Wyman-Gordon Ltd v. Proclad International Ltd [2005] ScotCS CSOH_177 (29 December 2005)
The pursuers specialize in, among other areas, the extrusion of pipes. The defenders are engaged in the design of pipeline components, and supply and manufacture pipes for such pipelines. They have developed a patented process for the manufacture of clad co-extruded pipe; this is known as Proclad Wex pipe (weld extruded pipe). The outside part of Wex pipe is manufactured from carbon steel, as in an ordinary extruded pipe, but bonded to the inside surface of the carbon steel is a cladding material known as Inconel. The pipe used in oil and gas pipelines tends to corrode, and the advantage of the process is that it enables an extruded pipe to be produced with cladding on the inside surface to protect against such corrosion. The pursuers also manufacture ordinary extruded pipe, which is generally known as Ex pipe. This is manufactured from carbon steel, and does not have any cladding on the inside surface.
[2] In early February 2002 the defenders approached the pursuers in connection with an order that they had obtained from an American company known as FMC for the supply of pipes for an oil installation in the Gulf of Mexico. The project was originally known as Crazy Horse but, apparently for reasons of political correctness, the name was changed to Project Thunderhorse. The defenders' intention was to supply FMC with both Wex and Ex pipes of various diameters.
[3] Wex pipes had been used in one previous project, in Saudi Arabia. The procedure followed in their manufacture was, in summary, as follows. The pursuers ordered round steel bars, known as blockers, from an outside supplier. Each blocker was compressed into shape by the pursuers and then pierced, in readiness for the process whereby the blocker was extruded into a pipe. The pierced blocker was machined by the pursuers and then supplied to the defenders, who applied the cladding process, involving Inconel, to the inside surface. The blocker was then returned to the pursuers, who fed it through the extrusion press, producing the clad pipe. This was subject to a number of further treatments before the sections of pipe were ready for use, at which point they were supplied to FMC. I emphasize that the above is merely a summary; the processes involved are extremely complex and technical. Those processes were the subject of elaborate manufacturing procedure specifications for each category of pipe. These were produced only after lengthy correspondence and meetings between the parties; representatives of FMC were involved in those discussions, because the pipes had ultimately to satisfy their requirements. Much of the discussion related to the acceptable tolerances for the pipe, as the extrusion process places limits on the number of different tolerances that can be achieved. Agreement on the tolerances required by FMC was finally concluded on 30 September 2002, and the agreed tolerances are set out in a fax sent by the pursuers to the defenders on that date.
[4] The pursuers' initial quotation for the supply of certain sizes of Wex pipe was dated 6 February 2002. During the ensuing months a number of other quotations, for various sizes of Wex and Ex pipe, followed. Those quotations were accepted by purchase orders from the defenders, which were for specific quantities of each category of pipe. The initial purchase orders were for small quantities for qualification testing, to ensure that the pipe was capable of meeting the requirements of FMC and the ultimate customer for the installation, BP. Later purchase orders were for quantities of pipe for use in the installation. Following supply of the pipe invoices were rendered by the pursuers, and the defenders paid substantial numbers of those invoices.
[5] As the project proceeded it became apparent that significant numbers of the Wex pipes were failing to meet the tolerances agreed on 30 September 2002. In it also became apparent that the cross-section of the pipe on occasions developed eccentricities, or deviations from a rounded shape in either the base material or the cladding. In addition, channels or grooves became apparent on the inside surfaces of the pipes. Discussions took place between the parties about these matters. The pursuers concluded that it was not possible to meet FMC's tolerances in respect of the Wex pipes or to guarantee perfect roundness because of inherent limitations in the manufacturing process. They contended that none of the problems identified in the pipes affected their suitability for use in the Thunderhorse installation. They further contended that the grooves were caused by scale on the pipes that resulted from processes carried out by the defenders. Nevertheless, in March 2004 the defenders informed the pursuers that they would not make payment of any further invoices because they considered the pursuers to be in breach of contract in failing to meet FMC's tolerances.
[6] At that time a number of invoices were outstanding, for both Wex and Ex pipes. The pursuers raised an action for payment of the amount of those invoices, which related to both Wex and Ex pipes. The sole outstanding invoice in respect of the Wex pipes was for the sum of £54,050, and the four outstanding invoices relating to Ex pipes amounted to the sum of £145,777.55 in total. In addition, the pursuers aver that the defenders were in breach of contract in rejecting the pipes supplied by the pursuers, and claim the sum of £332,183 by way of damages for breach of contract. In relation to the disconformities between the Wex pipes and the agreed tolerances, the pursuers aver that pipes that did not conform had, with only two exceptions, been accepted and paid for by the defenders. The pursuers aver that they relied on the defenders' conduct in accepting the pipes that did not conform to FMC's tolerances in continuing to make supplies of pipe. They accordingly aver that the defenders are personally barred from relying on the tolerances that had been agreed on 30 September 2002.
