Chameleon Partners Limited v Babylon Enterprises Limited - Reference No. MVD 195/13 (Auckland) [2014] NZMVDT 6 (23 January 2014)

Last Updated: 18 March 2014

UNDER APPEAL

Decision No:AK 5/2014
Reference No. MVD 195/13

IN THE MATTER of the Motor Vehicle Sales Act 2003

AND

IN THE MATTER of a dispute

BETWEEN CHAMELEON PARTNERS LIMITED

Purchaser

AND BABYLON ENTERPRISES LIMITED

Trader

BEFORE THE MOTOR VEHICLE DISPUTES TRIBUNAL

Mr C H Cornwell, Barrister & Solicitor, Adjudicator
Mr G Middleton, Assessor

HEARING at Auckland on 20 January 2014

APPEARANCES

Mr N Craig, director of the purchaser

Mr S Shattky, witness for the purchaser
Mr A Ramadan, director of the trader
Mr R Hanodi, witness for the trader

DECISION

Background

[1] On 19 December 2012 Chameleon Partners Limited (“the purchaser”) agreed to buy a 2003 BMW 745i registration GRH30 (“the vehicle”) from Babylon Enterprises Limited (“the trader”) for $21,750. The trader supplied the vehicle to the purchaser on 21 December 2012. The purchaser rejected it on 20 May 2013. The purchaser says that the vehicle’s engine has a build-up of sludge which requires the engine to be stripped and cleaned. The cost of doing that would be several thousand dollars and even then the success of the work could not be guaranteed.
[2] The trader says in defence of the purchaser’s claim first, that the vehicle has been driven 13,000kms by the purchaser’s employee Mr Shattky in the six months he used it and the vehicle was ten years old and had 100,000kms on its odometer when it was sold to the purchaser. Second, that the purchaser has not prosecuted its claim diligently; the purchaser did not file its claim until 11 November 2013 after advising the trader it intended to do so at the end of June 2013. Third, the purchaser has refused the trader’s request on 20 June 2013 to have the vehicle independently inspected. Finally, the trader says it has done everything reasonably expected of it to have the vehicle repaired. It accordingly says the purchaser is not entitled to reject the vehicle.

[3] Pursuant to clause 10 of Schedule 1 of the Motor Vehicle Sales Act 2003 the Tribunal has appointed Mr Middleton as expert assessor to assist in the determination of the complaint. Mr Middleton took the oath required by clause 10(2) of Schedule 1 to that Act. As an assessor Mr Middleton assisted the adjudicator but the application was determined by the adjudicator alone.

Issues
[4] The following issues require consideration:
[a] Whether the vehicle sold to the purchaser was of acceptable quality?
[b] If it was not, is the failure of substantial character?
[c] Whether the purchaser is entitled to reject the vehicle?

Issue [a]: Whether the vehicle sold to the purchaser was of acceptable quality?

Relevant law

[5] Section 6 of the Consumer Guarantees Act 1993 (“the Act”) imposes on a supplier and the manufacturer of consumer goods "a guarantee that the goods are of acceptable quality." Section 2 of the Act defines "goods" as including "vehicles.”

[6] The expression "acceptable quality" is defined in s 7 of the Act as follows:
“7 Meaning of acceptable quality
(1) For the purposes of section 6, goods are of acceptable quality if they are as–
(a) fit for all the purposes for which goods of the type in question are commonly
supplied; and
(b ) acceptable in appearance and finish; and
(c) free from minor defects: and
(d) safe; and
(e ) durable, ¾
as a reasonable consumer fully acquainted with the state and condition of the
goods, including any hidden defects, would regard as acceptable, having
regard to ¾
(f) the nature of the goods:
(g ) the price (where relevant):
(h) any statements made about the goods on any packaging or label on the
goods:
(i) any representation made about the goods by the supplier or the
manufacturer
(j) all other relevant circumstances of the supply of the goods.

(2) Where any defects in goods have been specifically drawn to the consumer’s
attention before he or she agreed to the supply, then notwithstanding that a
reasonable consumer may not have regarded the goods as acceptable with
those defects, the goods will not fail to comply with the guarantee as to
acceptable quality by reason only of those defects.

