• require the adjudicator to reach a decision within 28 days of referral or such longer period as is

agreed by the parties after the dispute has been referred;

• allow the adjudicator to extend the period of 28 days by up to 14 days, with the consent of the

party by whom the dispute was referred;

• impose a duty on the adjudicator to act impartially; and enable the adjudicator to take the

initiative in ascertaining the facts and the law.


39

Certain standard contracts used by developers in the UK contain references to adjudication being

the method that both parties agree to use to resolve any disputes. This is despite the fact that the

1996 Act provides that adjudication will not apply to consumer contracts. The English courts have

interpreted this provision as excluding statutory adjudication yet permitting contractual adjudication

if the parties have so agreed.

For a few years there was not a coherent judicial approach to the question of whether or not the

inclusion of contractual adjudication in a contract between a developer and a consumer and was an

unfair term under the UK implementation of the Unfair Terms Regulations. In the case of Picardi v

Cuniberti48 the adjudication clause was considered to be an unfair term. However, this landmark

decision was not followed in the two subsequent cases of Lovell Projects Limited v Legg49 or Westminister

Building Company Limited v Beckingham50.

The Court of Appeal has clarified when such a clause will be considered to be an unfair term under

the Unfair Terms Regulations. In Bryen & Langley Limited v Boston51 it was held that the key factor in

determining whether it can be said that the contract term was unfair is whether the term itself was

imposed on the consumer or not.

In this case the consumer had insisted on the use of a particular standard contract which included an

adjudication clause. The Court held that because this is how the clause came to be incorporated

there was no redress under the Unfair Terms Regulations. The term may indeed have been declared

unfair if the contractor had imposed the term but because the consumer had insisted on the use of a

particular contract the term was not unfair.

48 [2002] EWHC 2923 (QB) 49 [2003] 1 BLR 452 50 [2004] 94 Con LR 107 51 [2005] EWCA Civ 973.


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10. Stage payments

10.1 Stage payments

Stage payments are relevant in the context of the construction of new build one off houses and the

purchase of a new build from plans. The practice involves consumers paying for new homes in

instalments as the construction progresses. Stage Payments have been the subject of much

discussion in recent years. A report in 2004 prepared by accountants Peelo & Partners for the Law

Society of Ireland found that as much as 25,000 of home buyers unnecessarily pay €175 million to

the construction sector each year for stage payments. On average, the cost of financing stage

payments to the purchaser is in the region of €7,000 per purchase. 52 For some time now, the Law

Society of Ireland has voiced its disapproval with the stage payment regime and sought its removal.

Current law in Ireland

The Declaratory Order made by the High Court in December 2001 listed 15 unfair terms that were

unfair to consumers in building contracts. This Order also made reference to stage payments and

prescribed the maximum level of stage payments which could be charged by contractors.

The following are the current limits:

Booking deposit 4%

Contract deposit 11%

Interim payment at joist level 25%

Interim payment at roof level 25%

Interim payment at internal plastering stage 25%

Completion payment 10%

The Government has agreed with the Irish Home Builders Association (IHBA) that a new,

voluntary code of practice operated by the Association, under the auspices of the Construction

Industry Federation will abolish stage payments. The new code of practice came into operation

from 30 June 2007.53 The code of practice applies to an estimated 80% of contractors, according to

the IHBA, and it contains a complaints procedure regarding members who break the code.

Why is there a perception that stage payments are unfair?

There is a view that stage payments are unfair, for a number of reasons. As noted above, they

generally increase the purchasers financing costs. Interest on late payments of instalments may also

arise and incurring costs of this nature may leave the purchaser financially exposed to delays in

52 Law Society Gazette, July 2004. 53 “Time to abolish stage payments”, Irish Independent, 4 May, 2007.


41

completing the house and thus be left with reduced leverage over the contractor if the finished work is

not up to scratch.54

In addition, if the contractor goes out of business, a range of problems may occur. Homebond, which

is considered in more detail in another volume, will only provide cover up to certain limits. If the

building firm becomes insolvent, purchasers may be both out of pocket and forced to find themselves

another contractor. The house may have to be completed with diminished resources. If the title has

not been transferred, purchasers could end up having difficulty with the liquidators for the contractor

in securing it.

Recent developments

Delivering Homes, Sustaining Communities

The Department of the Environment, Heritage and Local Government published a statement on

housing policy – “Delivering Homes, Sustaining Communities”.55 In that policy, the Department

states that:

“The DoEHLG has pursued agreement with the voluntary phasing out of stage payments in house

purchase contracts in housing estates…A commitment has been given by the Construction Industry

Federation to phase out the practice within a relatively short timeframe….It is hoped to finalise

details shortly which would be incorporated in an industry code of practice and reflected in standard

house building contracts…it is envisaged that the voluntary approach being developed will prove

effective and that it will not be necessary to have recourse to legislative action.”56

However, one commentator57 has suggested that the above statement may be interpreted as an

attempt to diminish the impact of the decision of the High Court which legally prescribed the

maximum level of stage payments which could be charged by contractors and to reduce this legal

housing right to a gentleman’s agreement.

The Irish Home Builders Association (“IHBA”) Purchase Protection Pledge: Code of Practice

The IHBA’s voluntary code of conduct became effective of 11 May 2007 and Section 4 of the code

deals with stage payments. Under the code, contracts signed after 30 June 2007 shall not include

provision for stage payments unless:

• The employer commissions the construction of a dwelling by way of tender or where the

construction is on land not owned by the contractor.

• Where the house is to be built in a housing estate, only in circumstances where the design

commissioned by the employer is not a standard design.

The complaints procedure is further outlined in section 5 of the code. All complaints may be made

to the IHBA. In the event of a member’s breach of the code, or if the member fails to respond to

the IHBA, the IHBA has the option of:

• Dealing with the member under the IHBA’s Constitution and Rules;

54 “Controversy builds over developer’s demands for staged payments from house purchasers” Irish Times, May 14, 1999. 55 Published February 2007. 56 Ibid, at page 34. 57 Kenna, P., “State housing policy makes no move to regulate industry”, Irish Times, 3 March, 2007.


42

• Dealing with the member under the CIF Constitution and Rules; and

• If guilty of misconduct, the member may also be expelled from the IHBA.

Limitations of voluntary code of conduct

The fact that the IHBA does not represent all contractors (currently an estimated 80% of the

sector58) means that the code will not have application to all contractors nationwide. It is hoped

that those not affiliated with the IHBA will observe the new code.

In addition, the Minister for Housing and Urban Renewal emphasised that stage payments can

continue to apply in the case of one-off housing by agreement between the buyer and the developer.

