CATCHWORODS TRADE PRACTICES - misleading statements - sale of kit home - system misdescribed ~ house not weatherproof - measure of damages - whether cost of rectification recoverable. Trade Practices Act, 1974 s.52 Jennifer Nancy Remedios v. Kentucky Homes Pty. Limited NSW G361 of 1986 PINCUS J. BRISBANE 11 JULY 1986 I ate wane eve Abner ke ne aw a - a ee shai a Sea on te ne IN THE FEDERAL COURT OF AUSTRALIA ) NEW SOUTH WALES DISTRICT REGISTRY N.S.W. G36l of 1985 GENERAL DIVISION BETWEEN: SENNIFER NANCY REMEDTOS Applicant AND: KENTUCKY HOMES PTY LIMITED Respondent AND: KENTUCKY HOMES PTY LIMITED Cross Claimant AND: JENNIFER NANCY REMEDIOS First Cross Respondent AND: SPUNTEN PTY LIMITED Second Cross Respondent MINUTES OF ORDER JUDGE MAKING ORDER: PINCUS J. DATE OF ORDER: 11 JULY 1986 WHERE MADE: BRISBANE THE COURT ORDERS THAT: 1. The respondent pay to the applicant the sum of $25,000. 2. The applicant pay to the respondent the sum of $2,892.50. 3. The costs of and incidental to the proceedings be taxed and paid by the respondent to the applicant. NOTE: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. nF ANAB ey > pear tare IN THE FEDERAL COURT OF AUSTRALIA ) NEW SOUTH WALES DISTRICT REGISTRY N.S.W. G361 of 1985 GENERAL DIVISION BETWEEN: JENNIFER NANCY REMEDIOS Applicant AND: KENTUCKY HOMES PTY LIMITED Respondent AND: KENTUCKY HOMES PrY LIMITED Cross Claimant AND: JENNIFER NANCY REMEDIOS First Cross Respondent AND: SPUNTEN PTY LIMITED Second Cross Respondent PINCUS J. 11 JULY 1986 REASONS FOR JUDGMENT This is a building case. The applicant wished to build a home for herself and her children, and decided, in the hope of saving money, to buy a "kit home" from the respondent. She contracted with a builder to have it erected, and there seems little doubt that the home is rather unsatisfactory in that wind and water come in. She has brought proceedings against the vendor of the kit home, claiming that she was misled by statements about its eee eee eee ee a a oe | are 2. qualities in a brochure. The respondent says that the building's lack of resistance to penetration by the weather is the fault of those who constructed it, and is not caused by any deficiency in the materials it supplied. The house is partly single- and partly double-storied and is built on a site having magnificent views. It is convenient to say at the outset that there is no difficulty in concluding that the brochure was misleading. The problems in the case are whether the misleading statements caused the applicant any loss, and if so, how much loss. The applicant gave evidence that, in the first instance, she desired a brick house and told Mr. Sawyer, a representative of the respondent, of her wish. She had bought some land at Killcare, near Sydney, and arranged to meet Mr. Sawyer on the site. When he saw the land, Mr. Sawyer said that the site required a "log home" on poles. He thought it would look "great" and would be perfect for the block. The applicant said, and I accept, that she raised with Mr. Sawyer the nature of the site, which is very windy and exposed, but although that matter was mentioned several times, Mr. Sawyer continued to recommend the log home. However, it is important to notice that the applicant did not plead these conversations with Mr. Sawyer as containing misleading statements. They are relevant only on the question of inducement. Her case was based upon a written statement contained in a brochure, exhibit 2. It is common ground that the brochure eo eae oe fee aE rt. a 3. emanated from the respondent, and very nearly common ground that it is inaccurate. It is convenient to quote the whole of the relevant paragraph: "Adjustable panels for weathertight seal. This is unique to Kentucky - and it's now patented in the U.S.A. and patent pending in fussy places like Germany, Sweden, Canada and New Zealand. Each leg is carefully machined to enable a timber strip and special sealant to be inserted as a weathertight seal between one log and the next. The logs are then tied into solid wall modules by three concealed vertical galvanised rods, locked in position with heavy-duty nuts. Each module is a single unit: logs and timber sealing move with weather changes as only timber can move. Which means you always have a seal, even in extreme weather conditions. The entire modular process is done in the factory to ensure a permanent satisfactory seal. Your builders are handling whole modules, mot trying to juggle single logs into position on site." I would remark in passing that the system being sold turns out not to have been patented, in fact, in the United States. The letters patent which were granted in that country in 1978 were tendered, and were for a system which is significantly different. That is by the way; it is of interest only as illustrating the danger, from the point of view of liability under s.52 of the Trade Practices Act, of entrusting the drafting of such brochures wholly to advertising