(3) Where goods are displayed for sale or hire, the defects that are to be treated
as having been specifically drawn to the consumer’s attention for the purposes
of subsection (2) of this section are those disclosed on a written notice
displayed with the goods.

(4) Goods will not fail to comply with the guarantee of acceptable quality if—
(a) The goods have been used in a manner, or to an extent which is
inconsistent with the manner or extent of use that a reasonable consumer
would expect to obtain from the goods; and
(b) The goods would have complied with the guarantee of acceptable quality if
they had not been used in that manner or to that extent.

(5) A reference in subsections (2) and (3) of this section to a defect means any
failure of the goods to comply with the guarantee of acceptable quality.”

[7] In considering whether or not goods meet the guarantee of acceptable quality in s6 of the Act, the Tribunal must consider the quality elements as set out in s7(1)(a) to (e) of the Act as modified by the factors set out in s7(1)(f) to (j) from the perspective of a “reasonable consumer”. The test is an objective one; it is not a view of those factors from the purchaser’s subjective perspective.

[8] In Stephens v Chevron Motor Court Limited [1996] DCR1, the District Court held that the correct approach to the Act was first to consider whether the vehicle was of “acceptable quality”. If the vehicle was not of acceptable quality, the next point to consider was whether the purchaser required the trader to remedy any faults within a reasonable time in accordance with s19 of the Act. If the failure to comply with the guarantee of acceptable quality is of a “substantial character” within the meaning of s21, or if the faults cannot be remedied, the Tribunal is directed to ask whether the purchaser exercised its right to reject the vehicle within a reasonable time.

Application of law to facts

[9] The purchaser agreed to buy the vehicle on 19 December 2012 for $21,750 intending to transfer it to its employee, Mr Shattky, as a bonus. The purchaser did not have the vehicle inspected by a mechanic before it agreed to buy it. The vehicle is a Japanese imported ten year old BMW 745i with 100,000kms on its odometer. Mr Craig, the purchaser’s director merely test drove it a few kilometres. There was no evidence produced to the Tribunal to show that the purchaser had held itself out as acquiring the vehicle for the purpose of its business or that the parties had agreed to exclude the provisions of the Act.
[10] The trader had its repairer, Prestige Motors Ltd change the engine oil and oil filter, replaced a damaged radiator cap and re-gassed the vehicle’s air conditioning system on 21 December 2012 before it supplied the vehicle to the purchaser. Prestige Motors’ invoice records the vehicle’s odometer as 100,255kms on 21 December 2012.

[11] After receiving the vehicle Mr Shattky used it over the Christmas New Year period to drive to Napier and Wellington. He says he first noticed the vehicle was blowing excessive exhaust smoke and would lose power on acceleration as he was driving back to Auckland during January 2013. He contacted the trader and arranged to take the vehicle back to Prestige Motors on 31 January. On 31 January Prestige Motors replaced the vehicle’s PCV valve and two vent pipes as well as a window lifter at a total cost of $1,428.31. The odometer was recorded on their invoice as 106,365kms indicating that Mr Shattky had driven 6,110kms in the vehicle in the six week period from 21 December 2012 to 31 January 2013.

[12] The vehicle continued to blow excessive exhaust smoke after it was returned to the purchaser. It was returned to the trader on 23 February in the expectation that a repairer on the North Shore would investigate and rectify the cause of the excessive smoke. Instead the trader took the vehicle back to Prestige Motors who on 28 February 2013 invoiced the trader $2,600 for replacing the valve stem seals, the rocker cover gaskets, the timing cover gaskets, the vanus seal, changing and flushing the oil, replacing the oil filter, coolant, power steering oil and air conditioning gas. Prestige Motors’ invoice shows they replaced the breather hose. Significantly, Prestige Motors wrote on their invoice:
“Smoke engine, check engine found the breather vale (sic) and breather hose leake (sic). Replace breather hose and flush engine oil and replace new oil and filer (sic). Afrter (sic) week smake (sic) comes again check found valve stem seal leak. Replace seal and teased (sic) OK smoke found while drive.
“Need to change every 10,000km engine oil with engine flush there are (sic) too much carbon in engine.” [emphasis added]