The code does not prohibit stage payments where the design or construction of a one-off build is

tendered for. While it is clear that the purpose of the code is to remove the protections of stage

payments from estate developers, the problems that stage payments bring will still be encountered

by those who commission the design and construction of a new build, one-off house.

It is argued by some commentators that the consequences of a breach of the stage payments codes

do not act as a sufficient deterrent. Other commentators note that in practice, where contractors

have received 90% of the purchase price for houses, basic economics suggest that concentrating

resources on starting new units and progressing the construction to joist or roof level whereby 65%

of build cost and all of the site cost would be payable, is more in the contractors interest than

finishing the nearly built house in return for the final stage payment which is usually 10% of the

build cost.59

Critics also question where the Government’s priorities lie. In approving the IHBA’s voluntary

code, it is arguable that the public’s perception will be that the Government believes that in certain

circumstances, it is acceptable to transfer the funding costs of construction and development risk to

consumers. However, it is also arguable that in not banning stage payments across the entire

housing sector, the Government has recognised that the survival of smaller building contractors is

very important in a sector of the economy that is coming under increasing pressure in recent times.

Approaches in other jurisdictions

England and Wales

In England and Wales, stage payments are permitted by the Housing Grants, Construction and

Regeneration Act 1996. However, the provisions of the 1996 Act dealing with construction

contracts do not apply to consumers.

In addition, the Home Builders Federation’s code of conduct deals with certain provisions in

relation to deposits and pre payments. This would seem to indicate that stage payments are

permitted in England and Wales.

Spain

The Spanish approach to stage payments is quite consumer friendly; Spanish consumer protection

laws oblige developers to either insure all the stage payments they receive from buyers or provide a

bank guarantee. These protections ensure that if the developer goes out of business, the buyer

58 IHBA submission to the Department of the Environment, Heritage & Local Government Consultancy

Study of Energy Efficiency Regulations and Options for Improvement, dated 24 July 2007, at page 1. 59 Article: “Why the Government couldn’t ban stage payments”, www.Irishconstruction.com (11 September 2007)


43

should be refunded through the insurance or the guarantee. The bank guarantee system provides for

the stage payments to be kept in a separate bank account, so that in the event of any problems

arising during the course of construction the monies that the customer has paid are secure and can

be refunded.

An alternative to the bank guarantee system is to take out insurance for the stage payments. Insuring

the stage payments allows the developer to use the actual payments during the construction stage.

An insurance company will insure against the developer either not completing the development or

going out of business.

It should be noted that there is a large amount of anecdotal evidence that not all developers provide

insurance policies or bank guarantees. It is important to remember that it is up to the consumer to

ensure that such assurances are being provided. If they are not provided the consumer may be left

with no remedy.

France

In France, the law regulates the amount of stage payments payable to a contractor prior to

completion of a new build house.

The maximum stage payments allowed by French law are as follows60:

1 5% deposit on signing of the contract.

2 35% on completion of the foundations of the property.

3 70% when the property is weatherproof.

4 95% on completion of the construction of the property.

The final 5% is payable by the employer at completion. If an inspection of the property reveals any

issues that the employer is unhappy with or do not comply with the description of the property

agreed to (‘notice descriptif’), the employer can refuse to pay this final payment. In order to still get

the keys of the property, the employer must give the final payment to an independent [arbiter] who

will decide whether or not the ‘notice descriptif’ has been complied with.

There is also a system in place, similar to the Spanish system discussed above which requires stage

payments to be protected in the event that a developer either goes out of business or fails to

complete the new build property.

Two types of guarantee are common-place. The key distinction between the two guarantees is that

the first provides that if the developer is unable for some reason to complete the construction of the

property, then the bank will step in and fund the construction. However, the latter guarantee only

requires the developer to repay the employer the funds that he or she has paid out for the purchase

of the property.

60 Art R 261-14 Code de la construction et d’habitation


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The latter guarantee is the most common form given by developers. The employer will

subsequently have to litigate to recoup any losses suffered as a result of the construction not having

been completed.

The examples cited above suggest that consumers in continental countries are provided with more

protection than those in Ireland, England or Wales. While insurance may be provided such as

through HomeBond, there is no legal requirement for such protection to be provided and much is

left to the diligence of the consumer and/or his/her advisers.


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11. Dispute resolution

11.1 Introduction

In recent years, conciliation and arbitration have been the main forums for the resolution of

disputes arising on foot of consumer building contracts. It has been reported recently61 that 3% of

construction contracts entered into in 2006 were referred to conciliation/arbitration. This is

substantial, given that the total value of residential construction in that year was €24 billion. (Ref:

Department of the Environment, Heritage and Local Government; Review of Construction

Industry 2007 and Outlook 2008-2010) It is not possible to break these into greater detail such as

the ratio of disputes settled by conciliation versus arbitration, or the extent to which disputes were

referred to the courts.

In the RIAI forms of contract, conciliation is a prerequisite to arbitration. If any party to a dispute

does not accept the recommendation of the Conciliator, it is open to that party to refer the matter

to arbitration. Unlike conciliation, the decision of the arbitrator is binding.

In the Law Society forms of contract, arbitration is the form of dispute resolution process to be

adopted. In default of agreement between the parties, either party can apply to either the President

of the Law Society of Ireland or the President of the Construction Industry Federation to have an

arbitrator appointed from a list of arbitrators jointly approved by both organisations. The decision

of the arbitrator is final and binding on the parties.

This Law Society form of contract also provides that the consumer shall notify the contractor of any

defects or omissions in the works within 7 days of receiving the completion notice. If there is a

dispute in relation to the existence of the defects or omissions, there is provision for the

appointment of an expert to decide whether there are any defects or omissions that the contractor

needs to remedy. If the parties cannot agree on the choice of the expert, either party can apply to

either the President of the Law Society of Ireland or the President of the Construction Industry

Federation to appoint an expert from a list of experts jointly approved by both organisations. It is

important to note that the decision of the expert is final and binding on both parties and the expert

has discretion in awarding the costs of the determination.

In order to examine the practicalities involved in the dispute resolution process from the perspective

of the average consumer, it is useful to highlight by way of case study, where it might be argued that

shortcomings exist in the process.

61 Behan, J., “Ireland can take the lead in resolving disputes”, Irish Times, 2 November, 2007.


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Case study: Conciliation and arbitration

In the following, specific facts and figures have been generalised, slightly amended or approximated

in order to preserve the anonymity of the parties involved.

