New South Wales Court of Appeal CITATION : Hunter Douglas v Chadwick [2001] NSWCA 27 FILE NUMBER(S) : CA 40637/99 HEARING DATE(S) : 9 February 2001 JUDGMENT DATE : 8 March 2001 PARTIES : Hunter Douglas Architectural Products Pty Limited v Chadwick Industries (Qld) Pty Ltd JUDGMENT OF : Mason P at 1; Priestley JA at 4; Meagher JA at 5 LOWER COURT JURISDICTION : District Court LOWER COURT 7214/97 FILE NUMBER(S) : LOWER COURT Mahoney DCJ JUDICIAL OFFICER : COUNSEL : Appellant: M. Rudge/N.Manousaridis Respondent: F. Corsaro SOLICITORS : Appellant: Baker & McKenzie Respondent: Burridge & Legg CATCHWORDS : Sale of Goods Act 1923 (NSW) - fit for purpose - reliance - where goods supplied for use in execution of building contract between purchaser and third party. LEGISLATION CITED : Sale of Goods Act, 1923 (NSW) s19(1); s.52 Trade Practices Act 1974 (Cth). CASES CITED: D. Galambos & Son Pty Limited v McIntyre (1974) 5 ACTR 10; Vacwell Engineering Co Ltd v BDH Chemicals Ltd [1971] 1 QB 88, Milne Construction Ltd v Expandite Ltd [1984] 2 NZLR 163, Morgan v Johnson (1998) 44 NSWLR 578. DECISION : 1. Appeal dismissed with costs on a solicitor-client basis from 29 January 1999; 2. Cross-appeal allowed and the cross-respondent to pay the costs of the cross-appellant.; 3. The matter to be stood over for 28 days to enable the parties to bring in Short Minutes embodying the proposed orders of the Court.. THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL CA: 40637/99 MASON P PRIESTLEY JA MEAGHER JA Thursday, 8 March 2001 HUNTER DOUGLAS ARCHITECTURAL PRODUCTS PTY LIMITED v CHADWICK INDUSTRIES PTY LIMITED FACTS The appellant is a manufacturer and supplier of structural panels used in the building industry to externally clad sub-structures. The respondent contracted with the appellant for the supply of the panels in the construction of buildings to be known as the Brisbane Convention and Entertainment Centre. The appellant provided the respondent with a manual to their product and asserted, inter alia, that the panels were suitable for affixation to a particular structural product manufactured by BHP. On this assertion the respondent relied. The panels were supplied and were found during the course of construction to be incompatible with the BHP product. The respondent then incurred cost increases and production delays in altering the appellant's product to enable its use in construction. The respondent then failed to make further and final payments to the appellant for the supply of the panels, which payment the appellant sought to recover in proceedings the subject of this appeal. The defendant successfully cross-claimed that the goods were not fit for their intended purpose and that the statements made by the appellant misled the respondent in its choice of product. The appellant appeals. The respondent cross-appeals the addition of interest on the amount outstanding to the appellant and allowed by the trial judge, and claims his Honour incorrectly disallowed their Offer of Compromise on the basis that it was not in the form under Part19A of the District Court Rules. HELD 1. The goods clearly were not fit for their purpose as understood by the provisions of s.19(1) of the Sale of Goods Act (1923) NSW. The respondent made the goods fit for their intended purpose by substantially altering them. 2. The statement of the appellant, both express and implied, that its panels were readily suited for use with BHP product were misleading. 3. Although the judgment below may be criticised, the primary facts as found by the trial judge justify a finding for the respondent on its Sale of Goods defence. 4. It is inappropriate for the verdict in favour of the respondent, to include in the calculation of moneys to be set off, an amount of interest owed to the appellant: this is because the respondent should not be liable for moneys it did not properly owe: D. Galambos & Son Pty Limited v McIntyre (1974) 5 ACTR 10. 