[13] Mr Shattky says the vehicle continued to blow excessive smoke after it was received from Prestige Motors prompting Mr Craig to send an email on 20 March to the trader saying that the lack of any really meaningful action to address the vehicle’s problems was unacceptable. Mr Craig’s email offered the trader two options: first, either the purchaser would reject the vehicle and return it for a full refund of the purchase price or a replacement vehicle of the purchaser’s choice or, second, the vehicle be sent immediately to one of either Team McMillan BMW, Jerry Clayton BMW or BM Workshop to be repaired. Mr Craig’s email asked the trader to let him know by the end of business on 20 March which of the two options the trader wanted to proceed with. Mr Ramadan, the trader’s managing director replied on 22 March by email to the purchaser asking it to take the vehicle back to Prestige Motors to fix the problem again.

[14] The purchaser did not take the vehicle back to Prestige Motors but instead Mr Shattky took it on 17 April to BM Workshop who recorded the odometer as 111,550kms. BM Workshop carried out an oil service and replaced the oil filter, removed and replaced the front and rear brake pads, rotors and sensors and replaced the air filter and leaking coolant hoses. Their invoice was $2,986.26. It contains the following additional list of the vehicle’s faults:
“ADVISE
castor bushs worn/split knocking on road=$750.20 +GST
Both arms replaced [superseded]
Spark plugs oil contaminated and coated in carbon build up
And have recorded misfires due to build up
Spark plugs = $360.00 +GST
Valve stam (sic) seals=$4000.00 +GST
Rebuild vacumn (sic) pump= $190.00+GST
Alternator bracket gasket leaking=$450.00+GST
Bonnet stays missing=$250.00+GST”

[15] On 19 April 2013 Mr Craig sent an email to Mr Ramadan informing him that the problem with the vehicle blowing large amounts of smoke, losing power and misfiring was continuing with the vehicle doing it more regularly. He sent a copy of the quote from BM Workshop with his email to Mr Ramadan and asked Mr Ramadan what he would like to do about it. Mr Ramadan replied in an email dated 22 April sending the purchaser copies of the invoices from Prestige Motors for work done on the vehicle paid by the trader and told Mr Craig that “I spoke to Udith [of Prestige Motors] and hes taking responsibility to fix the job hes done”. Mr Craig sent an email on 23 April to Mr Ramadan asking him what this meant and whether Prestige Motors were going to do the valve stem job. On 26 April Mr Ramadan replied:
“Udith told me he needs the car so he can get it diganosed (sic) and something he needs change or fix in the “vannus Valve” according to him he did do the valve stem seal and use 100 genuine part and if I doubt that he has not done it, hes willing to take it to BMW New market and get a report done and if the valve stem job has not been done hes willing to refund my money that I paid him $2800.”

[16] On 7 May 2013 the purchaser took the vehicle to Team McMillan BMW for an assessment. Mr Bright the Assistant Service Manager of Team McMillan states in a letter dated 8 July 2013 to Mr Shattky:
“Re Registration GRH30 BMW 745i
I can confirm BMW 745i came into Team McMillan on the 7th May 2013. It was booked in for check and report on blue smoke on motorway after driving around town, engine loses power and also a fluttering noise from the engine.

Technician reported that the vanos solenoids were blocked with oil sludge. This is consistent with a vehicle that has not been serviced in accordance with the manufacturers recommendations with the correct synthetic oil.

To remedy this in the first instance we would carry out an oil flush, removal and cleaning of the vanos units and the correct oil being filled. If this fails and the fault returns, we would recommend a complete strip and rebuild, cleaning out all the oil galleries or a replacement engine.”

[17] On 20 May 2013 Mr Craig sent Mr Ramadan an email reporting on the work done by Team McMillan and enclosing their invoice for $1,525.77 and notes. The invoice records the vehicle’s odometer as 112,181km. Mr Craig described the work done by McMillans and said that after the vehicle was returned it initially drove quite well despite some sporadic blowing of engine smoke but that since 17 May it was blowing engine smoke almost continuously when under acceleration or load as well as losing power and pre-igniting that was evident prior to Team McMillan’s diagnostic and testing work. Mr Craig’s email stated the purchaser was not prepared to engage in a series of stripping down engines or the likelihood of a complete engine replacement and that the purchaser wanted to reject the vehicle and requested the trader to take the vehicle back and “refund the purchase price forthwith”. The trader did not respond to the letter of rejection and so on 28 May 2013 the purchaser sent the trader another copy of the email of 20 May and asked the trader to let it know what it wanted done with the email sent on 20 May. The trader still did not respond.