Outline of the facts

In March 2003, a married couple (the “Consumers”) contracted with a building contractor (the

“Contractor”), pursuant to an RIAI Blue Form 2002 Edition standard form contract, to refurbish

and renovate their house. The contract was for a duration of one year and the contract price was

approximately €600,000.

In December 2003, the Consumers became aware that the project was not being delivered in

accordance with the contract. In March 2004, the Contractor was formally instructed to proceed

with remedial works without delay by the architect, and when he failed to do so, the Consumers

terminated the Contractor’s employment as contractor. Up to that time, approximately €250,000 had

been paid to the Contractor.

Consulting Engineers employed by the Consumers reported that the structural work had been

improperly carried out and that no realistic alternative existed for the house owners other than to

demolish the house. During that time, the Consumers were forced to move out of their house, and

move in with relatives.

Under the standard form of contract, the parties agreed to refer any dispute to conciliation, and,

failing settlement, either party may refer the dispute to arbitration. The house owners referred the

matter to conciliation in May 2004. In November 2005, the conciliator’s recommendation was

made in favour of the house owners and was rejected by the Contractor. As required under the

building contract, the arbitration process began in January 2006 and was suspended when a

conditional settlement was reached. In July 2006, the arbitration recommenced following the

Contractor’s failure to comply with the settlement agreement. In August of 2007, the arbitrator

awarded approximately €600,000 and costs in favour of the claimant Consumers.

It is worth noting that the dispute resolution process took 3 ½ years to conclude and during that

time, the Consumers had to pay approximately €400,000 relating to the demolition and

reconstruction of the house in accordance with the original plans. In addition, they had incurred

approximately €180,000 in legal fees. The arbitrator’s fee was €60,000. While these sums were

ultimately recouped in the arbitration award, not all consumers will have the resources to rely on

such a lengthy and costly dispute resolution process, which is often only slightly preferable to

litigation in terms of speed and cost-effectiveness.

It is also worth noting that the Consumers have yet to receive payment from the Contractor.

Accordingly, they may have to incur further legal expenses in enforcing the arbitration award in the

courts. This would also be a lengthy process and could take up to 2 years through the courts.

A key lesson from the above is that dispute resolution procedures can take substantial amounts of

time, and that some consumers may not have the resources needed to fund the process, even where

decisions are made in their favour.

Critique of the dispute resolution process

Conciliation is often presented as a more consumer-friendly process, and often it may prove to be as

the basis for conciliation is to aim to seek agreement between the two parties that is acceptable to


47

both. It differs from other dispute resolution procedures where a judgement based on the facts of

the case will be delivered. However, conciliation does have some shortcomings:

• The conciliation process may be seen as a method of delaying the dispute resolution process and

frustrating a claimant. Delays can occur in a number of ways, for example, choosing the

conciliator can take a long time if there is disagreement between the parties over the person, the

conciliator’s qualifications or where the conciliation should take place. As the nature of the

conciliation process is consensual, and there is no rigid time limit as there is with the RIAI

arbitration procedures, long delays are inevitable.

• These delays, coupled with the non-binding recommendation and the costs may be seen as a

disincentive to a consumer to further assert its rights.

• The conciliator, in practical terms, seeks to find a solution that both parties are satisfied with, and

not what he believes to be the correct apportionment of liability. This formula for dispute

resolution may work against some consumers who do not have the resources or the appetite to

proceed to arbitration in the event of a recommendation from the conciliator that the consumer

feels is unfair.

• It should also be noted that invoking the conciliation procedure does not stop the clock for the

purposes of the Statute of Limitation Acts. Claimants have 6 years to bring a claim for breach of

contract, so if this period is coming to an end, it is in the defendant’s interests to resist every step

of the conciliation process in order to prevent the legitimate claimant proceeding through

arbitration or the courts.

• The time limits for conciliation and arbitration need to be more strictly adhered to.

• The time and expense involved in conciliation and/or arbitration may put the average consumer

off pursuing a medium sized claim. Many disputes will not involve large amounts of money,

therefore the incentive to engage in such lengthy and expensive dispute resolution mechanisms to

obtain relatively small sums of money acts as a barrier.

Validity of arbitration clauses in consumer contacts

The issue of the validity of arbitration clauses has also been the subject of debate recently, at

European level. The recent European Court of Justice decision in Claro v Centro Movil Milenium SL62

is relevant to contracts entered into by consumers in the context of:

• purchase of a new build from plans

• construction of a new build one off houses

• extensions and renovations.

The case was not construction related, however, the plaintiff was a consumer and the case is

therefore relevant in the context of consumer contracts. Ms. Claro entered into a contract with

CMM to obtain a mobile telephone. CMM asserted that Ms. Claro had broken the agreement by

failing to comply with the minimum subscription period, and initiated arbitration proceedings under

62 Case C-168/05, 26 October 2006.


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the arbitration clause in the contract. The arbitrator wrote to Ms. Claro granting her a 10-day period

to refuse arbitration proceedings and commence legal proceedings. Ms. Claro did not avail of this

opportunity and instead participated in the arbitration proceedings.

The arbitrator found in favour of CMM. Ms. Claro sought to have the arbitration award set aside.

The question referred to the ECJ by the Madrid Court was whether (a) the arbitration clause was

valid, and (b) was it open to Ms Claro to challenge the clause after having participated in the

arbitration?

The court noted that the Unfair Terms in Consumer Contracts Directive states that a term may be

regarded as unfair if it has the object or effect of: ‘…..excluding or hindering the consumer’s right to

take legal action or exercise any other legal remedy, particularly by requiring the consumer to take

disputes exclusively to arbitration not covered by legal provisions…’

The validity of the arbitration clause fell to be determined under the EU’s Unfair Terms in

Consumer Contracts Directive (Council Regulations 93/13/EEC), which has been implemented

more or less verbatim in the Ireland. The general principle is set out in art 3(1) of the Directive,

which provides that: ‘A contractual term which has not been individually negotiated shall be

regarded as unfair if, contrary to the requirements of good faith, it causes a significant imbalance in

the parties’ rights and obligations arising under the contract, to the detriment of the consumer’

The court held the EU Unfair Terms in Consumer Contracts Directive should be interpreted so that

any national court presiding over an application to annul an arbitration award should determine

whether an arbitration agreement is void and annul the award where the arbitration agreement

contains an unfair term, even though the consumer has not pleaded invalidity in the course of the

arbitration proceedings. The remainder of the contract would remain in place.

