Scottish Court of Session Decisions

OUTER HOUSE, COURT OF SESSION [2009] CSOH 98
CA151/04	OPINION OF LORD DRUMMOND YOUNG in the cause WYMAN-GORDON LIMITED Pursuers; against PROCLAD INTERNATIONAL LIMITED Defenders: NO 3 ­­­­­­­­­­­­­­­­­________________

Pursuers: Paterson, Solicitor; Tods Murray W.S.

Defenders: Robertson; Brodies LLP

3 July 2009

[1] Between May 2002 and March 2004 the parties entered into a series of contracts for the production of clad pipes, of a form known as Wex (weld extruded) pipes. The pipes were required by the defenders' customer, a company known as FMC, for use in an oil installation in the Gulf of Mexico known, ultimately, as Project Thunderhorse. The history of those contracts is set out in an earlier opinion in the present case, issued on 31 December 2007. The pipes were manufactured from carbon steel but on the inside surface of the steel a cladding material known as Inconel was bonded to the surface. The purpose of the cladding was to provide resistance to corrosion when oil or gas was fed through the pipe; the carbon steel was required, as in a normal pipe, to provide the appropriate degree of strength. The manufacturing process involved both the pursuers and the defenders. The pursuers were responsible for the extrusion of the pipes, that being an area in which they had particular expertise, and the defenders were responsible for the application of the Inconel cladding, that being done according to a process for which they held the patent. The manufacturing procedure, in summary, was that the pursuers obtained steel bars, known as blockers, which were compressed into shape and pierced through the middle at the pursuers' premises. The pursuers were responsible for calculating the dimensions of the blockers, the objective being to produce an extruded pipe of the desired diameter. The blockers were then delivered to the defenders, who applied the Inconel cladding to the inside surface. Thereafter the blockers were returned to the pursuers, who heated each blocker to a very high temperature and fed it into an extrusion press, which compressed and extended it in such a way as to form a pipe with carbon steel on the outside and Inconel on the inside. The pipes were then returned to the defenders for final treatment, including grinding where necessary.

[2] Pipes were manufactured according to the above process for some time, but in March 2004 the relationship between the parties broke down, in circumstances that are considered in detail in this opinion. Thereafter the pursuers raised the present proceedings in which they claim payment of a total of £199,827.55 as the unpaid price of goods supplied by them to the defenders and a further sum of £332,183 as damages for the defenders' breach of contract. The defenders claim that goods supplied to them by the pursuers were in breach of contract and that the pursuers are accordingly not entitled to payment. The defenders have advanced their own claim for breach of contract by the pursuers and have counterclaimed for payment of damages for such breach; the sum that is now concluded for in the counterclaim is £335,777.71 (that amount having been reduced following the issue of an earlier opinion). The action proceeded to a preliminary proof to determine whether the parties had entered into a single contract or a series of contracts and whether certain terms had been included in the parties' contract or contracts. Following that proof I decided that they entered into a series of individual contracts for the supply of specific quantities of Wex pipes. Under those contracts the pursuers warranted that the inside diameter and overall wall thickness of the pipes would meet certain dimensions and tolerances, those dimensions and tolerances being set out in e-mails of 30 September and 17 October 2002. The pursuers did not, however, agree to tolerance the clad thickness of the pipes, nor did they warrant that the pipes would be suitable for use by the defenders' ultimate customer, FMC.

[3] Following the issuing of the earlier opinion the parties made further adjustments to their pleadings in order to focus the remaining disputes between them. It was agreed that the court should allow a further preliminary proof before answer on certain specific issues. The first of these was whether an e-mail sent by the pursuers to the defenders on 4 March 2004 was a repudiation of the parties' contract and demonstrated the pursuers' intention not to perform fundamental contractual obligations to carry on extrusions; the alternative suggested by the pursuers was that that e-mail truly related only to clad thickness. The second issue was whether an e-mail sent by the defenders to the pursuers on 22 March 2004 amounted to confirmation by the defenders that they were accepting the earlier e-mail as a repudiation, or whether it was itself a repudiation of the parties' contract.