[18] On 14 June 2013 ASCO Agmen-Smith & Co lawyers for the purchaser sent the trader a letter claiming their client was rejecting the vehicle in return for the full purchase price. Their letter also notified the trader that if the trader did not accept the purchasers rejection and return the purchase price within ten days from the date of the letter their instructions were to take legal action to recover the $1,525.77 paid to Team McMillan, the costs of storing the vehicle, the cost of leasing a replacement vehicle and other associated costs as well as their legal costs until the matter was resolved. Subsequent cross correspondence took place between the parties solicitors which did not resolve the matter. On 11 November 2013 the purchaser filed an application with the Tribunal a copy of which was sent to the trader by the Tribunal with a standard letter asking the trader to discuss the application with the purchaser and to make a written report to the Tribunal on the outcome of those discussions in terms of clause 5 of the Schedule to the Motor Vehicle Sales Act 2003. Mr Ramadan confirmed in answer to a question from the Tribunal that the trader had not attempted to discuss the purchaser’s application with the purchaser after receiving the application and the Tribunal’s written request to do so.

[19] The Tribunal considers that there is strong evidence to show that, from shortly after the vehicle was supplied to the purchaser it blew engine smoke, lost power and started to misfire. Mr Shattky, the driver of the vehicle was, unfortunately, an unimpressive witness. He appeared to be incapable of remembering very much. He said he first recalled the vehicle’s exhaust smoking in January 2013 but then said that he thought he might have contacted the trader earlier. He was vague as to the number of times and dates he had returned the vehicle to the trader and its repairer Prestige Motors even when it must have started to become evident to him that the vehicle had problems and he should have been recording the events. The Tribunal placed far more weight on Mr Craig’s evidence for the purchaser, the exchange of emails between Mr Craig and the trader, and also on the content of the invoices from the trader’s mechanics Prestige Motors Ltd, and the purchaser’s mechanics BM Workshop and Team McMillan BMW.

[20] The evidence shows first, that Prestige Motors Ltd serviced the vehicle for the trader before it was supplied on 21 December 2012. On 31 January 2013 Prestige Motors replaced the PCV valve after the purchaser had notified the trader the vehicle was blowing excessive engine smoke and losing power. Finally Prestige Motors disclosed in their invoice of 28 February 2013 after replacing the value stem seals, flushing the engine oil and the oil filter for the second time within two months and 7,000kms that there was a :
“Need to change every 10,000km engine oil with engine flush there are (sic) too much carbon in engine.” The Tribunal considers that advice is strong evidence that by 28 February 2013, after the trader had spent a total of $4,603.31 in replacing the valve stem seals, servicing and repairing minor faults with the vehicle that the trader’s mechanics were informing it that the vehicle’s engine contained too much carbon and that the vehicle’s engine was in such a state that it would need an engine flush every 10,000km.

[21] Second, the purchaser, after failing to get any satisfaction from the trader to the continual engine smoking and loss of power issues with the vehicle took it to BM Motors on 17 April 2013. They reported that, only 4,350kms after Prestige Motors had replaced the valve stem seals, that the valve stem seals needed replacing as did the spark plugs because they were “oil contaminated and coated in carbon build up and have recorded misfires due to build up”.

[22] Third, the Tribunal has relied on the evidence produced by the purchaser from Team McMillan to whom the vehicle was taken on 7 May 2013. Team McMillan reported in a letter dated 8 July 2013 that they had diagnosed the fault causing the engine to blow smoke, lose power and the engine to “flutter” as due to the vanos solenoids being blocked with oil sludge consistent with the vehicle not having been serviced with the correct synthetic oil. After the purchaser spent $1,525.77 having Team McMillan BMW try and fix the fault with an oil flush, cleaning the vanos units and replacing the oil the purchaser discovered that the cleaning had not been successful in solving the engine’s underlying fault; it was still clogged with oil sludge and now needs a complete engine strip and rebuild or a new engine.