5. The purpose of a Calderbank letter is not to be compromised simply because it is not couched in the precise terms used in Part 19A of the District Court Rules. ORDERS 1. Appeal dismissed with costs on a solicitor-client basis from 29 January 1999; 2. Cross-appeal allowed and the cross-respondent to pay the costs of the cross-appellant; and 3. The matter to be stood over for 28 days to enable the parties to bring in Short Minutes embodying the proposed orders of the Court. THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL CA: 40637/99 MASON P PRIESTLEY JA MEAGHER JA Thursday, 8 March 2001 HUNTER DOUGLAS ARCHITECTURAL PRODUCTS PTY LIMITED v CHADWICK INDUSTRIES PTY LIMITED JUDGMENT 1 MASON P: I agree with Meagher JA. 2 Specification of the appellant's product in the head contract did not preclude implication of the implied warranty as to reasonable fitness for purpose. Nor did the fact that the purchaser was expected to exercise a measure of skill and judgment in applying the product to the panels at the Convention and Entertainment Centre. 3 The vendor's manual asserted that the product "may be fixed directly to … proprietary C and Z purlins". This reinforced the finding of implicit reliance in the context of the particular contractual arrangement between the parties. The assertion was inadequate and misleading in its absence of reference to the types of unforeseen problem and expense encountered by the purchaser in achieving the appropriate "direct" fix. Such a deficit is capable of assisting in the conclusion that the warranty of reasonable fitness for purpose was not honoured (cf Vacwell Engineering Co Ltd v BDH Chemicals Ltd [1971] 1 QB 88, Milne Construction Ltd v Expandite Ltd [1984] 2 NZLR 163). 4 PRIESTLEY JA: I agree with Meagher JA. 5 MEAGHER JA: This is an appeal, and two cross-appeals, against orders determined by Mahoney DCJ. 6 They concerned one part of the Brisbane Convention and Entertainment Centre ("BCEC"). Leighton Contractors Limited ("Leightons") was the head contractor, Messrs Richard Cox ("Cox") the architects. Brisbane is situated in Queensland. 7 In the BCEC there were certain large buildings, or parts of buildings, called "pods". It was envisaged by Leightons and Cox that they should be externally clad by panels called the Luxalon Multipanel Facade System ("MPF"), manufactured by the plaintiff/appellant Hunter Douglas Architectural Products Pty Limited ("Hunter Douglas"). The contract ultimately entered into between Leightons and Chadwick Industries Pty Limited ("Chadwick") contained a priced Bill of Quantities which included the following provisions: "J. Lightweight cladding system shall be Hunter Douglas Luxalon Multi Panel Facade type 300 "C" and "F" panels used as shown on the detailed drawings or equal approved all as specified." 8 It is apparent that a Mr David Mills was an employee of Hunter Douglas whose business it was to promote sales of MPFs. As I have said, the contract to do the cladding work was a contract between Leightons and Chadwick. Chadwick's spokesman in the present dispute was a Mr Michael Saul, who had many conversations with Mr Mills. Indeed, Mr Mills tried both to have the cladding sub-contract awarded to Chadwicks and to ensure that the sub-contract contained a provision promoting the use of MPF panels. He was successful in both endeavours. 9 Chadwick was a company which had lengthy experience in the building trade; it may even have had extensive experience in the erection of cladding; but of MPF it was entirely innocent. Mr Saul approached Mr Mills as neophyte to master. 10 In one of their conversations (apparently pre-contractual, although his Honour does not favour us with a finding as to the date of the contract), Mr Mills gave Mr Saul, as part of his indoctrination, a company manual. It was a document of some sixty pages and contains much which is relevant to the present dispute. However, of immediate interest is p.53, where the following appears: "SUPPORTING STRUCTURE. Luxalon Multipanel Facade may be fixed directly to most types of purlin systems such as proprietary C or Z purlins or I beams." 11 The C and Z purlins were steel rods which were placed vertically between the horizontal I beams. In the present context, "proprietary" C and Z purlins were certain types of purlins manufactured and sold by BHP. They were made out of cold rolled steel, but further description of them is irrelevant. 12 The contractual task, then, of Chadwick (in its contract with Leightons) was to erect a skeleton, or sub-structure, each side forming a wall of the pod, and affixing MPF panels to that skeleton. The skeleton consisted of horizontal I beams 5m apart, joined to one another by purlins (mostly, but not entirely, Z purlins). The purlins were attached to the I beams by brackets. Clips were positioned in pre-determined locations on the outer surface of the purlins. It was to this sub-structure (or skeleton) that the MPF panels were to be attached. 