[4] I heard evidence on the background to those two e-mails. That evidence was important in setting the context in which the e-mails arise. Nevertheless, for reasons discussed below at paragraphs [20] and [21], the e-mails must be construed objectively, in the manner that they would be regarded by a reasonable recipient having the relevant background knowledge. For that reason evidence of the parties' intentions is not material, and evidence of the understanding of recipients of an e-mail is likewise of very limited use in determining the document's objective meaning. Consequently I have had regard to the evidence not to determine the parties' subjective opinions but in order to establish the factual background to the two critical e-mails. That background, so far as relevant, is as follows. I should note that, in summarizing the evidence of individual witnesses, I have confined the summary to those parts of the evidence that I consider relevant to the issues in the case.

[5] Initially most of the lengths of pipe supplied following extrusion by the pursuers were usable by the defenders to supply FMC, although certain sections had to be discarded because they did not satisfy the requirements of the defenders' contract with FMC. At that stage, however, FMC required short lengths of pipe for use in the manifolds where oil and gas were collected before being piped to the surface. Consequently it was possible to cut away unsatisfactory sections of pipe and to make use of the remaining lengths; this involved concessions from FMC. In later stages, however, longer lengths of 9m or more were required, and it became more important that the pipes extruded by the pursuers should be usable throughout most or all of their length. At this time three extrusion runs of pipe exhibited a variety of features which caused the defenders to reject them. On this matter the defenders led the evidence of Mr William Lawrie, their Quality Assurance Manager. I found Mr Lawrie to be a straightforward and careful witness, and I accept his evidence on the defenders' understanding of the state of the pipes. He began by describing the testing carried out by the defenders' Non-destructive Tests Department, which he described as a specialized department that carried out tests at all stages of a manufacturing process. When the blockers were supplied by the pursuers to the defenders, the defenders used a liquid penetrant test on the surface prior to cladding to ensure that the surface was in good condition. After the clad had been applied an ultrasonic test was used to ensure the integrity of the bond between the Inconel cladding and the carbon steel. That bond was a metallurgical bond, and the adhesion of the cladding to the steel was vital to the Wex process. Mr Lawrie stated that if there had been any underlying problem with the bond after the cladding had been applied it would certainly show up in the ultrasonic testing by the defenders. After extrusion by the pursuers a further ultrasonic test was carried out, again to ensure the integrity of the bond. At the same time a liquid penetrant test was used in the bore to ensure that there were no defects breaking the surface of the cladding. Mr Lawrie stated that all blockers supplied by the defenders to the pursuers for extrusion had been fully tested and the bonds were intact.

[6] Mr Lawrie then referred to the pipes in the last three runs, which he said had exhibited a number of defects; these are specified in the reject notes lodged in process (pages 326-333 and 335-341). In relation to the first of these reject notes (page 326), Mr Lawrie stated that the note indicated that two problems were disclosed: the pipe had failed ultrasonic testing because the bond had not held between the cladding and the base metal, and severe channelling was found throughout the full length of the poor. No good pipe had been available. He stated that the blocker had been checked and passed at an earlier stage, and that consequently the problem must have arisen at the stage of extrusion. The sort of failure disclosed in this reject note was of a new sort, and had not arisen in the early batches. The channelling referred to was not a mere scratch, but was rather an indentation. The second reject note (page 327) stated that the pipe had failed ultrasonic testing and that it was rejected on the basis of minimum/maximum wall thickness; no good pipe was available. Mr Lawrie again indicated that the failure in ultrasonic testing meant that there was no bond between the carbon steel and the cladding after extrusion. The wall thickness referred to would be the total will thickness, consisting of carbon steel and cladding. In this case the tests carried out were limited to a visual inspection and an ultrasound test; it was unnecessary to go further because of the results of the latter test. Mr Lawrie explained that in the last three batches some pipes had not had cladding throughout their length because it had torn away. All pipes failed ultrasonic tests. In cases where lengths were without cladding, the reason was that the Inconel had not flowed properly during extrusion. In some pipes half of the length was without clad, and in others the last two or three metres of clad were missing. In such cases the clad thickness would be excessive in the parts where it had remained.