[23] Team McMillan have now confirmed in an undated letter produced to the Tribunal that on 17 January 2014 one of their technicians checked to see if the remedy outlined in their letter of 8 July 2013 was successful and it appeared that the core issue of sludge in the engine remains and the oil flush done on 7 May 2013 was unsuccessful. The vehicle continues to blow engine smoke under load. They have advised that they believe the oil separators in the rocker covers are blocked causing the engine breather system to allow oil to flow into the intake system and that the rocker covers will need to be replaced in order to remove the engine sludge from that area. They have given the purchaser an estimate of $4,967.66 for that work but they say they cannot guarantee that doing it will fix the engine sludge issue. The cost to strip the engine to assess the sludge is, they estimate, $2,025 +GST and only after doing that could they fully estimate the cost of repair.

[24] The Tribunal does not accept the trader’s submission that because the purchaser has used the vehicle to travel 11,926kms it is not entitled to regard the vehicle as having failed to comply with the guarantee of acceptable quality. This is because the Tribunal considers that a reasonable consumer paying $21,750 for a ten year old BMW 745i with 100,255kms on its odometer would expect such a vehicle to travel far more than 12,000kms without needing its engine fully stripped and cleaned or replaced at a total cost of $7,296.40 as estimated by Team McMillan .

[25] The Tribunal considers, on the basis of the evidence contained in the technical reports on the vehicle and invoices for work done on the vehicle over the period 21 December 2012 to 9 May 2013 described in paragraphs 20 to 23 (above) which the Tribunal notes in passing has cost the parties a total of $9,115.34 equivalent to 42% of the cost price of the vehicle that first, the vehicle engine was so badly affected by the presence of oil sludge at the time of sale that it cannot be considered to be fit for the purpose for which it was supplied. It is also, because of the presence of the oil sludge in the engine neither free from defect nor has it been as durable as a reasonable consumer fully acquainted with the state and condition of the vehicle would regard as acceptable having regard to the make, age, mileage and price paid for it.

Conclusion on issue [a]

[26] The vehicle did not comply with the guarantee of acceptable quality in s6 of the Act first, because it is not fit for the purpose for which it was supplied, is not free from defect and has not been as durable as a reasonable consumer would expect of such a vehicle.

Issue [b]: Is the failure of substantial character?

Relevant law

[27] Section 21 of the Act defines the circumstances in which a failure to comply with the guarantee as to acceptable quality will be regarded as being a failure of a substantial character for the purposes of s18(3) of the Act. Section 21 of the Act provides as follows:

“ 21 Failure of substantial character
For the purposes of section 18(3), a failure to comply with a guarantee is of a substantial character in any case where ¾
(a) the goods would not have been acquired by a reasonable consumer fully acquainted with the nature and extent of the failure; or

(b) the goods depart in 1 or more significant respects from the description by which they were supplied or, where they were supplied by reference to a sample or demonstration model, from the sample or demonstration model; or

(c) the goods are substantially unfit for a purpose for which goods of the type in question are commonly supplied or, where section 8(1) applies, the goods are unfit for a particular purpose made known to the supplier or represented by the supplier to be a purpose for which the goods would be fit, and the goods cannot easily and within a reasonable time be remedied to make them fit for such purpose; or

(d) the goods are not of acceptable quality within the meaning of section 7

because they are unsafe."

Application of law to facts

[28] The Tribunal has decided that the engine’s fault is one of substantial character, on the basis of the advice from Team McMillan that the cost of removing the oil sludge from the rocker cover area will be $4,967.66, equivalent to 23% of the cost price of the vehicle and that even after incurring such expense, the engine sludge issue may not be fixed. The Tribunal thinks it very unlikely that this vehicle would have been acquired by a reasonable consumer fully acquainted with the nature and extent of the failure.

Conclusion on issue [b]:

[29] The Tribunal concludes that the failure of the vehicle’s engine to comply with the guarantee of acceptable quality is of a substantial character.

Issue [c]: Is the purchaser entitled to reject the vehicle?