agents. The principal of the respondent, Mr. D.S. Napier, gave evidence that he had an advertising agency draw up the brochure about a year after he started in business, some six or seven years ago. He said that he had not had the document examined from the point of view of compliance with the Trade Practices Act and that = Anata eee 4. "This trade practices thing I really was not aware of until a couple of years ago." When the draft document came back from the agents, he made no alteration to it. Mr. Napier appeared to agree that the paragraph quoted above did not accurately describe the effect of the system in question. It seems to me probable that the advertising agent simply did not understand how it worked. A purchaser of the respondent's kit acquires from it, inter alia, as many wall panels as are necessary to construct the dwelling in question. The panels consist, so far as buildings of the relevant type are concerned, of small pine half-logs which are so arranged (horizontally) that the flat surface of each is to be to the inside, and the rounded surface to the outside, of the building. These half-logs are secured in position in two ways. They are located in the vertical plane by steel rods which pass right through them, each rod having a thread and nut at the end to allow for tightening of the whole panel. Also, each half-log is screwed to angled pieces of steel which run vertically down the panel. The screws' heads are in vertical slots in the angled steel, to enable the logs to move vertically. The idea of these slots and the thread and nut on the end of each rod is to enable the half-logs to be forced together to take up any gap which may appear between them. This process of taking up gaps can take place either before the panels are eR een we ween ee -— a ek Ore ae ee 5. installed, or afterwards. In either case ~ particularly in the latter case - the tightening of the panels is not a trivial exercise. If the panels are to be tightened in situ, as Mr. Napier explained in evidence during an inspection on site, it is necessary to have access to coach screws which are at the bottom of each panel frame. One removes a bottom "infill" log from a panel, takes out the coach screws, then knocks the rest of the logs together upwards one by one with a large hammer, tightens the nuts on the ends of the vertical rods to which I have referred, putties up the old coach screw holes, drills new coach screw holes, fastens the panel again by means of the coach screws and replaces the bottom log. It is important to note that the panels are intended to operate as single-thickness walls without a cavity or lining behind them. It is a critical feature of the system that no such lining is necessary, and no doubt this is thought to save money. The way in which the panels of half-logs are supposed to be made waterproof is as follows. Each haif-log has a slot machined in it at top and bottom running along its whole length. Into that slot a piece of plywood is fitted. If the half-logs are tightened up against each other, they tend to compress the piece of plywood and thus resist the ingress of weather. The system does not rely, however, merely upon a tight seal of plywood against the bottom or top of a machined slot. There is supposed to be a piece of a synthetic 6. compressible material, neoprene, in the slot, so that tightening the panel compresses the neoprene. If, for some reason, e.g. shrinkage of the timber, the pressure on the neoprene lessens, it is intended to expand and take up the slack. It is my view, on the evidence, that the capacity of these panels to be tightened is an important aspect of their operation. At one stage during the proceedings, much was made, on behalf of the respondent, of alleged deficiencies in the construction of the dwelling in question which were claimed to have rendered it impossible or impracticable to tighten the panels in situ without doing substantial damage to the structure. In particular, it was said that the coach screws had been covered-up, whereas they should have been left exposed for easy access. There was a change of front on the part of Mr. Napier as the implications of this argument sank in, and eventually little emphasis was laid, on the part of the respondent, on the question of tightening in situ. The danger of the contention that tightening in situ is an important aspect is that the brochure, so far from making that clear, suggests the contrary. A reader of it, who was interested, as the applicant was, in the question of weatherproofness, would note that there is a "weathertight seal", that the logs are tied into "solid wall modules" "locked in position", and would understand that the promise that "you always have a seal, even in extreme weather conditions" was based upon the assurance that: "The entire modular process is done in the factory to ensure a permanent satisfactory seal." Sa aaa naeel wee nn' 7. While there appeared, as I have noted, to be