13 Each panel had to be clipped into place on the clips to which I have referred, starting at the top and working to the bottom of each panel. Moreover, each panel had to have its top rolled edge ("male") forced into the bottom rolled edge ("female") of the panel above it. 14 At first, Chadwick had some difficulty affixing the panels, which was reflected in an "oil-can" effect (to use a trade term) where the facade as a whole was rippled and visually marred by unevenness. This was discovered by Mr Mills and rectified by him. It was the fault of Chadwick, not Hunter Douglas. It was the result of using oversized brackets to fix the panels to the I frame. 15 Thereafter, Chadwick continued its building, collecting from Hunter Douglas the panels and brackets it had ordered, and affixing those panels to the sub-structure of the pod. However, problems did not cease. The oil-canning continued. In order to avoid this it had to resort to several expedients. Those expedients included: (i) inserting spacers, called "packers", between the clips and the purlins; (ii) nibbling a rectangular cut-out from the flared edge or tail of the upper (male) part of each panel; and (iii) negotiating with Hunter Douglas to shorten the flared projection of the male end of each panel. These problems lasted for the duration of construction. 16 In other words, Hunter Douglas were asked to, and agreed to, supply panels which were appropriate to BHP-manufactured purlins; but they in fact supplied panels which could only be adapted to those purlins with great expenditure of time, skill and money. In fact Mr Mills, in an in-house memorandum, summarized the position thus: "I think we have to convince Chadwick that on its own the Z section is not compatible with our panel." 17 At the commencement of this litigation, Chadwick had not paid for all the materials ordered from Hunter Douglas and supplied to it. Hunter Douglas, therefore, sued for the amount outstanding ($94,002.83) together with interest, which inflated the amount owing to $144,219. Chadwick filed a defence alleging, in effect, a breach of s.19 of the Sale of Goods Act, 1923 (NSW). It then commenced a cross-action based on the same statutory provision, and also based on s.52 of the Trade Practices Act 1974 (Cth). His Honour upheld the defence and the cross-action. As a result Chadwick was awarded a verdict of $73,545.00. 18 Hunter Douglas appealed from the s.19 verdict against it, and Chadwick sought leave to cross-appeal both on interest and on costs. 19 Section 19(1) of the Sale of Goods Act 1923 (NSW) is in the following terms: 'Subject to the provisions of this Act, and of any statute in that behalf, there is no implied warranty or condition as to the quality or fitness for any particular purpose of goods supplied under a contract of sale, except as follows: (1) Where the buyer expressly or by implication makes known to the seller the particular purpose for which the goods are required so as to show that the buyer relies on the seller's skill or judgment, and the goods are of a description which it is in the course of the seller's business to supply (whether he be the manufacturer or not), there is an implied condition that the goods shall be reasonably fit for such purpose: Provided that in the case of a contract for the sale of a specified article under its patent or other trade name there is no implied condition as to its fitness for any particular purpose." 20 Learned senior counsel for the appellant, Hunter Douglas, Mr Rudge SC, made a swinging attack on his Honour's judgment. Those criticisms include the following: his Honour investigated the question of whether a duty to warn arose, not whether the goods (ie the panels) were reasonably fit for their intended purpose or were of merchantable quality; many of his findings - eg whether the MPF panels were originally intended for domestic use - were both irrelevant to the issues in the case and unsupported by the evidence; that Chadwick did not stick precisely to the Hunter Douglas manual instructions for affixing the panels, whereas his Honour, at different places, thought that they did and then they did not; and, most importantly, that, instead of adjudicating on the central matter required