Relevant law

[30] Section 18(3) of the Act sets out the remedies available to a consumer where a failure is one of a substantial character. It provides:
“(3) Where the failure cannot be remedied or is of a substantial character within the meaning of section 21, the consumer may-
(a) subject to section 20, reject the goods in accordance with section 22; or
(b) obtain from the supplier damages in compensation for any reduction in value of the goods below the price paid or payable by the consumer for the goods.”

Application of law to facts

[31] Although the trader claimed that on 20 June 2013 it had asked the purchaser to have the vehicle independently inspected the Tribunal is satisfied that the purchaser, having already notified the trader in its email of 20 May 2013 and in its solicitors letter to the trader sent on 14 June 2013 that the purchaser was rejecting the vehicle, had no obligation to comply with such request.

[32] The purchaser exercised its right to reject the vehicle in writing and sent notice of it to the trader on 20 May in an email setting out the grounds for its rejection. The purchaser’s solicitors also sent the trader written notice of rejection supported by reasons in its letter of 14 June 2013. The purchaser thus complied with s22(1) of the Act. Rejection took place on 20 May 2013 within five months of the vehicle being supplied to the purchaser on 21 December 2012 which the Tribunal considers to be within a reasonable time as defined in s20(2) of the Act. The fact that the purchaser did not file its application with the Tribunal until 11 November 2013 is irrelevant.
Conclusion on issue [c]

[33] The purchaser is entitled to reject the vehicle. The Tribunal will therefore uphold the purchaser’s rejection of the vehicle with effect from 20 May 2013. It will order the trader to refund the purchaser with its full purchase price of $21,750, and also the reasonably foreseeable consequential loss or damage the purchaser has suffered in accordance with s18(4) of the Act as follows:

a) the cost of the Team McMillan invoice dated 9 May 2013 of $1,525.77;
b) storage charges from 31 July 2013 to 23 January 2014 of $185.25;
c) the reasonable cost of legal advice obtained by the purchaser of $1,500.00.
The total sum payable by the trader to the purchaser is therefore $24,961.02.

[34] The vehicle cannot be transported back to the trader without significant cost to the purchaser so the trader shall collect the vehicle at its expense from the purchaser’s storage site as soon as the trader has made payment to the purchaser of the sum of $24,961.02.

Costs

[35] The Tribunal has limited power to make an award of costs to or against a party to any proceedings under clause 14(1) of Schedule 1 to the Motor Vehicle Sales Act 2003. The relevant provision is as follows:

“14 Disputes Tribunal may award costs in certain circumstances
(1)The Disputes Tribunal may award costs to or against a party to any proceedings before it only if,-
(a) in the opinion of the Disputes Tribunal,-
(i) the proceedings are frivolous or vexatious or ought not to have been brought:
(ii) the matter ought reasonably to have been settled before proceeding to a hearing but that the party against whom an award of costs is to be made refused, without reasonable excuse, to take part in the discussions referred to in clause 5(1)(b) or acted in a contemptuous or improper manner during those discussions; or
(b) any party after receiving notice of a hearing, fails to attend the hearing without good cause.

(2) In any case to which subclause (1) applies, the Disputes Tribunal may order a party to pay---
(a) to the Crown all, or any part of either or both of the following:

(i) the reasonable costs of the Disputes Tribunal hearing:
(ii) the fees and expenses of any witness that have been paid or are payable by the Crown; or

(b) to another party all, or any part of the reasonable costs of that other party in connection with the proceedings.”

[36] The Tribunal considers that the matter ought reasonably to have been settled before proceeding to a hearing but the trader refused to take part in the discussions referred to in clause 5(1)(b) of the Schedule to the Motor Vehicle Sales Act 2003 The trader will therefore be ordered to pay the reasonable costs of the Tribunal’s hearing of $500.

Orders

1. The purchaser’s rejection of the vehicle is upheld with effect from 20 May 2013.

2. The trader shall pay the purchaser $24,961.02 by Bank Cheque within ten days of the date of this order.

3. As soon as the trader has paid the purchaser the sum of $24,961.02 the trader shall arrange to collect the vehicle, at its expense, from Storage King Grey Lynn at a time to be arranged with the purchaser.

4. The trader shall pay to the Crown the sum of $500 within 21 days of the date of this order by payment to the Auckland District Court, Albert Street, Auckland.

DATED this 23 January 2014

C.H Cornwell
Adjudicator