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National Consumer Agency

The Home Construction Industry and the Consumer in Ireland

Volume 3

Review of legal issues


November 2008

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Review of legal issues

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
NCA - The Home Construction Industry and the Consumer in Ireland 15
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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.
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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.
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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.
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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.
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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
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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.
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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.
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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.
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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.
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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.
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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.
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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).
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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.
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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
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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.”
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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.
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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.
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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
NCA - The Home Construction Industry and the Consumer in Ireland 33
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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.
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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.
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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.
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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.
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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.
NCA - The Home Construction Industry and the Consumer in Ireland 38
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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.
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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.
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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.
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• 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)
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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.
NCA - The Home Construction Industry and the Consumer in Ireland 45
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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
NCA - The Home Construction Industry and the Consumer in Ireland 47
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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.
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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.
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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,
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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


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• 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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