some change of emphasis in the presentation of the respondent's case, it is clear enough that the respondent did not really contend that the work in the factory produces a "permanent satisfactory seal". To the contrary: the whole arrangement is designed to enable, admittedly at the cost of considerable effort, restoration of a weather seal after the panels have left the factory. There is not really any question, even if the system works as Mr. Napier says it should, of ensuring a permanent satisfactory seal in the factory; at best, there is a hope of such a seal. Mr. Biscoe, 1n his able argument on behalf of the respondent, laid emphasis upon the heading of the paragraph and its reference to "Adjustable panels". It is true that that is hard to reconcile with the body of the paragraph. Mr. Biscoe argued that while the applicant might have been led to wonder what it was that was adjustable about the panels, that was merely a case of confusion and not one within s.52. I am satisfied, however, that the paragraph, read as a whole with the heading, misled the applicant, and would have misled all but the most alert readers; sceptical customers might have been struck by the lack of explanation of the word "Adjustable" and made further enquiry, but it seems clear that that possibility should not deprive the applicant of a finding, which I make, that the brochure was misleading in the respects pleaded. Mr. Biscoe referred, in his oral and written submissions, to the principle that to enable recovery the statements complained of must relate to existing facts. He argued pe po rn -— oF HF en 'et aa —* -eoOoO ter es 8. that if the panels delivered to Mrs. Remedios' site under the contract happened to be of poor quality and such as to let in wind and water, that did not necessarily establish that there was a breach of s.52 of the Trade Practices Act. It does not appear, however, that the applicant is faced with that problem, on the question whether the brochure was misleading. Whether or not the panels supplied to Mrs. Remedios were especially bad, the brochure was misleading because it gave an erroneous impression of an aspect of the system which was important to the applicant, namely weather sealing. It should have explained that, dependent upon circumstances, it might be necessary for an acquirer of the kit home to cause some substantial work to be done on the panels to achieve weather tightness before construction and perhaps (a much more onerous task) afterwards. I should add that there is no reason to doubt the explanation given by Mr. Napier as to how the error in the brochure, which has proved to be an important one in the instant case, arose, or to think that he deliberately caused misleading statements to be used in the brochure. He may well have been let down by the suppliers of the half-logs. It is, however, clear that liability under s.52 does not depend upon finding that the respondent acted fraudulently. Mr. Biscoe also argued that I should find that panels of this type are ordinarily weathertight even in extreme conditions and should, for that reason, reject the contention that the brochure was misleading. Even if I were satisfied of the correctness of the premise, I would not adopt the conclusion; the SF emer eS STE Pim CaN eke ed 9. brochure was misleading mainly because it gave quite a false picture of what it was that, according to the design, would make the panel weathertight, namely not a permanent seal ensured in the factory, but a process of tightening. Further, I am not prepared to find that the premise is correct. It is true that evidence was given on behalf of the respondent from which one might deduce that the applicant's experience, referred to in detail below, was unique. On the other hand, Mr. Napier told me, on being asked whether the panels in question were "standard, proper quality Kentucky panels", that they definitely were, from which one might infer that standard Kentucky panels are not reasonably resistant to wind and weather. At the request of the parties, I inspected the house and a rough test of the weatherproof qualities of the house was done using a garden house. Each side claimed that the result of the test was favourable, but I did not find it of any particular assistance. The principal point in determining the extent to which the house resists ingress of wind and water is whether to accept the evidence of the applicant. She said that when wind drives rain against the house, a substantial amount of water penetrates the panels and eventually wets the interior of the walls. In this she was, to some extent, supported by photographs she produced. Simple observation of the panels also, in my opinion, tended to substantiate the applicant's evidence. In varying degrees, the half~logs had unacceptably large gaps between them and it would seem to me improbable that in that condition they would be well able to keep out the weather. A report of a wees = eee wears