[7] The defenders lodged defences to the action in which they assert that the pursuers were in breach of contract in supplying goods that did not conform to the agreed tolerances and were otherwise disconform to contract. They have further lodged a counterclaim for losses that they claim to have sustained in consequence of the pursuers' alleged breaches of contract. This includes sums paid to the pursuers in respect of disconform pipe, and payments made for batches of pipe that failed to produce any usable pipe. Those losses are said to amount to £1,394,000.
[8] The pleadings were adjusted, and the adjustments raised the question of whether certain standard terms and conditions put forward by the defenders applied to the parties' contract. In due course I allowed a preliminary proof before answer on three questions: (i) the terms and conditions applicable to the parties' contract, and in particular whether the defenders' standard terms and conditions formed part of the contract; (ii) whether or not the defenders' conduct in accepting and making payment for extruded pipes that did not conform to the tolerances agreed on 30 September 2002 precluded the defenders from relying on those tolerances; and (iii) in relation to the counterclaim, to inquire into the effect of the acceptance of the pipes by the defenders and the defenders' payment for the pipes.
[9] When the proof took place, I heard six days of evidence, all from the pursuers, and adjourned the proof to a later date. At that point the pursuers made a motion for summary decree in respect of the sums due under the invoices for the Ex pipes. Their solicitor contended that the Ex pipes had been conform to contract, and the defenders did not argue otherwise. It followed that the sums due under the invoices for the Ex pipe were payable to the pursuers. The matter was not affected by the dispute between the parties, which related only to the Wex pipe. Consequently the defenders were not entitled to assert a right of retention in respect of the sums due for the Ex pipe. That could be clearly seen from the fact that separate orders were placed for the Ex pipe; thus the pursuers could have refused to supply further pipe at any time.
[10] Counsel for the defenders opposed the motion. He contended that, because the preliminary proof related specifically to the terms of the parties' contract, it was too early to determine whether the various different orders for pipes were related to one another or were independent. He further pointed out that the correspondence between the parties had referred to both Ex and Wex pipes. Consequently the court might ultimately conclude that the various quantities of pipe were supplied under a single contract. In that event there was a presumption that the obligations of the parties were interdependent, with the consequence that, if one party was in breach of contract, the other might withhold performance of its own obligations. In the present case, if the defenders were correct in asserting that the pursuers were in breach of contract, they were entitled to exercise a right of retention in respect of the sums due in respect of the Ex pipe.
[11] The legal principles that govern motions for summary decree are well established. In Mackays Stores Ltd. v City Wall (Holdings) Ltd., 1989 SLT 835, Lord McCluskey stated (at 836)
"The test I have to apply at this stage must be to ask myself if the question of law which is raised (the only question being one of law) admits of a clear and obvious answer in the pursuers' favour".
In P. & M. Sinclair v The Bamber Gray Partnership, 1987 SC 23, the defenders contended that they had entered into a contract as agents for an undisclosed but unidentified principal, and indicated that they were willing to make a case that the pursuers were aware of the principal's identity. Lord Prosser stated (at 206)
"Even with a closed record, I have come to the conclusion that neither side's pleadings clearly focus what the position was as to the pursuers' or the defenders' views as to who would be the parties to the contract. It appears to me that where that is so I cannot achieve the near certainty as to an absence of a defence which would justify granting summary decree. Indeed it appears to me quite probable that the circumstances when more fully pled, or when taken to proof, would reveal that there is a genuine issue as to whether the pursuers had an identifiable or identified principal in their minds".
It is clear from those statements of the law that the test that must be satisfied in a motion for summary decree sets a high standard. Any question of law must admit of "a clear and obvious answer", and when questions of fact are involved there must be "near certainty" as to the absence of a defence.
[12] In the present case I am of opinion that the pursuers have failed to meet that standard at this stage. The critical issue relates to the defence of retention that is advanced by the defenders. The defenders do not contend that the Ex pipe was defective in any way. They resist payment for the Ex pipe solely on the basis that the pursuers were in breach of contract in relation to the Wex pipe. For the defence of retention to be available, it is necessary that the two categories of pipe should have been supplied under a single contract; otherwise the principle of mutuality does not operate between the obligation to supply Wex pipe and the obligation to pay for Ex pipe: see Gloag, Contract, 595. Two other possibilities exist. The first is that the individual quantities of pipe specified in individual purchase orders were the subject of independent contracts. The second is that the various types of pipe supplied (Wex or Ex, and of various dimensions) were each the subject of independent contracts.
[13] 