In the light of the court’s decision in Claro v Centro Movil Milenium SL, it would seem that a consumer

can either object to the arbitration clause at the outset, or take his chances in the arbitration and,

should he lose, object to the jurisdiction of the arbitrator and then try again in the ordinary courts.63

In light of this judgment, the validity of arbitration clauses in consumer contracts is very

questionable, especially where it appears that the clause has not been individually negotiated or

brought to the consumer’s attention. In Ireland, as the standard forms of building contract (as well

as architect and engineer’s contracts) include a conciliation and arbitration clause, the Claro case will

be very relevant.

The point that arose in the Claro case has attracted much comment in the UK in the context of

adjudication. Commentators suggest that where a contractor seeks to rely on these clauses against a

consumer, the contractor must show that the clause in question does not cause a significant

imbalance in rights and that the requirements of good faith have been complied with. In other

words, the contractor may have to explain to the consumer the consequences of any clause which

limit their rights to exercise any other legal remedy.64

63 Arbitration Law Monthly, March 2007. 64 Article: Blacker, T. “Consumer Power”, BD Newsletter, Issue 11, 2005. http://www.bdonline.co.uk/story.asp?sectioncode=57&storycode=3048426


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Dispute resolution in other jurisdictions

Australia

A more pragmatic approach to resolving construction disputes involving consumers is provided by

Queensland’s Building Services Authority (“BSA”). It provides assistance to consumers who have a

dispute with a contractor or trade contractor in relation to defective or incomplete works. The BSA

will advise consumers of their rights and obligations and offer their own dispute resolution process

for consumers.

This may involve a BSA officer acting as a negotiator, or may involve an inspection of the work by a

BSA building inspector or an independent consultant to identify the extent of defective work. BSA

has a discretionary power to direct the contractor to rectify the substandard or incomplete work, or

alternatively, attempt alternate dispute resolution procedures.

If the contractor fails to comply with the BSA’s direction, the authority may commence disciplinary

action in the Commercial and Consumer Tribunal (“CCT”) or Magistrates court. The CCT provides

a cost effective dispute resolution mechanism for disagreements between consumers and licensed

contractors with technical input from the BSA if necessary. BSA also operates a statutory insurance

scheme to cover non-completion of contract works or defective construction.

The BSA’s website65 contains three downloadable contracts for domestic building projects

depending on the size of the works. The two contracts relating to more substantial projects require

all disputes to be referred to the CCT.

Canada

Mandatory mediation was recently introduced in all civil (non-family) proceedings in Ontario.

Although the introduction was intended to reduce the volume of litigation and encourage the use of

a more cost-effective dispute resolution process, the reality seems to be that many lawyers and

clients feel it only serves to add an extra layer of time wasting and cost to the overall proceeding.66

The mediation process may allow some litigants to vent their emotions and see the realities of the

arguments to be prepared in court; however, commentators suggested that mandatory mediation

forced some litigants to go through the motions of attending the session whilst not being fully

prepared or willing to resolve the dispute at that stage.

England and Wales

As discussed above in the unfair terms section of this report, adjudication is a possible avenue for

the rapid resolution of construction disputes.

Adjudication was introduced to provide an alternative to litigation and arbitration which are

expensive and time consuming. In contrast, adjudication is less expensive and relatively informal

which allows many parties to handle the adjudication process without the involvement of lawyers.

The adjudicator’s decision, unlike a conciliator’s decision in Ireland, is binding on both parties and

they must comply with it until the dispute is finally determined by arbitration, by legal proceedings

or by agreement. In practice, the courts have been supportive of adjudication and, save in limited

circumstances; they will enforce an adjudicator’s decision.

65 www.bsa.qld.gov.au 66 Prince, S., “Mandatory Mediation: The Ontario Experience”, Civil Justice Quarterly, 2007.


50

When adjudication was introduced, there was concern that the speed of the decision process would

lead to challenges on the grounds of procedural unfairness and impartiality. In Austin Hall Building

v Buckland Securities 67 the defendant argued that they had been denied a proper opportunity to

present their case or respond to the claim being made against them. The defendant contended that

this breached the Human Right Act 1998 (which transposed the European Convention on Human

Rights into English law) as it denied them a fair trial.

The judge held that the 28 day time limit imposed on the adjudicator had not led to a breach of the

defendant’s rights to natural justice under the under the European Convention. Despite this

judgment, it is likely that tight time limits to be adhered to in the adjudication process will inevitably

lead to some disputes being dealt with inadequately and leading to similar defences being made in

the future. Nevertheless, adjudication has been well received and, although there has been little

empirical evidence, there is a consensus amongst commentators that there has been a reduction in

the number of disputes being resolved in the courts or by arbitration.

South Africa

Arbitration is provided for in the BIFSA House Building and Small Contracts Agreement (January

2002 Edition). Clause 13 also provides for the settlement of disputes by way of conciliation or

mediation prior to entering into arbitration if both parties agree to do so. In other words,

conciliation or mediation is voluntary, rather than mandatory.

In summary, a range of approaches has been used, but appear to suffer from similar issues as the

Irish process, though the adjudication process in England has appeared to have performed well,

both in terms of the quality of the process outputs and the time required for the process to take

place within.

Courts system

While the conciliation and arbitration processes can take a long time to resolve a dispute, this delay

can also be mirrored where an action is referred to the courts. Consumers that use any of the

standard building agreements referred to above will have recourse to the courts in a limited number

of circumstances including68:

• where the arbitrator is guilty of misconduct;

• where the arbitrator admits that a mistake was made and desires to have it corrected;

• where there is some error or defect patent on the face of the award; or

• where new evidence, which despite all reasonable diligence was not discovered before the award,

has since come to light;

• where the arbitration or the award has been improperly procured.

67 (2001) CILL 1734 68 Ss. 36 and 38, Arbitration Act, 1954.


51

Costs involved in court proceedings can often dwarf the value of the claim. For example, the

Supreme Court ruled69 in November 2006 that the claimant consumer was entitled to €100,000 in

damages for an extension that the Judge described as “quite appallingly built”. It was estimated that

legal costs for the case could run up to €1 million.70 While the court held that the plaintiff’s costs

were to the paid by the appellant defendants, it is likely that most consumers would either be unable

to afford or unwilling to take the risk of losing such a case.

In addition, courts may be used to seek equity based remedies, for example, specific performance or

injunctive relief or rescission.

Remedies

The following remedies may be available to any consumer claimant, depending on the circumstances

and the form of building contract executed by the parties, if any.

Specific performance

Specific performance is an equitable, discretionary remedy, where the courts may order that a party

or parties to a contract undertake their obligations as required under the terms of the contract. For

example, a court could order a contractor to undertake works which he was required to do under

the contract or in the context of the consumer, the court could require the consumer to complete a

sale or payment of monies due under the building contract. In the context of the latter, and

especially in a depressed property market, it is very possible that development companies might seek

to enforce such a right under the terms of the building contract for the build of a new house.