menses eee ee 10. Mr. Kormos, described as the chief designer/construction manager for the respondent, was tendered. It said:. "Considerable shrinkage has occurred in the logs, causing gaps of approximately 3-4 mm to open up in the horizontal joints between each log. Due to the nature of construction of the panels ... no daylight is visible through these gaps. However, in extreme weather conditions, it is possible for water penetration to occur, as the shrinkage has caused the logs to move away from the seals provided, thereby reducing their effectiveness. The panels are constructed to allow for timber shrinkage, and can normally be adjusted by a simple procedure to re-tighten the logs, and eliminate the gaps. " I assume that Mr. Kormos, who was not called, is experienced in the use of the system and his description of the nature of the problem appears to be correct. I donot, however, accept his suggestion that it would be a "simple procedure" to rectify the problem; Mr. Napier admitted, indeed contended, that the "adjustment" of the logs would be extremely difficult. The case put forward on behalf of the respondent was that the panels delivered were in perfectly satisfactory condition, but that they deteriorated due to exposure to rain while waiting to be installed. I do not believe that the wetting of the panels before they were incorporated into the structure was the cause of the problem. After all, the panels were supposed to be the exterior walls of a house and to be able to withstand many years of weather. Assuming that the timber was not fairly green when delivered to the site, its exposure to the rain would cause it to take up moisture and expand. The theory advanced by Mr. —t- 8 ee a masssetire ke a a il. Napier was that this process of expansion strained the nuts and the frame of the panels, so that when the panels dried out again, gaps appeared. Although he applied considerable ingenuity to the elaboration of this theory, I remain entirely unconvinced of its correctness. I accept the estimate of Mr. Lumsdaine, an architect called on behalf of the applicant, that the total of the gaps which have appeared in the panels averages about 40 mm per panel. It seems to me pretty clear that the substantial cause of these gaps was drying out of the timber, no doubt because it was not sufficiently dry when the panels were built. It was argued for the respondent that there is a number of other causes of water ingress. At one stage, the roof leaked, for reasons unconnected with the respondent; that has been corrected. Apart from that, two other causes of leaking suggested by the respondent should be dealt with. The first is that some water penetrated because of defects in the vertical seals between the panels. These seals consist of a silicon compound. It is true that some small holes in the seals may be observed on inspection, but they are quite insignificant and plainly did not cause the substantial water penetration complained of by the applicant. Secondly, the respondent said that the flashing affixed to the house has been inadequately applied - a point which is not open to dispute. Particular complaint was made by the respondent of flashing at the top of panels where, it was said, too large a gap has been left because of defective construction methods. While it is clear that the flashing was poorly done, and in some instances omitted altogether, that has not been the cause of the trouble. Nor did the respondent initially regard it as 12. such; the applicant was recommended to apply numerous coats of a product intended to prevent water penetration, which she did. As to the vertical flashing, its absence has not been the cause of water penetration because of the use of the silicon compound mentioned ahove. As to the horizontal flashing, the evidence makes it clear that the water penetration does not originate at the top of the panels and flow down; water comes in between the half-logs. In summary then, I am satisfied that due to shrinkage of the half-logs substantial gaps have appeared between them, letting the weather in. Next, the respondent contended that, assuming such a finding against it as has been made, still there was an intervening cause, namely a breach of contract on the part of the builder, relieving the respondent of all liability. The respondent's case was that the builder's contract required it to tighten up the panels before installation and that, had it done so, the problem would never have occurred. It was not contended that it is necessary, as a matter of routine, to tighten the panels up before installation - indeed that could hardly have been put forward, in view of the content of the brochure quoted above. There was evidence on behalf of the respondent that it is the practice to attach to panels, as delivered, a notice explaining the procedure for tightening panels, which I have outlined above. It appears to me probable that such notices were attached to the panels