[7] The defects that the defenders claimed to have found are specified in the reject notes. These state that several of the pipes failed ultrasonic testing because of lack of clad adhesion. They also refer to tears in the cladding (page 328), eccentricity (pages 331, 333), wall thickness outside tolerances (pages 331, 333, 337), "deep pitting" (page 331), "deep channelling" (page 333), mechanical internal damage (pages 335, 336, 337, 338, 341), "severe internal grooving" (pages 338, 340, 341), and extruded yield 6 m (below the 9 m required by FMC) (page 339). The rejected pipes were identified in an e-mail that Mr Lawrie had sent to the pursuers on 29 February (page 343). The mechanical internal damage referred to in the reject notes was described by Mr Lawrie as visible and "quite bad "; the pipe had "push" or damage marks into the cladding which amounted to more than a mere scratch. He expressed the view that something had damaged the bore during the extrusion process.

[8] The defenders' attitude to the pipes that they had found defective was explained principally by Mr David Neill, their Group Technical Director. He stated that the defenders were particularly concerned at the financial implications of the supply of defective pipe. Those concerns related both to the contract with FMC and to the future of the Wex product. Nevertheless the defenders' board had decided that they should continue working with the pursuers to try to resolve the issues that had arisen. In part this was driven by the fact that there was no alternative supplier of extruded pipes at the sizes that were required. Consequently Mr Neill had been keen to keep the relationship with the pursuers going, and he understood that the pursuers' attitude had been similar. He was hopeful that resolution might be achieved. He had noted that several hundred extrusions had already been carried out without the problems that had manifested themselves in the last three batches. He focused particularly on the tearing of clad (although that was not a particularly frequent defect), and expressed the view that it was caused during the extrusion process either by inadequate lubrication or by an incorrect furnace temperature. The lack of lubrication can cause the mandril (the part of the extrusion press that moves up through the middle of the blocker) to stick, which can cause tearing. Likewise, if the temperature is incorrect, the fluidity of the material will not be at the right level to achieve a proper extrusion. Mr Neill thought that it was the pursuers' responsibility to ensure that adequate lubrication was used and the proper temperature was achieved, as these were part of the extrusion process. In addition, Mr Neill referred to the lack of adhesion of the clad, problems with wall thickness and eccentricity, and explained that these meant that the pipe could not be used.

[9] The pursuers' attitude to the pipes rejected by the defenders was explained by Mr Douglas Armet, their Commercial Manager, and Mr Grant Webster, their Business Units Manager. Mr Armet, whose involvement was essentially on the commercial side, explained that the contracts with the defenders were profitable from the pursuers' point of view; the pursuers had no incentive to escape from their contractual obligations. I accept that evidence. Mr Armet gave evidence that the pursuers were trying to work with the defenders to find a manufacturing process, but that in the e-mail of 24 February (set out in paragraph [11] below) the defenders appeared to have given up on that and were intent on talking to their customer about the future of the project. He also stated that the pursuers were not clear about the nature of the defects alleged by the defenders, and did not accept that the pipes were defective. In cross-examination Mr Armet was asked what he understood the parties' contractual obligations to be. When asked if the parties had a binding agreement to produce the pipes, he replied that the agreement was to produce pipes from clad blockers. Those had to conform to certain overall dimensional tolerances. Nevertheless, nothing was said in the agreement about channelling. Nor was it agreed that the whole of the pipe should be clad, nor that the clad would adhere to the pipe, nor that specific lengths of pipe would be available. He stated that the parties had not found a way of producing a reliable product.