Delay will be a factor a court will consider in deciding whether to grant such an order. Accordingly,

if the party sought the order after considerable delay, the court may consider that the claimant is not

entitled to the relief.

Obvious defences of misrepresentation will be available to the defendant, for example, if the

defendant was wilfully misled.

It is important to note that specific performance is not only available through the courts, but also

through arbitration, unless the terms of the building contract expressly exclude it. The Arbitration

Act 1954 provides for exclusion for matters relating to land or any interest in land, however, in the

context of a build and purchase of a new house, an order for specific performance may be possible

through arbitration.

Damages may also be awarded in addition to a decree of specific performance.71

Damages

Damages may be awarded for claims made for breach of the terms of the building contract, for

example for defective workmanship or for costs incurred to repair defective works. The various

standard forms of contract provide for varying reliefs for particular type of loss. For instance, the

RIAI SF 88 form of building contract provides for a set level of liquidated damages at specified rate

per week whilst works remain incomplete. Or, where defects appear in the works within 6 months

of the date of practical completion, and the architect has scheduled these defects, the contractor is

69 Sarah Leahy (Plaintiff) v. Rawson and Others, Supreme Court (30 November 2006). 70 Carolan, M., “€100,000 for woman over “botched” extension” Irish Times, 30 November 2006. 71 Murphy v. Quality Homes, High Court, McWilliam J., unreported, 22 June 1976.


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obliged to make good these defects entirely at his own cost. Failure to remedy would result in

breach of contract and the employer will be entitled to claim for damages. Damages may also flow

from rescission or repudiation, which is dealt with below.

Rescission/Repudiation

Rescission is a remedy available to one contracting party following misrepresentation by the other

contracting party, in other words, “where a contract has been obtained by fraud, misrepresentation

or some other ground which vitiates its character as a contract.”72 The level of misrepresentation

will be an issue. There are varying kinds, for example, negligent misrepresentation and fraudulent

misrepresentation. The key requirement is that the misrepresentation must have induced the

claimant to enter into the contract.

Under the Law Society of Ireland form of building agreement, the employer and the contractor have

the right to rescind the agreement where the employer fails to secure loan approval for the works. In

such circumstances, the employer is entitled to have the deposit monies returned but without

interest and costs.

Repudiation, on the other hand, occurs when one contracting party chooses not to continue the

contract. The effect of repudiation depends on the attitude of the non-repudiating party. If the

non-repudiating party agrees that the contract should be dissolved, then the contract is at an end

and there are no further obligations. However, if the non-repudiating party wants to continue the

contract, they can reject the repudiation and claim for damages, or alternatively, they can accept the

repudiation and claim damages.

The Law Society of Ireland form of building agreement also provides that the contractor has a

deemed right of repudiation where the employer has failed to pay any sum due within 14 days of

being served with a written notice of the debt. If the employer fails to pay within the 14 day period,

damages will follow for any losses suffered.

72 Buckland v. Farmar and Moody, 1979 1 W.L.R221 at 228.


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12. Other issues

12.1 Quality/fitness for purpose

Consumers may not enjoy direct statutory guarantees of quality when purchasing property off plans

or second hand. They may, however, enjoy some rights under statute when commissioning

contractors to build a once off property or to improve an existing property. Moreover, in the case of

particularly egregious construction they may be able to sue for negligence. Finally, where a term in

the contract itself specifies that the property must be constructed to a sufficient standard then a

consumer may be able to rely on that term against a contractor who fails to complete the work

adequately. Where consumer rights as to fitness for purpose and quality are not provided for

expressly under the contract, the law has recognised that certain terms may be implied into

consumer contracts.

Implied terms

For some years, the law has recognised that consumers required heightened protection when

contracting with commercial service and goods suppliers. One method of increasing consumer

protection is by deeming that certain terms may be implied into a contract, even though such terms

have not been expressly stated (i.e. “implied terms”) in the contract. The law has achieved this in

three ways:

• Terms implied by Statute – by introducing statute law, e.g. Sale of Goods and Supply of Services

Act 1980.

• Terms implied by Common law - where courts have developed principles through case law.

• Implied “in fact” – where contracting parties would have agreed to a particular term if they had

put their mind to it.

Terms implied by Statute

The Sale of Goods Supply of Services Act 1980 (the “1980 Act”) sets down certain terms which are

to be implied into every consumer contract for the sale of goods or supply of services. However, the

purchase of a property off plans or from its existing occupant falls outside the scope of this Act.

This is because “goods” for the purposes of the 1980 Act does not include real estate. This leads to

something of an anomaly in the law. Consumers enjoy a guaranteed level of quality when purchasing

day to day goods but do not enjoy such protection when making what is often their riskiest and

most expensive purchase: their home.

Notwithstanding the above limitation in the 1980 Act, consumers who purchase building materials

directly from suppliers may also benefit from a number of statutory protections concerning the

quality of such materials. Sections 13, 14 and 15 of the Sales of Goods Act 1893, as amended,


54

provide that a contract for the sale of goods (which would include building materials) will contain a

number of implied terms pertaining to the quality of the goods.

Consumers also enjoy rights under the 1980 Act when they contract with a contractor to construct a

one-off property or to improve an existing property. Such contracts would generally be seen as

amounting to contracts for services. As a result, the 1980 Act will imply certain minimum guarantees

of quality into the contract. Specifically, a contractor must have the necessary skill to render the

service, the service must be provided with due care and diligence and, where materials are used, they

must be sound and reasonably fit for the purpose for which they are required. It is possible for a

contractor to reject these minimum quality guarantees in a contract of service. However, where they

are dealing with a consumer, they may only reject the guarantees where it is fair and reasonable to do

so and where they have expressly brought the issue to the consumer’s attention. The exclusion may

be achieved by course of conduct or by express term under the contract. It should be noted that

terms will not be implied to the extent that they contradict express terms in the contract.

In England and Wales, all consumers enjoy a statutory guarantee of quality when purchasing real

property. The Defective Premises Act 1972 provides that any person who takes on work for, or in

connection with, the provision of a dwelling has a duty to ensure that the work is done in a

workmanlike or professional manner, with proper materials so that the dwelling will be fit for

habitation when completed.

In New South Wales, Australia, the consumer also has a high level of statutory protection through

the Home Building Act 1989 (as amended by the Home Building Legislation Amendment Act

2001), which requires that the contractor warrant that:

• the work was done in a workmanlike manner, in accordance with the plans and specifications;

• all materials supplied will be fit for purpose;

• work will be done diligently and in time specified in the contract, and if no time in contract, then

in a reasonable time; and

• that the dwelling will be reasonably fit for occupation.

