Remedios, J.N. v Kentucky Homes Pty Ltd

I ,

C A T C H W O R D S

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 Nancv Remedios

v. Kentuckv Homes Pty. Limited

NSW G361 of 1986

PINCUS J.

BRISBANE

11 JULY 1986

IN THE FEDERAL COURT OF AUSTRALIA

NEW SOUTH W E S

D:ISTRICT REGISTRY

N.S.W. G361 of 1985

4 GENERAL DIVISION

BETlJB2N:

JENNIFE3 NANCY REMEDIOS

Applicant

-	AND: KENTUCKY HOMES PTY LIMITED

Respondent

m: KENTUCKY HOMES PTY LIMITED

Cross Claimant

JENNIFER NANCY REMEDIOS

First Cross

Respondent

m:	SPUNTEN PTY LIMITED

Second Cross

Respondent

4 MINUTES OF ORDER

JUDGE MAKING

PINCUS

ORDER:

;

DATE OF ORDER:	1986	JULY	11
WHERE MADE:	BRISBANE
THE COURT ORDERS THAT:

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

of the Federal Court Rules.

*! ,	.
5

IN TH!Z FEDERAL COURT OF AUSTRALIA

)

NEW SOUTH W E S

DXSTRICT REGISTRY

N.S.W. G361 of 1985

GENERAL DIVISION

BFPWEEN:

JENNIFER NANCY REMEDIOS

Applicant

m: KENTUCKY HOMES PTY LIMITED

Respondent

m: KENTUCKY HOMES PTY LIMIm

Cross Claimant

m: JENNIFER NANCY REMEDIOS

First Cross

Respondent

m: SPUNTEN PTP 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

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

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

of Killcare, near Sydney, and arranged to meet Mr. Sawyer on the

her

wish.

She

had

bought

some

land

the	respondent,

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

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 weathertisht 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

log is carefully machined to enable a timber strip

and

special

sealant

inserted

weathertight seal between one log and the next. 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

the

factory

ensure

apermanent

satisfactory

seal.

Your

builders

are handling

whole modules, not 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

liability under

5 . 5 2 of the Trade

Practlces 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

"This trade practices thing

I really was not aware

of until

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

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.

A l s o ,

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

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

evidence

durmg an inspection

site,

necessary to have access to coach screws

which are at the bottom

of each panel frame. One removes

a bottom "infill" log from

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-thlckness walls without a cavity or lining

I I .

behind them.

It is a critical feature of the system that no such

lining is necessary, and

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 half-log has

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

machined slot. There is supposed to be

piece of a synthetic

1 -

compressible material, neoprene, in the slot,

so that tightening

the panel compresses the neoprene.

If, for some reason, e.g.

shrinkage of the timher, 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

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 eficiencies

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.

particular, it was said that the coach screws had been covered-up,

whereas they should have been left exposed for easy access. There

was

change

front

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

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."

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 ensurins a permanent satisfactory seal in the factory;	a best,
there is a hope of such a seal.

Mr.

Biscoe, in his able argument on behalf of the

respondent, laid emphasis upon the headlng 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.

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

r ferred,

his

oral

written

submissions,

the

principle

that

enable

recovery

the

statements complained of must relate to existing facts. He argued

0 .

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

breach of 5.52

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.

nether or not the

panels supplied to Mrs. Remedios were especially bad, the brochure

was misleading because it gave

an erroneous impression of

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

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 misleadlng

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 5.52

does not depend upon finding that the

I .

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

I were

satisfied of the

correctness of the premise,

I would not adopt the conclusion; the

brochure was misleading mainly because it gave quite

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

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

10.

Mr. Kormos, described as the chief designerlconstruction 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

...

daylight

visible

through

these

gaps.

However,

extreme

weather

conditions,

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.

do not, however, accept his

suggestion that it would be a "simple procedure" to rectify the

problem; Mr. Napler

admitted,

indeed

contended,

that

"adjustment" of the logs would be extremely difficult.

The case put forward on behalf of the respondent was

that

panels

delivered

were

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.

11.

Napier was that this process of expansion strained the nuts and

the frame of the panels,

o 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	I
in some instances omitted altogether, that has not been the cause

of the trouble. Nor did the respondent initially regard it

12.

such; the applicant was recommended to apply numerous coats of

product intended to prevent water penetration, which she did.

to the vertical flashing, its absence has not been the cause of

water penetration because of the use of the silicon compound

mentioned above.

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

finding

against

has

been

made,

still

there

was

intervening cause, namely

a breach of contract on the part

of the

builder, relieving

respondent's case was that the builder's contract required it to

tighten up the panels before installation and that, had it done

the

respondent

all

liability.

The

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

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

13.

by no means satisfied that the notices were in such terms

a 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

j	sub-heading “Installation”, covering, among others, the following directions:

“1.	Refer to the engineer’s computations and construction

manual prior to commencement of work.

2.	Strictly adhere to the ‘important notice’ as posted	on	I
I .
panels.

3 .

Generally

ensure

that

all panels

are

tight

and

well-fitting prior to installation.”

14.

Neither the engineer's computations nor the construction

manual referred

to the shrinkage problem or

how it should

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

dellvery gaps of more than

a stipulated size were observable

between the half-logs then the tightening process should be gone

through.

There

were

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

breach

of contract.

But

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

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

the

proceedings, was not

a party

to the hearing before me. It

enough to say that

I am satisfied that there is a sufficient

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,

s it did, to the applicant's having

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.

not accept, however, that there is any significant connection

I I

between

the

inadequacy

the

bracing

and

the

problem

I j

penetration of wind and water through the gaps between the	I /
!
half-logs.	8 -
I

I would add that the respondent argued that all the gaps

presently observable must have been present before the house was

built;

I thlnk 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

l'...

a plaintiff is entitled to recover as damages

sum representing the prejudice or disadvantage

has suffered in consequence of his altering

his

position under the inducement of the fraudulent

misrepresentations made by the defendant."

16.

That proposition was stated by Dixon

in Toteff v.

Antonas (1952) 07 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

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 in a

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 lncorporated 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

...

'I 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 all" such

cases as this were followed,

I should award the difference between

the value of the goods delivered and their price. It seems clear,

17.

however, that that would be contrary to the basic principle set

out in Toteff v. Antonas (above). Another possibility, not being

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;

18.

one of Mr. Bell-Chambers, called for the applicant and the other

of Mr. Frew, called for the respondent.

,Speaking generally, 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

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 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

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	I .
I

respect in which

I do not do so is that he priced the work on the

basls that the cladding would not run all the way up the building,

on the two-storey section, without a break;

he contemplated

"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.

19.

There is also

a claim by the respondent for $2,892.50

unpaid under the contract.

That was not disputed except,

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.

[1986] FCA 304

11 Jul 1986