[10] Mr Webster explained that he tended to become involved with the defenders when problems arose. Initially the extrusions had seemed to run well. Then, in about October 2003, the defenders had requested that the pursuers should replace a certain number of the blockers which had resulted in failed extrusions. That would cost in the region of £90,000, which the pursuers thought that they could not consider. In February 2004 a number of reject notes (those referred to above) had been received. Mr Webster stated that he had not been clear what the problem was with these. The reject notes stated that pipes had failed ultrasonic testing, but that could be for a number of reasons: some of these might definitely be the pursuers' or defenders' responsibility, but others might be doubtful. Responsibility for any channelling, if that was observed, was not clear. Overall, however, the pursuers thought that the defenders had rejected pipes incorrectly, and the defects that were indicated in the reject notes were not the pursuers' responsibility. It is neither necessary nor appropriate for me to express any view as to whether the pipes rejected by the defenders were in fact defective; it is sufficient to note that the defenders had expressed dissatisfaction, on specified grounds, and that this was known to the pursuers.

[11] When the problems with pipes became apparent, as the evidence of Mr Webster mentioned in the last paragraph makes clear, an issue arose as to the liability of the parties for any defects that might exist. Apart from the warranting of dimensions, a matter which is discussed at length in my earlier opinion, nothing had been expressly agreed as to liability for defects such as channelling, failure of clad adhesion, tearing and mechanical damage. Mr Armet, when asked in chief about responsibility for tearing, accepted that that feature could render a pipe unacceptable, but stated that it had never been expressly discussed as a requirement. The length of the pipes had not been agreed, however, and in some cases it might be possible to cut out the sections that exhibited tearing. At a later stage in his evidence in chief Mr Armet expressed the view that "mechanical damage" would result from hitting the pipe, which would not be the pursuers' responsibility; if, on the other hand, tearing had been caused by a failure in lubrication, that involved the pursuers' process and would be their liability. Mr Webster also accepted, when asked about the defenders' e-mail of 27 February 2004 (see paragraph [13] below), that the pursuers might bear responsibility for tearing. Lack of adequate lubrication was one of many possible causes of tearing; others related to temperature, or the alloy material used, or roughness in the punch used in the extrusion press. Mr Webster agreed that the responsibility would be the pursuers' if lubrication were the problem. For the defenders, Mr Neill was of a broadly similar view, for the reasons discussed at paragraph [8] above.

[12] Thereafter correspondence passed and meetings were held between representatives of the parties in order to discuss matters. On 19 February 2004 Mr Webster sent the pursuers an e-mail in the following terms (page 342):

"Following our meeting on Tuesday this is a draft of the type of agreement we would be looking at to cover us for future extrusion runs. In general the commitment on our part would be to produce a pipe which would meet the overall dimensional requirements in the spec. Additionally we would agree to control the process variables listed below to optimize the end product yield. What we are not comfortable with is an acceptance [criterion] based on clad thickness.

The agreement we are proposing would be along the following lines;

Wyman Gordon Ltd would commit to the extrusion of clad blockers based on controlling the following process parameters.

1.     Extrusion temperature.

2.     Furnace heating time.

3.     Blocker dimensions".

Certain dimensional tolerances were also suggested. This e-mail indicates that, as Mr Neill indicated, it was recognized that extrusion temperatures might be a factor in the problems that had arisen. On 24 February the defenders responded as follows (page 342):

"Confirmation of our discussions and for discussions at a meeting scheduled for 11am today.

* Proclad are unable to agree to any tolerance change which will impact the Thunder Horse project without the prior discussion and approval of our customer FMC and end user BP.

* The product tolerances current were predicated on details supplied by Wyman Gordon, this information forms part of the scope of supply and is not subject to change on a project which is heading towards the completion stage.

* Proclad would ask Wyman Gordon's full co-operation in completing this project. The quality issues which lead to low yield have to be considered and solutions addressed, Proclad will provide all necessary support and required resource to achieve this end.

Look forward to productive discussion today which will move this prestigious project towards a positive end completion".

In this e-mail, and indeed in the pursuers' e-mail to which it was a reply, it is clear that the writer was proposing co-operation with a view to finding a solution to current problems.

[13] A meeting was held later that day between the parties' representatives. Following the meeting, on 27 February 2004 Mr David Neill sent an e-mail to Mr Webster in the following terms (page 334):

"Following our meeting 24/2 we have reviewed the documentation relating to the 5 inch pipe and would confirm the following.