By providing a statutory basis to imply standards as to standards of work etc, consumers can be

protected in situations where there is no written contract, by relying on statutory rights.

Terms implied by Common Law

Terms may be implied into contracts by law, whether the contracts are orally agreed or in written

form. For example, in contracts for the supply of services generally, the provider must exercise

reasonable skill and care in discharging his obligations. In the context of construction, caselaw has

established that a contract builder will generally be implied to have given a threefold undertaking:

• that the builder will do the work in a good and workmanlike manner;

• that he or she will supply good and proper materials; and


55

• that the house, built or to be built, will be reasonably fit for human habitation.73

Terms may be implied into contracts under common law for a number of reasons, especially where

it is necessary to enable the provisions of a contract to have effect.

Terms implied “in fact”

A term is implied in fact on the basis that both parties would have agreed that the term was a

necessary part of the contract if, at the time of contracting, they had applied their minds to the

question.74 Broadly speaking, there are three grounds upon which a term will be seen as being

implied in fact. First, a term may be implied where it was left out of the contract but is regarded as

being so obvious that it goes without saying. Second, a term may be implied where it is necessary to

ensure that the contract is able to operate effectively. Finally, a term may be implied where it follows

the custom within a certain trade. Implying terms in such circumstances will assist a consumer in

the context of orally agreed contracts, by ensuring that failure to make reference to some obvious

matter (such as that the work must not pose a severe risk to human health) during the contract

negotiations cannot be relied upon by the contractor to say that the matter falls outside of the

contract.

Tort of negligence

It is well established that the existence of a contract between the consumer and the contractor does

not entail that the consumer’s rights are confined to contract.75

At common law, it was, until quite recently, impossible to sue a contractor who constructed and

sold a dwelling on land which he owned. This position changed in the leading case of Ward v.

McMaster76, and it now appears that a consumer may be able to bring a claim in negligence where

they have suffered as a result of purchasing a defective property.

In Ward the defendant was a taxi driver and amateur contractor who constructed a bungalow on his

own land. After residing in the bungalow for a period he sold it to the plaintiffs. Having noticed

certain defects in the construction, the plaintiffs commissioned an engineer to conduct a survey of

the property. This survey concluded that the premises were grossly sub-standard and structurally

unsound. The plaintiffs, on the advice of the engineer, moved out of the building.

Costello J. found that the contractor was liable to the plaintiffs for the defects in the house. A

contractor owes a person to whom he sells a building a duty of care, the scope of which falls to be

determined by the criterion of reasonable foresight and includes avoiding any dangerous hidden

defects in the property. The contractor was required not only pay damages to the plaintiffs for the

structural flaws in the building, but was required to compensate the plaintiffs for inconvenience and

consequential loss they had suffered.

73 Salmond & Heuston, Law of Torts,19th Ed. (1996), p.329 74 Enright, Principles of Irish Contract Law (Clarus, 2007) at 159 75 Siney v Dublin Corporation [1980] I.R. 422 76 Ward v. McMaster [1986] ILRM 43. This case was later appealed to the Supreme Court [1989] ILRM 400

however, the Supreme Court did not consider these issues on appeal


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In certain cases, a person other than the person who has employed the contractor or subcontractor

may be owed such a duty of care, such as the second owner of the house which the employer of the

contractor contracted to build.77

It should also be noted that a consumers’ advisers can, where they are negligent, be held liable for

the loss suffered by the consumer as a result of the purchase of a defective property. In O’Connor

v. First National Building Society,78 the plaintiffs’ solicitor was held to be liable for defects in a

property where he failed to advise the plaintiffs to commission a survey of the property prior to its

purchase.

As discussed in Report 5: Review of Professional and Contracting Services, a key concept in relation

to liability in tort is that of ‘defective premises’: a contractor may be liable where his work results in

the premises being ‘defective’. This concept, however, has different meanings and legal implications

depending on whether it is seen from the perspective of tort law or contract law:

‘From the point of view of tort liability premises are defective only if they constitute a source of

danger to the person or property of those who are likely to come on to them or to find themselves

in their vicinity. In the contractual sense they are defective if their condition falls short of the

standard of quality which the purchaser or lessee was entitled to expect in the circumstances. We

refer to these different kinds of defects as dangerous defects and defects of quality respectively

[…]’79

However, caselaw has given rise to uncertainty as to the distinction between dangerous defects and

defects of quality: there are indications that in certain cases a plaintiff may also be able to recover for

defects of quality under the law of tort.

Accordingly, the damages available to a plaintiff in a tort action are not the same as in an action for

breach of contract. In a claim for breach of contract, a contracting party can sue to be put in the

position he would have been if the contract had in fact been performed properly. A plaintiff in an

action for negligence can only seek to be put in the same position he would have been in if the tort

had not taken place. It follows that, in the case of dangerous defects, a plaintiff would be entitled to

damages in a negligence action which would include damages for personal injuries sustained as a

result of defects in the building or the expenses incurred in fixing defects which threaten the health

and safety of the occupier. There is considerable doubt as to recoverability of damages for defects of

quality and dangerous defects which are discovered before any harm is caused.

Negligent misstatement may also be relevant in a construction context. A contractor may be liable

for economic loss for a negligent misstatement where he makes a statement or gives advice to a

known consumer for a specific purpose, and that consumer relies on the advice or statement to his

detriment. The contractor may exclude liability if he or she expressly states that it is given without

any responsibility as to its consequences. If a consumer (or indeed a contractor) is induced to enter

into a contract for works upon the advice of another party, and that advice proves to have been

misleading or wrong, the person giving the advice may be liable for negligent misstatement.

77 Colgan v Connolly Construction Company (Ireland) Ltd [1980] ILRM 33 (HC) 78 O’Connor v. First National Building Society [1991] ILRM 208 79 Civil Liability of Vendors and Lessors for Defective Premises (1970) English Law Com, No 40, para. 2 as

quoted in McMahon & Binchy, Law of Torts, 3rd Ed. (2000), p.337


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Contractual

Many standard form contracts used in Ireland impose an obligation on a contractor to complete a

given piece of work to a sufficient standard. Clause 1 of the Law Society Building Agreement

requires that a contractor must “build and completely finish in a good substantial workmanlike

manner” the relevant property. Condition 1 of the RIAI “pink form of contract” similarly requires

the contractor “to carry out and complete the works in a good and workmanlike manlike manner …

in accordance with the Contract Documents and to the reasonable satisfaction of the Architect.”

