New South Wales Supreme Court CITATION : Ilhan v Cvitanovic [2009] NSWSC 479 HEARING DATE(S) : 22/05/09 JUDGMENT DATE : 22 May 2009 JURISDICTION : Equity JUDGMENT OF : White J EX TEMPORE JUDGMENT DATE : 22 May 2009 DECISION : 1. Order in accordance with paras 1 and 2 of the originating process; 2. Defendant pay the plaintiffs' costs; 3. Exhibits may be returned after 28 days. CATCHWORDS : CORPORATIONS - winding up - appeal from liquidator's rejection of proof of debt - hearing de novo - SALE OF GOODS - conditions and warranties - implied conditions and warranties - plaintiffs made known to company the purpose for which they required goods so as to show that they relied on the company's skill or judgment - breach of implied warranty as to fitness for purpose LEGISLATION CITED : Sale of Goods Act 1923 (NSW) Trade Practices Act 1974 (Cth) CATEGORY : Principal judgment Ilhan v Cvitanovic [2009] NSWSC 160; (2009) 69 ACSR 702 Watson v Foxman (1995) 49 NSWLR 315 CASES CITED : Mead v Watson [2005] NSWCA 133; (2005) 23 ACLC 718 Re Mendarma Pty Ltd (In Liq) (No. 2) [2007] NSWSC 99; (2007) 25 ACLC 193 Silvia v Brodyn Pty Ltd [2007] NSWCA 55; (2007) 25 ACLC 385 TEXTS CITED : Kenneth Sutton, Sales and Consumer Law, 4th ed (1995) PARTIES : S Semih Ilhan & Anor v Daniel I Cvitanovic FILE NUMBER(S) : SC 4597/08 COUNSEL : Plaintiffs: R J Brender & J Wilcsek Defendant: Ms K Watson (solicitor) SOLICITORS : Plaintiffs: Forbes Dowling Lawyers Defendant: Meehans Solicitors IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION CORPORATIONS LIST WHITE J Friday, 22 May 2009 4597/08 S. Semih Ilhan v Daniel I Cvitanovic JUDGMENT 1 HIS HONOUR: This is an appeal from a liquidator's rejection of a proof of debt. In May 2006 the plaintiffs purchased two air-conditioning units from a company then called Hartrez Pty Ltd ("the company"). The company installed the units in the plaintiffs' house in Roseville. There is no defect in the air-conditioning units and they work according to their intended capacity, but they do not adequately heat the living areas of the plaintiffs' house. It is not in dispute that the units are not reasonably fit for the purpose for which the plaintiffs purchased them; namely, to provide such heating. 2 The units were installed on 23 May 2006. Almost immediately after the installation, the plaintiffs complained that the system was inadequate. The company refused to take the units back. That was because the tests made by the manufacturers showed that there was no defect in the units. That was not the plaintiffs' complaint. 3 The plaintiffs took proceedings in the Consumer, Trader and Tenancy Tribunal and obtained an order on 21 March 2007 that the company pay a sum of $8,135 immediately and collect the two units by 30 March 2007. Those orders were made after a hearing which the company did not attend. The orders were not complied with. The Tribunal refused the company's application for a rehearing. 4 On 30 November 2007 the members of the company resolved that it be wound up. The defendant was appointed its liquidator. 5 On 18 December 2007 the plaintiffs lodged a proof of debt for $9,607.48. 6 This was the amount which the tribunal had ordered, plus interest and some other items. There is no issue about the quantum of the claim. The liquidator rejected the proof on 22 August 2008. He said that the Tribunal had erred by reason of evidence which he said the Tribunal had not properly considered. The effect of that evidence was that the air-conditioners were working in accordance with the plaintiffs' specifications and that the reason the plaintiffs' rooms were not being adequately heated was due to lack of insulation. 7 On 18 March 2009 Barrett J decided a separate question, namely that: " The circumstances that the winding up is a members voluntary winding up and that the debt sought to be proved is a judgment debt do not, of themselves and without more, preclude rejection by the defendant of the plaintiffs' proof of debt. " 8 His Honour held that the liquidator of a company which is the subject of a members' voluntary winding-up is required to deal with proofs of debt in substantially the same way as the liquidator of an insolvent company, and can go behind a judgment, at least if there has not been a hearing on the merits (Ilhan v Cvitanovic [2009] NSWSC 160; (2009) 69 ACSR 702). 9 An appeal from a liquidator's rejection of a proof of debt is by way of hearing de novo. Affidavits were read before me which were not before the liquidator and the principal deponents were cross-examined. It is not in dispute that the air-conditioning units do not adequately heat the living area. Nor is it in dispute that the plaintiffs' purpose in buying the units and having them installed, was that they should do so. 10 The plaintiffs rely on subs 19(1) of the Sale of Goods Act 1923 (NSW) and ss 71(2) and 74(1) and (2) of the Trade Practices Act 1974 (Cth). In terms of subs 19(1) of the Sale of Goods Act, the issue is whether the plaintiffs expressly or by implication made known to the company the particular purpose for which the air-conditioning units were required so as to show that they relied on the company's skill or judgment. 