·       By opening up the throat die to 7.67" this would allow sufficient wall section to avoid grinding under the specified thickness.

·       Wall thickness checks will be carried out pre-grind to avoid over grinding.

·       We have to ensure each extrusion is adequately lubricated to avoid tearing of the clad layer.

·       Each extrusion will be witnessed by a representative from Proclad International

·       We will require temperature records from blocker preheating

·       We will also require the applied load data, and extrusion profiles.

Relaxing of these dimensional requirements goes a long way to meet the tolerances specified in your e-mail 19/2, providing we are careful in the finishing process we should have acceptable product. As I mentioned during our meeting the customer is more likely to accept pipe which is thicker than specified, any deviation below the minimum wall section resulting in scrap would be Wyman Gordon's liability.

As we have now carried out several hundred extrusions without any internal tearing, and in the recent batches that have been run we have had several with mechanical damage to the internal bore, and tearing it would suggest we have a lubrication problem. Any reoccurrence of this defect resulting in scrap would also be Wyman Gordon's liability.

We have evaluated the flat throat development pipe, and it is a vast improvement from where we were on this pipe size in terms of cladding distribution and dimensional accuracy....

Your comments would be greatly appreciated".

[14] Mr Neill explained in evidence that the first two bullet points referred to the risk of over grinding of pipes, which could take them below the agreed overall thickness. The third bullet point related to lubrication, which he had seen as a possible cause of the problems that had arisen. Lubrication was designed to stop friction or sticking of the material as it was extruded. The extrusion process involved high reduction ratios, of 9 or 10 to 1, and in those circumstances Mr Neill explained that it was possible that the material would tear or separate; that was true of Wex and other extruded pipes. The defenders thought that lubrication was very important. The last two bullet points related to temperature and the load applied during extrusion; Mr Neill explained that both of these were important in achieving a successful extrusion. In relation to the first paragraph following the bullet points, Mr Neill explained that thicker pipe would be more acceptable because it could be ground down; if, however, the pipe was of less than the minimum agreed wall thickness that could not be remedied. The second paragraph following the bullet points indicated Mr Neill's concern that there was a lubrication problem in the extrusion of the recent batches; the problem did not seem to be a general one because there had been a large number of extrusions without internal tearing or mechanical damage. The other matters that Mr Neill thought could be causes of the damage were the application of an incorrect load to the blocker during extrusion and pre-heating to the wrong temperature prior to extrusion. These elements would affect the resistance of the blocker to the extrusion press, and that could produce mechanical damage. They were reflected in the last three bullet points, which required the presence of a representative of the defenders during extrusion together with temperature and applied load records. This would help the parties to discover what the problem was. In relation to the last sentence of the paragraph dealing with lubrication, to the effect that reoccurrence of the defect resulting in scrap would be the pursuers' liability, Mr Neill explained that he considered the lubrication problem to indicate that the pursuers had quality control issues; either they were under-resourced or they felt it unnecessary to cover what he considered an important issue. Consequently, if the defect reoccurred as a result of inadequate lubrication, he thought that any wastage that resulted would be the pursuers' responsibility. The converse would be true if the problem were the defenders' responsibility. Finally, Mr Neill stated that the defenders had offered resources and help and wanted the Wex product to be successful. I accept Mr Neill's evidence on all of the above matters, to the extent that it indicates the factual background to the exchange of e-mails. Overall, I consider that the tone of this e-mail, which was intended to reflect the agreement reached at a meeting on 24 February, was conciliatory and designed to assist in working towards a solution to the parties' problems.

[15] In passing, I note that on 29 February Mr Lawrie sent the e-mail (page 343) mentioned at paragraph [7] above which identified the pipes that the defenders claimed were defective. It stated

"There are Eleven extruded 5" pipes for the Thunderhorse project at your premises ready for dispatch, Proclad International Ltd inspected the pipes last week and have rejected Seven of the Eleven, the remainder of the pipes are under review as they may be salvaged through re-working at Proclad, this review will be complete as soon as possible, and I will advise upon completion".