Where a contract contains terms similar to these, a consumer will be able to sue a contractor for

breach of contract where their property is not completed to a sufficient standard.

12.2 Latent defects and limitation periods

Latent defects in the context of construction projects are defects that exist in the works at the date

of practical completion of the project and are not discoverable through a reasonable inspection of

the works.

A consumer who has suffered damage as a result of negligence or breach of contract must bring a

claim against the responsible party within certain strictly defined time limits. These time limits are

termed limitation periods and are governed by the Statute of Limitations 1957, as amended by the

Statue of Limitations (Amendment) Act 1991 and the Statute of Limitations (Amendment) Act

2000. Any claim brought after the expiration of the specified limitation period is said to be “statute

barred” and will not be entertained by any court, regardless of the merits of the case. Broadly

speaking, these rules seek to prevent injustice by requiring plaintiffs to bring legal claims quickly and

by protecting defendants from having to defend claims after memories have faded and documents

have been destroyed.

At present, a claim for damages in contract or tort (other than personal injury) will be statute barred

after a period of six years from the date the cause of action accrues. A cause of action accrues at the

earliest time at which an action can be brought. In other words, the clock starts ticking as soon as

the damage is suffered and could be discovered.

These rules have caused considerable difficulty to consumers who have sought damages for defects

in the construction of their homes. The difficulty stems from the fact that the six year time limit

begins to run from the date the damage is suffered and could theoretically be discovered and not from

the date the consumer actually becomes aware of such damage. Thus, if a property suffers from

hidden or latent defects that only become apparent more than six years after a consumer takes

possession, he or she will be unable to claim any damages or other remedy for the poor

construction. This will be the case even where the defects in the property could only be identified by

a skilled professional.

The case of Irish Equine Foundation Limited v. Robinson80 offers a good example of the difficulties that

this rule can create. Here, an action in negligence was taken against the architects and consulting

engineers who advised on the design and supervision of the construction of the plaintiff’s building.

Specifically, it was alleged that the roof design was faulty. This fact was only discovered when water

began to come through the ceiling of the building.

80 Irish Equine Foundation Limited v. Robinson [1999] 2 IR 442


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Geoghegan J. in the High Court held that the plaintiff’s claim was statute barred. He noted that a

cause of action will accrue once all of the facts necessary to succeed in action for negligence

(including damage) are discoverable. Here, an expert could have immediately discovered the fault with

the roof from the date of its construction. This fact caused the clock to start ticking. It was utterly

irrelevant that an unskilled person would not be aware of the any problem with the roof or that

there was no reason why the plaintiffs would have had their roof inspected until it began to leak.

The obvious unfairness that these limitation periods cause to consumers has lead to harsh criticism

and calls for reform of the law in this area. Some commentators have gone so far as to suggest that

these limitation periods may in fact be unconstitutional to the extent that they violate a consumer’s

right of access to the courts.81 However, it should be noted that arguments have been made in

favour of retaining these strict limitation periods. It has been suggested that the possibility of latent

defects within a building leads to uncertainty and risk for all contractors involved in its construction.

This is a particular problem for engineers, architects and other professionals who lack the shield of

limited liability and cannot go into liquidation to avoid possible claims. 82

In 2001 the Law Reform Commission (the “LRC”), proposed a radical overhaul of the law in this

area, which would significantly increase the protection afforded to consumers.83 At the date of

writing, it appears that no legislative action has been taken to adopt the LRC’s recommendations.

The LRC has suggested that limitations periods be amended so that a person can bring an action

either from six years from the date on which the cause of action first accrued or three years from the

date on which the person first knew or ought reasonably to have known of the loss, that that loss

was attributable to the defendant and that the loss warranted bringing legal proceedings. However,

the LRC also recommended that a claim should be absolutely barred after 10 years from the date on

which the cause of action accrued.

This position is similar to that taken in the UK. The UK Limitation Act 1980, as amended by the

Latent Damage Act 1986 provides that limitation period for claims in tort not involving personal

injuries is either six years from the date on which the cause of action accrued or three years since the

plaintiff had both the “knowledge required for bringing an action for damages in respect of the

relevant damage and a right to bring such an action”. No action may be brought after a period of

fifteen years has elapsed since the caused of action accrued.

12.3 Privity of contract

A contract is a legal binding agreement concluded between two or more parties. The essence of

such an agreement is that each party has certain rights and obligations vis-à-vis the other party. A

key idea in contract law is that these contractual rights can only be enforced by the other party to

the contract. For example, if A, a consumer, enters into a contract with B, a car salesman, to

purchase a car and B subsequently breaches that contract, then only A is able to sue B as a result of

the breach. C, a passer by who is upset by B’s conduct, has no right to sue B as he is not a party to

the contract. This idea is called “privity of contract”.

81 Quill, “Defective Buildings and the Limitation of Actions: Part II”, 1992 10 ILT 202 82 Stack “Liability in Negligence for Defective Buildings: Accrual of the Cause of Action “ 2000 5(4) CPLJ

87 83 Report on The Statue of Limitations: Claims in Contract and Tort in Respect of Latent Damage (Other

than Personal Injury)


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This doctrine can impact consumers in certain circumstances, in the context of a construction of

extensions/renovations or construction of a new build one off house. For example, a consumer (the

“employer”) may contract with a contractor for the construction of an extension to their elderly

parent’s home. The contract is clearly intended to benefit the employer’s elderly parent. However, if

the contractor refuses to complete the building, or provides a defective service, the parent is not

entitled to sue the contractor for breach of contract as they are not a party to the agreement. The

employer themselves may be able to sue but they will not be able to secure an effective remedy. As

the employer (as opposed to their parent) may not have personally suffered as a result of the breach

they may have difficulty securing more than nominal damages. Moreover, it is almost impossible to

get a mandatory court order directing the contractor to complete the work. Thus, the rule of privity

leads to an unusual situation where the person who has suffered loss under the contract cannot

enforce the agreement.84

In addition the doctrine can give rise to a difficulty which stems from the common practice of using

sub-contractors in the building trade. Although a sub-contractor is liable to the main contractor for

any defect or breach, the rule of privity means that the sub-contractor is not directly liable to the

consumer85 (unless in the rare instance where collateral warranties are executed by the sub-

contractors in favour of the consumer). This can lead to serious difficulties for the consumer where

the sub-contractor has only partially completed the work and the primary contractor has gone

insolvent or cannot be found.86

The Law Society/CIF Building Agreement provides that a contractor is liable for injury caused by

the Contractor ‘or any person for whom the Contractor is responsible’, which is likely to include

subcontractor. The RIAI plain language form of contract provides that if the “Contractor or

nominated sub-contractor sub-contracts work, they remain responsible as if they had not sub-

contracted”. Therefore, while the consumer can recover against the contractor where loss arises by

the fault of a subcontractor, there is no mechanism for making the contract enforceable as against

the subcontractor. As long as the main contractor is accountable under the contract for the work

carried out by subcontractors, this may offer the consumer sufficient redress.