11 In terms of s 71(2) of the Trade Practices Act, the question is whether the plaintiffs made known to the company the particular purpose for which the units were being acquired, namely to provide adequate heating to the living areas of the plaintiffs' house. If they did, there is no issue that it would be unreasonable for the plaintiffs to rely on the skill or judgment of the company. I will consider s 74 later in these reasons. 12 The plaintiffs' house in Roseville is of modern construction and has been constructed by them using the services of builders. It backs onto the Lane Cove National Park. It is a large house over a number of levels. It has large windows, hard tiled floors, concrete surfaces, and significant voids. Even in summer it is a cool house. The plaintiffs have not installed curtains or carpets which would provide greater insulation and limit the escape of heat. They have no intention of doing so. I understand this is partly for aesthetic reasons, partly so as not to block the views, and partly because of their daughter's allergies. 13 The plaintiffs made extensive inquiries as to a suitable air-conditioning or other system to heat the house. Not only is the house itself built over a number of levels, with large windows and spaces and hard areas, but the lounge room or living room area which runs directly into the kitchen and dining room, is on a lower level from the kitchen. In short, it is a hard house to heat. 14 The plaintiffs say, and the defendant denies, that in October 2005 a representative from the Joyce Mayne Mount Druitt store visited the house and thereafter provided a quote. The company was the owner of that store. The first plaintiff, Mr Ilhan, deposed that he telephoned the Joyce Mayne Mount Druitt store in response to an advertisement. The advertisement invited telephone calls for a free quote. He deposed that he spoke to someone at Joyce Mayne and asked if someone could come to have a look at the plaintiffs' house and advise if they had a suitable air-conditioner that could be installed. He was told that the store specialised in air-conditioning sales and could handle a sale from selection to installation. He deposed that a few days later a man who identified himself as having been sent by Joyce Mayne, came to inspect the house. He does not recall this man's name. He deposed that the man measured the rooms and advised that the plaintiffs would need a 3.5 HP air-conditioner to heat the kitchen/living room and another 2.5 HP air-conditioner for downstairs that would boost the heating in the rooms above. According to Mr Ilhan, the man pointed to the places on the wall where the air-conditioners should be installed. According to Mr Ilhan, the man assured him that the air-conditioners would more than cover the heating required for the living room/kitchen areas. 15 The defendant denies that any such visit occurred. The defendant's evidence is that at this time only one person was employed to make house calls for the purpose of providing quotes of the kind which Mr Ilhan described. That person was not called as a witness and there is no explanation as to why that person was not called. I can infer that the evidence which that person could give would not be of assistance to the defendant on this issue. 16 The director of the company, Mr Reznikov, gave evidence. He said that he conducted the day-to-day operations of the company. He deposed that the company had a practice that if a representative was to attend a customer's premises to provide a quote on the installation of an air-conditioning system, then the representative would complete a quote form at the inspection of the premises. He deposed such a copy of the quote form would be left with the customer. In this case the plaintiffs have not produced any such form completed by a representative at the time of his inspection of the premises. Mr Reznikov deposed that the company does not have any paperwork or quote forms in respect of an attendance at the premises. 