delivered to the applicant's site, but I am weer eee ee ne a? wy Oe eee eae id, o> he 2 13. by no means satisfied that the notices were in such terms as to entitle the respondent to assume that, in such a case as this, the builder would take remedial action. Instead of saying that unless on inspection there appear to be no gaps between the logs, it is necessary to follow the procedure indicated, the form of notice contains only the following cryptic indication of when action is necessary: "Movement may occur in transport or storage if this occurs undertake the following ..." It would have made more sense to refer to apparent timber shrinkage as an indication of a need to take the steps set out; the builder was apparently supposed to take "movement in transport or storage" as including shrinkage. Next, the respondent relied upon the specification it supplied which, under the heading "Timber Panels", had a sub-heading "Installation", covering, among others, the following directions: "lL. Refer to the engineer's computations and construction manual prior to commencement of work. 2. Strictly adhere to the 'important notice' as posted on panels. 3. Generally ensure that all panels are tight and well-fitting prior to installation." rrr ee 14. Neither the engineer's computations nor the construction manual referred to the shrinkage problem or how it should be combatted. As to the second direction, I have already dealt with the notice in question. According to the respondent, the third direction really covered the same ground as the second and was designed to convey the information that the process set out in the notice should be gone through if there were any gaps between the half-logs. It is not suggested that the panels were delivered in such a condition that the half-logs were loose within them. They were likely to have been still "tight" in the sense that they did not move relatively to one another. It would have been a sensible precaution for the respondent to have simply said that if on delivery gaps of more than a stipulated size were observable between the half-logs then the tightening process should be gone through. There were no doubt commercial reasons why the respondent should not have wished to put the matter so bluntly; to do so would have implied that the panels had not been delivered in such a condition as to be suitable for use without extensive preparation - presumably a breach of contract. But the respondent's equivocation on the point does not assist it where, as at present, it seeks to have failure to comply with these vague directions held to be an intervening cause. It is not necessary for me to determine whether the builder was, as alleged, guilty of a breach of contract, and it is undesirable that I do so in view of the fact that the builder, which has been joined in the proceedings, was not a party to the hearing before me. It is enough to say that I am satisfied that there is a sufficient a rte ee Sam eat 7! © Poer2S2 he fe ammo 15. causal link between the present condition of the house and the actions of the respondent of which the applicant complains; if it matters, I am satisfied that it was well foreseeable that the sale of the system pursuant to such a misrepresentation as is contained in the brochure would lead, as it did, to the applicant's having a house with highly permeable walls. It should be mentioned, for the sake of completeness, that there is evidence that the house moves perceptibly in high winds, and I find that this is due to inadequate bracing. I do not accept, however, that there is any significant connection between the inadequacy of the bracing and the problem of penetration of wind and water through the gaps between the halif-logs. I would add that the respondent argued that all the gaps presently observable must have been present before the house was built; I think that to be unlikely. The next question is that of damages. I am satisfied that the misleading brochure induced the applicant to purchase. What is not so clear is what the applicant would have done if she had not contracted with the respondent. That assumes importance because the fundamental rule generally applicable in cases of this sort is the same as in an action of deceit where ~ --- a plaintiff is entitled to recover as damages a sum representing the prejudice or disadvantage he has suffered in consequence of his altering his position under the inducement of the fraudulent misrepresentations made by the defendant." mer eo tee Eee ePS ER le ook wt ae aa 16. That proposition was stated by Dixon J. in Toteff v. Antonas (1952) 87 C.L.R. 647 at p.650 and approved by Mason, Wilson and Dawson JJ. in Gates v. City Mutual Life Assurance Society Ltd. (1986) 60 A.L.J.R. 239 at p.243. In that case, their Honours expressed themselves in favour of the view that the measure of damages just mentioned is "appropriate in most, if not all, Part V cases, especially those involving misleading or