by him (viz. whether the Sale of Goods warranty applied, and if so whether it was broken), his Honour went on a little ramble through the authorities dealing with the implication of implied terms in contracts. Most, if not all, of these criticisms are, it seems to me, well justified. However, they do not in the end amount to much. The primary facts found by his Honour make it inevitable that Chadwick had to win, and on its Sale of Goods defence. As Mr Rudge SC conceded, the purpose of Chadwick's purchase was well known to Hunter Douglas. That the goods were not reasonably fit for that purpose seems to me reasonably clear: they became fit for their purpose only after the purchaser spent time and money and effort to make them fit. Mr Rudge also conceded that, on appeal, he was not relying on the proviso. 21 Equally, Chadwick should succeed on its Trade Practices claim. There could be nothing more misleading than Hunter Douglas's misrepresentation, both express and implied, that its panels were readily suitable for affixation to BHP-manufactured purlins. 22 There remain two arguments - interest and costs. 23 As to interest: the amount claimed by Hunter Douglas was $94,002.83. Chadwick claimed in its defence, which was by way of set-off, the sum $181,973. The interest rate in the contract between the parties was 1.5% per month. His Honour held that it would not be just to deprive Hunter Douglas of its contractual benefits for having supplied goods which, whilst initially deficient, became ultimately sound and were, after having been rectified by Chadwick, actually fit for the purpose for which they were purchased. 24 The decision of Mahoney DCJ on the principal issues was delivered on 2 July 1999. On 30 July 1999 his Honour sat again in the matter to receive Short Minutes of Order embodying interest rates up to that date. Hunter Douglas contended it should be entitled to a verdict of $94,002 together with interest thereon at 18% per annum (which is the same as 1.5% per month) from 29 June 1995 (a date the selection of which puzzles me) to 30 July 1999, whilst Chadwick's entitlement to interest on its verdict of $181,973 between those two dates should be at Court rates. 25 Chadwick contended that it should be entitled to judgment of $87,970.17 (Chadwick's verdict minus Hunter Douglas's verdict) and interest at Court rates on that amount from 29 June 1995 to 30 July 1999. Mahoney DCJ found for Hunter Douglas on this point. This seems to me to be inequitable because it means forcing Chadwick to pay interest on money which it did not properly owe. In this regard, Chadwick relied (with some reason) on D Galambos & Son Pty Limited v McIntyre (1974) 5 ACTR 10. In my view we should accede to the submissions of Chadwick. 26 As to costs: on 29 January 1999, Chadwick's solicitors wrote the following letter to Hunter Douglas's solicitors: "Without prejudice save as to costs. We are instructed by our client to make a final offer of settlement in respect of these proceedings. The offer is as follows:- 1. Judgement for the defendant on the plaintiff's claim. 2. Judgement for the plaintiff on the cross-claim. 3. Each party pay its own costs. This offer is open for acceptance until 5pm on Tuesday 9 February 1999. The above offer of settlement is made without prejudice except in respect of any argument upon costs in accordance with the principles outlined in the Calderbank case." 27 Mahoney DCJ decided that an application for solicitor and client costs based on that letter should be rejected because the offer was not couched in the form of an Offer of Compromise under Part 19A of the District Court Rules. But this, to my mind, is carrying formalism to a ridiculous extent. The purpose of a Calderbank type letter is to make the recipient's mind ponder seriously on its contents. There is nothing in this Court's decision in Morgan v Johnson (1998) 44 NSWLR 578 to the contrary. In my view, Chadwick should have its costs on a solicitor and client basis basis. 28 The orders I propose are: 1. Appeal dismissed with costs on a solicitor-client basis from 29 January 1999, 2. Cross-appeal allowed and the cross-respondent to pay the costs of the cross-appellant, and 3. The matter to be stood over for 28 days to enable the parties to bring in Short Minutes embodying the orders I have suggested. ****** DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.