17 The evidence given by Mr Reznikov in his affidavit is to the effect that the models, which were actually installed, were ordered as a result of a telephone call he had with Mrs Ilhan in May 2006. He denies any conversations with Mr Ilhan. However, it is clear that Mr Ilhan did have dealings with representatives, or at least a representative, of the defendant in about October 2005. On 1 November 2005 Mr Reznikov sent an email attaching what he called "quote as requested." He sent this email to Mrs Ilhan, the reason for that being that she had an email address and she provided the quote to her husband. The quote is in the name of Mr Reznikov, although it is not suggested that he prepared it personally. It was addressed to Mrs Ilhan and said: " Thank you for the opportunity to quote for your air conditioning needs. To supply and install a 3.5 HP Mitsubishi reverse cycle air conditioner, $3,295 for the upstairs area. To supply and install a 2.5 HP reverse cycle split system LG, $1,895 downstairs. Please do not hesitate to contact me on ... for any further inquiries. Joyce Mayne, Thanks. " 18 Mr Reznikov gave evidence that he was unaware of the existence of this document until his attention was drawn to it by his solicitor in the course of preparing for these proceedings. He said that it did not indicate that a representative had attended at the plaintiffs' house, but rather was consistent with a quote having been provided on particular models over the telephone, or as confirming a quote which would have been asked for over the telephone. However, the quote indicated that the author of the document was aware that the plaintiffs' house had both upstairs and downstairs areas. It was submitted as a quote which would address the plaintiffs' air-conditioning needs. It is corroborative of Mr Ilhan's evidence. There was no real challenge in cross-examination to Mr Ilhan's credit. I accept his evidence as to the visit made by the representative from the defendant in October 2005 and I accept his evidence as to the statements made by that representative at the time of the visit. 19 The plaintiffs did not accept the quote provided on 1 November 2005. The air-conditioning units which they purchased more than six months later were not a 3.5 HP Mitsubishi model or a 2.5 HP LG model. They were Toshiba models of lower horse power. 20 Mr Ilhan deposed that he spoke to Mr Reznikov by phone about 17 May 2006 and that in that conversation, Mr Reznikov recommended a Toshiba 901 model. Mr Ilhan deposed that he asked whether that would be good enough because the Joyce Mayne representative had previously said that the plaintiffs needed a 3.5 HP air-conditioning unit to heat the living area upstairs and a 2.5 or 3 HP unit downstairs which would assist in the heating of the main room upstairs. He said that Mr Reznikov guaranteed that the models would "heat the rooms up." He agreed to proceed and agreed on a price of $6,400 for the two models, including installation. He paid by credit card over the phone in full at that time. According to the plaintiffs, his wife was unhappy that he should have done so and the next day she telephoned Mr Reznikov. She says that she expressed concern about how two Toshiba 901 units would adequately heat the rooms and she deposed that she said to Mr Reznikov: " I'm concerned about how adequately they will heat the rooms and also where they will be located. The house is very open-plan with lots of windows and tiled floors. " She asked if they would be powerful enough. She deposed that she said: " The room will stay as it is. There are no plans for blinds or anything. Winter is extremely cold, particularly in the living room. We are not worried about cooling in summer, as it is cool enough already. I want to make sure you are certain they will heat up the areas properly and that we will not just be wasting our money. " 21 According to Mrs Ilhan Mr Reznikov assured her that: " The units would definitely do the job. Our people have looked at the needs for your place. " 22 According to Mrs Ilhan, Mr Reznikov recommended a Toshiba 802 model because it had a filtration system which would suit the plaintiffs' daughter's allergy condition, and they agreed on a price of $5,985 for the installation of two Toshiba 802 models. 23 Mr Reznikov denies that such conversations occurred. According to him, he spoke only to Mrs Ilhan and she told him that the plaintiffs had decided to go with Toshiba models, having done careful research on air-conditioners for the past year. According to Mr Reznikov, the decision was all about the price, with Mrs Ilhan saying that she had said that Harvey Norman had told her that they could sell two models for $5,985, and he agreed to match that price. According to Mr Reznikov there was no discussion about the plaintiffs being concerned about the heating of their premises or that the premises were open plan with lots of windows and tile floors. He was not informed that the windows did not have any furnishings. 