deceptive conduct and the making of false statements." (p.244) In view of the decision in Gates' case, it appears to me that, whatever previous authorities may have said, one should ordinarily follow the general rule there laid down by the High Court, even if ina particular case that produces a greater or lesser sum than would be awarded if the contractual measure were used. Here, there was not, of course, merely a sale of goods. The materials sold were to be incorporated into a house and were, indeed, defined in the contract (exhibit 4) as being "for the building of a timber structure in accordance with and as specified in the Plans Specifications and Drawings annexed hereto ..." It seems that the documents just mentioned did not come into existence until after the contract was made, but that does not affect the nature of the parties' bargain. It was argued for the respondent that, if the rule laid down by the High Court as appropriate for "most, if not ali" such cases as this were followed, I should award the difference between the value of the goods delivered and their price. It seems clear, ol od 17. however, that that would be contrary to the basic principle set out in Toteff v. Antonas (above). Another possibility, not heing one that either side urged upon me, is to attempt to estimate the difference between the cost and value of the whole. structure; however, that would not, for obvious reasons, necessarily reflect the applicant's loss consequent upon her entry into this disadvantageous transaction with the respondent. In my view, the proper approach is to treat all the plaintiff's loss as "consequential" in the sense in which that description is used in Gates' case. It is a reasonable course for the applicant to attempt to remedy her present unsatisfactory housing. Of course, she might do so by simply selling out, but it would be hardly practicable, or indeed honest, to do so while the house is barely habitable. The applicant has taken competent advice and has been told that the proper remedy is to use boards to double the walls, placing an exterior skin over the half-logs. In my view, the cost of doing so is a measure of the loss directly flowing from the applicant's reliance upon the misleading statements. Further, it does not appear to me that adding an additional wall will (apart from achieving the necessary weatherproofness) significantly augment the value of the house. It will leave the exterior appearance as one different from that which the applicant initially desired and make it, at least to some tastes, less attractive. Nevertheless, I am not prepared to accept that the cost of rectification is as much as claimed by the applicant. There were two competing views as to the proper cost of rectification; ro a= a i eae. a ae ate na at aa eee 18. one of Mr. Bell-Chambers, called for the applicant and the other of Mr. Frew, called for the respondent. «Speaking generaily, I found the latter evidence more convincing and am of the view that Mr. Bell-Chambers' evidence was, in significant respects, simply erroneous. An important difference between the two views I have mentioned was that Mr. Bell-Chambers quoted for the use of western red cedar as a suitable exterior material, while Mr. Frew suggested that pine would do. In favour of the view advanced by Mr. Frew, it has to be pointed out that the present exterior is pine. That consists, however, of half~logs as I have explained; an exterior of pine boards of much thinner material than the logs may be thought to be unsuitable as an outer surface, intended to be left unpainted, on such an exposed site. But, on the whole I am inclined to accept the opinion of Mr. Frew in this respect rather than that of Mr. Bell-Chambers. I do not, however, accept Mr. Frew entirely. One respect in which I do not do so is that he priced the work on the basis that the cladding would not run all the way up the building, on the two-storey section, without a break; he contemplated a "notch" between the storeys. More generally, it seemed to me that having regard to the evidence of Mr. Bell-Chambers, the estimates of Mr. Frew, particularly as to labour costs, were rather low. It is not possible to be precise, but I have come to the conclusion that a fair estimate of the costs of rectification is $25,000 and will award that sum. eee penetra men nga 7 19. There is aiso a claim by the respondent for $2,892.50 unpaid under the contract. That was not disputed except, of course, on the basis of the allegation of misleading statements. There will be judgment for the applicant on the claim in the sum of $25,000 and for the respondent on the cross-claim in the sum of $2,892.50. It will be ordered that the costs of and incidental to the proceedings be taxed and paid by the respondent to the applicant. . i certify that this and the preceding pages are a true copy of the reasons for judgment herein of His Honour Mr, Justice Pincus Vel Lypro s ociate Dated // +9 1986