In recent months, Menolly homes, one of the State’s largest contractors, was forced to replace

cracked floors in a number of recently constructed homes. This damage was secondary to the use of

defective infill stone material which contained pyrite, better known as fool’s gold, a substance

unsuitable for use in construction.87 Under the privity of contract rules, the affected homeowners

have no claim under contract against the quarry that provided the defective materials. Thus, if the

contractor was unable or unwilling to provide compensation, the affected homeowners would not

be entitled to compensation from the quarry supplier for the damage to their homes.

As a result of these difficulties, the LRC has recommended that the privity rule should be amended

insofar as it operates within the construction sector. It believes that such amendment would result in

“clarity, less complexity, and, ultimately less expense.”88 . We recommend that the LRC approach

should be adopted.

84 Law Reform Commission Consultation Paper, Privity of Contract: Third Party Rights (LRC CP 40-2006)

at 1.06 85 Ibid at 1.79 86 Ibid at 1.89 87 The Irish Times, July 12 2007 88 LRC CP 40-2006 at 1.89


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In England, the application of the doctrine of privity of contract has been modified by the Contracts

(Rights of Third Parties) Act 1999 (the “1999 Act”). The 1999 Act allows for third parties to be

granted enforceable rights under contracts they are not parties to under certain circumstances. While

initially greeted with some scepticism, with the effect of the 1999 Act being explicitly excluded in

the provisions of many contracts, there are assertions that the British construction sector has begun

to avail of the possibilities offered by the 1999 Act in its contracting practices.

12.4 Contractors’ solvency

Property development and construction is a high risk business. In the first six months of 2006, the

construction and engineering sector accounted for the majority of corporate failures in Ireland.89

For a consumer ordering the construction of a “once off” house, seeking substantial improvements

to their own home or purchasing a home in a new housing development the possibility of the

developer or contractor going insolvent is a serious risk. In many cases a consumer who has paid a

deposit to a developer to secure a property will be unable to retrieve that deposit should the

developer subsequently become insolvent. This is because under insolvency law “secured” and

“priority” creditors such as banks holding “fixed charges” (e.g. mortgages) and the Revenue

Commissioners must be paid their debts in full before any “ordinary” creditors, such as the would

be purchaser, will be allowed to recover their money.90

While the Homebond scheme affords a consumer protection in the event of insolvency,

membership of this scheme is optional. Many contractors are not members of the scheme and the

consumers with whom they deal are exposed to considerable risks when placing deposits. This risk

is well illustrated by the case of Roche v. Peilow.91 Here, the plaintiffs wished to purchase a new house

in Cork. They consulted with their solicitor, the defendant, who warned them of the possible risk of

losing their deposit but failed to investigate the exact position of the contractor from whom they

wished to purchase their house. This was the standard practice at the time. The plaintiffs made

payments to the contractor totalling 75% of the total purchase price of their home. Notwithstanding

these payments the contractor subsequently became insolvent and the plaintiffs lost their down

payment. They sued their solicitor for negligence in failing to conduct an investigation in the

financial affairs of the contractor. The Supreme Court agreed with the plaintiffs and held that the

defendant solicitor was negligent, notwithstanding the fact that he had been following standard

practice at the time.

Following this decision, solicitors are now required to conduct thorough searches of the contractors

background, and, in particular, his or her debts, and to advise the consumer in detail of the results of

these searches and the risk posed by placing the deposit.92 While this ensures that the consumer

enters into the transaction with his or her eyes wide open, it does not reduce the risk that the

consumer may suffer considerable financial loss as a result of the contractor’s insolvency.

12.5 Ground condition risk

One of the key functions of a contract is to allocate the risk that each party bears. One of the key

risks in a construction contract, such as the construction of a new home, or the improvement of an

existing property, is the possibility that difficulties may be encountered with the physical land on

89 Farrell Grant Sparks Insolvency statistics and Analysis for the Six Month Period Ending 30 June 2007 90 Law Society of Ireland, Conveyancing, 4th ed at 458 91 Roche v. Peilow [1985] IR 232 92 Law Society of Ireland, Conveyancing (4th ed., OUP, 2007)


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which the dwelling is to be constructed. This possibility, known as “ground condition risk”, may

increase the final price that a consumer has to pay for a given piece of work. This is because an

employer (consumer) under a construction contract is generally liable for any loss or expense not

reasonably contemplated by the contract. As a result, where a contractor encounters unforeseeable

ground condition problems in the course of construction, a consumer may be required to pay

monies in excess of the agreed contract price to compensate the contractor for the extra work

required.

Ground condition risk is ultimately the consumer’s risk. It is arguable that to expect the contractor

to take on this risk would be an unfair allocation of risk.

12.6 Variation and increases in costs

It is a regular occurrence on many house building projects that variations may be necessary in the

course of the building, which may arise in a number of circumstances, for example:

• where the plans/drawings provided to the contractor at tender stage showed insufficient detail; or

• where the consumer changes his/her mind in respect of certain aspects of the design in the

course of the build.

Consumers often express surprise at the cost of such variations. However, when a build has

commenced, varying the works will inevitably lead to increases in costs. The standard forms of

building contract provides for valuing variations by the Architect or Quantity Surveyor. To minimise

the scope for variations, consumers should be informed that detailed plans and drawings should be

obtained as well as detailed specifications, down to the finishes before putting the build out to

tender.

In New South Wales, Australia, the Home Building Act 1989(as amended by the Home Building

Legislation Amendment Act) requires that the building contract, if it has a variation clause, it should

also be accompanied by a warning and an explanation of the effect of the provision.

In Queensland, Australia, the Domestic Building Contracts Act 2000 (Part 7) requires that all

variations requested by the contractor must be put in writing and copied to the home owner as soon

as practicable. There is an exception if the work is required urgently and it is not reasonably

practicable to produce a variation document before commencing work. If a variation requested by a

contractor involves additional work, the home owner is liable to pay for that extra work only if the

contractor could not reasonably foresee the extra work at the time of contract execution. The

contractor may not demand payments for variations before work commences.

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NCA Home Construction Volume 3

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