24 These conversations occurred about three years ago. I bear in mind what was said by McLelland CJ in Eq in Watson v Foxman (1995) 49 NSWLR 315 at 319 that: " … human memory of what was said in a conversation is fallible for a variety of reasons, and ordinarily the degree of fallibility increases with the passage of time, particularly where disputes or litigation intervene, and the processes of memory are overlaid, often subconsciously, by perceptions or self-interest as well as conscious consideration of what should have been said or could have been said. All too often what is actually remembered is little more than an impression from which plausible details are then, again often subconsciously, constructed. All this is a matter of ordinary human experience. " 25 I approach this evidence with caution. However, for the plaintiffs, the conversations which led to the ordering of the air-conditioning system is likely to have been much more important to them than the conversations would have been to Mr Reznikov. For him it was a detail in a business which must have involved hundreds of sales of like products. 26 It is also true to say that neither Mr Ilhan or Mrs Ilhan was seriously challenged in relation to their recollection of these conversations. If, as I consider it to be the case, a representative from Joyce Mayne had visited the house in October 2005 and recommended the models referred to in the quote of 1 November 2005 as being suitable for the plaintiffs' needs, then it is probable that the plaintiffs would have sought an assurance that the different models would be equally efficacious. The fact that the plaintiffs had conducted research, even extensive research, into different air-conditioning systems and into at least the price of different models does not mean that they would place no reliance on a supplier providing an assurance as to the suitability of particular models for their house. It was not suggested to either of the plaintiffs in cross-examination that their enquiries had led them, in effect, to become experts themselves as to the suitability of a particular air-conditioning model for their particular needs. 27 I do not accept that Mrs Ilhan provided all of the detail about the house in her conversation with Mr Reznikov as she deposed to. However, I do accept that she asked for his assurance as to whether the Toshiba models would heat the house properly and whether they would be powerful enough. There was no occasion, it seems to me, for her to have provided a description of the plan of the house and the number of windows and tile floors. A representative from Joyce Mayne had already visited the house, albeit that was some months before. But she would have needed an assurance from the supplier that the Toshiba models would be as efficient as those which had previously been recommended. She had not herself come to a point where she would have been able to make that assessment; at least so far as the evidence reveals. 28 I also accept Mr Ilhan's evidence that he had a conversation with Mr Reznikov at about this time and that he also was told that the Toshiba model, albeit the 901 model, would adequately heat the rooms. 29 It follows that I accept the submission for the plaintiffs that they had made known to the company the particular purpose for which the goods were required so as to show that they relied on the company's skill or judgment. It follows that the company was in breach of the implied warranty as to fitness for purpose under subs 19(1) of the Sale of Goods Act and s 71(2) of the Trade Practices Act. 30 It is unnecessary to consider whether there was a breach of the warranty implied by s 74 of the Trade Practices Act. It was submitted for the plaintiffs that even if the plaintiffs had not made their particular purpose known to the company, because the contract included the supply of services, namely the installation of the air-conditioning units, there was an implied warranty that the materials supplied, namely the air-conditioning units, would be reasonably fit for the purpose for which they were supplied. 31 In Kenneth Sutton, Sales and Consumer Law, 4th ed (1995) at p 271, Professor Sutton says that: " Where s 74(1) is applicable there is no need to prove that any particular purpose was made known to the corporation, for the obligation is merely to provide materials which are reasonably fit for the purpose for which they are supplied which will no doubt mean the normal or usual purpose in the absence of any indication to the contrary by the consumer. " 32 If that is a correct statement of the law and if the plaintiffs had not made their particular purpose known to the defendant, then I doubt that they would establish a contravention of s 74. But in the light of my finding to the contrary it is undesirable to express any view as to the scope of that section. 33 As I said earlier in these reasons, there was no dispute about the quantum of the plaintiffs' proof of $9,607.48. The parties have proceeded on the basis that if the plaintiffs were successful in establishing a breach of contract they were entitled to prove for the amount which is the subject of their proof. 34 As the plaintiffs have established that breach of contract, I make an order in accordance with paras 1 and 2 of the originating process. [Counsel addressed on costs.] 35 The plaintiffs seek indemnity costs. The defendant seeks an order that there be no order as to costs to the intent that each party pay its own costs. Alternatively, or maybe in addition, the defendant seeks costs of the separate question determined by Barrett J which were reserved, and also claims costs thrown away by reason of the defendant's expert, Mr Murray, not being required for cross-examination. 36 In support of the claim for indemnity costs the plaintiffs complain as to the manner in which the liquidator dealt with their proof of debt and complain about the conduct of the company prior to its going into voluntary liquidation. The plaintiffs complain that the company appeared before the Tribunal, but breached orders, or directions, for it to serve evidence, and did not appear at the hearing before the Tribunal. The company did not seek to appeal from the decision of the Tribunal; though my attention was not drawn to any avenue of appeal the company might have had which could have had any reasonable prospects of success. 37 I do not consider that those matters warrant an order for indemnity costs. Indemnity costs orders, if they are to be justified on the ground of misconduct on the part of a party, must refer to the misconduct of a party as a litigant, as distinct from the party's conduct which gave rise to the litigation (Mead v Watson [2005] NSWCA 133; (2005) 23 ACLC 718 at 720 [9]-[10]). 38 The plaintiffs rely on a letter of 2 September 2008, but it did not contain any element of compromise. The plaintiffs made an offer yesterday for settlement of the matter. The offer included a substantial element of compromise. It was expressed to be open until 9.30 am this morning. The offer was sent by facsimile at 3.09 pm. Such an offer might warrant an order for indemnity costs if it was unreasonable for the defendant not to accept the offer. Given the very limited time for the defendant to consider and deal with the offer, I do not think its failure to accept the offer warrants an order for indemnity costs. 39 So far as the submissions of the defendant are concerned I am told - and it is common ground as I understand - that the defendant's expert, Mr Murray, was required for cross-examination. He was not cross-examined. That was due, in part I think, to some pressure from the bench as to the utility of any such cross-examination having regard to the issues; but more particularly it flowed from my rejection of a paragraph in Mr Murray's report. I do not think that that is a matter which warrants any particular cost order. 40 It would not be appropriate to make no order as to costs on the ground that the liquidator's dealing with the proof of debt was reasonable, given that the appeal is a hearing de novo. The principle that costs follow the event does not depend at all on a decision as to whether the liquidator dealt with the proof reasonably or unreasonably. Where a liquidator rejects a proof, albeit acting reasonably, the successful plaintiff is usually entitled to his or her costs on the principle that costs follow the event. In such cases costs orders are made against liquidators personally, because they are the defendant to the proceedings, as is Mr Cvitanovic in this case. For the reasons I gave in Re Mendarma Pty Ltd (In Liq) (No. 2) [2007] NSWSC 99; (2007) 25 ACLC 193 and for the reasons in Silvia v Brodyn Pty Ltd [2007] NSWCA 55; (2007) 25 ACLC 385, where a liquidator has acted reasonably in rejecting a proof but the appeal has been allowed, the Court may, and usually will, protect the liquidator so that he does not have a personal exposure to costs which cannot be met out of the assets of the company. However, this is a solvent administration and no order has been sought along the lines made in Re Mendarma Pty Ltd (In Liq) (No. 2). 41 So far as the costs of the separate question are concerned, the note of Barrett J's order of 18 March 2009 is, "Costs of this motion will be reserved. They will be dealt with once the final determination has been made." Rule 42.7 provides that unless the Court otherwise orders, the costs of any application in any proceedings, including costs that are reserved, are to be paid and otherwise dealt with in the same way as the general costs of the proceedings. The note of the order made by Barrett J does not suggest that his Honour contemplated that any contrary order should be made in respect of the costs of that separate application, which were reserved. Had his Honour been persuaded that the defendant should have his costs of the application because he was successful on it, it could be expected that a costs order would have then been made. That application was but part of the entire proceeding and should follow the general costs order. 42 For these reasons, costs should simply follow the event and I order that the defendant pay the plaintiffs' costs. 43 The exhibits may be returned after 28 days. ****** 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.