The pipes in question were then identified. The e-mail concluded:

"Please advise further course of action, should you wish to discuss this matter please do not hesitate to contact me".

The tone of that e-mail is conciliatory, and does not suggest that the defenders were on the point of issuing an ultimatum to the pursuers.

[16] The next, crucial, development was that on 4 March 2004 Mr Webster e-mailed Mr David Neill in response to Mr Neill's e-mail of 27 February. Mr Webster's e-mail (page 344) was in the following terms:

"Thank you for your proposal. The changes you suggest on the throat dimensions are a positive step in helping us resolve the dimensional issues.

The engineers have completed their assessment and are of the view that opening up the throat by the amount you indicate would be possible with the existing blocker design. We would expect however that the clad thickness would also be affected in proportion to the total wall thickness. Also while this will help with the minimum wall it could still compromise the max. tolerance.

Unfortunately however this does not remove the basic problem which is that we do not believe that between us we understand the process variables sufficiently well to provide the guarantees you require on an on-going production basis. For example while the proposal helps address the dimensional problems the main reason for rejecting the pipe on the last two runs has been a lack of clad adhesion. This is something we cannot accept as our liability-either for future business or on the most recent extrusions.

As a consequence therefore we can only commit to further extrusions at your risk. Agreeing to an arrangement you describe does not make good business sense for us given the level of uncertainty there is in the manufacture of the product.

We will commit to control the process variables of forge temperature, soak time etc. plus provide access to your people to witness the extrusion runs but given these are within tolerance we would require you accept the product of these extrusions at the full value.

Having said all the above we still recognize the potential of the Proclad product for the future. As a consequence we would be prepared to make one more extrusion run on the basis that in the event of failure your liability would be limited to our manufacturing costs i.e. 85% of the current sales value. If the product was acceptable Proclad would pay the full price but for any unusable pipe your liability would be limited to our on-costs. Any commitment on our part to future extrusions would be contingent on the results of this run".

[17] The construction of this e-mail is the fundamental issue in dispute between the parties, and I will deal with the matter at paragraphs [23]-[30] below. The defenders' reaction to the e-mail was described principally by two witnesses, Mr David Neill and Mr Alan Rodger, who at the time was their Group Finance Director. By way of background, Mr Rodger explained that during 2003 he had become concerned because the use of Inconel in the product was greater than expected owing to the need to scrap pipe. The matter had been discussed by the defenders' board in October, when there had been criticism, in particular from Mr Neill, of the pursuers' extrusion process. Nevertheless, the pursuers were the only person able to exclude Wex pipe, and it was accordingly decided to deal with them to provide the best solution that was available. Mr Rodger's next involvement was on 4 March 2004, following the receipt of Mr Webster's e-mail. He was surprised by the content of the e-mail, and he stated that Mr Neill seemed shocked by it. Mr Rodger's view was that the e-mail brought the contract with the pursuers to an end, in that it proposed major and fundamental changes to the contract and in any event made the pursuers' commitment to further extrusions contingent on one further successful run. From a financial point of view, the arrangements proposed in the fourth, fifth and sixth paragraphs of the e-mail were not acceptable to the defenders. He stated that the defenders could not assume the sole risk of further extrusions, regardless of the cause of any defect that might arise, and that the alternative proposal in the sixth paragraph was not acceptable because it would involve the defenders in paying for defective products even though they considered that there were faults in the pursuers' extrusion process. Following the receipt of that e-mail discussions had taken place involving the defenders' board and their solicitors, the result of which was a decision that the e-mail should be treated as a repudiation of the contract. As a result Mr Neill had on 22 March 2004 sent the defenders the e-mail that is set out in the next paragraph. Mr Neill stated that his understanding of the e-mail of 4 March was that the pursuers would only commit to further extrusions at the defenders' risk, thus protecting their revenue in all cases where pipe was deemed unusable. He stated that he was extremely disappointed by the e-mail; he had faith in the Wex product and many successful pipes had been produced. The defenders had taken the view that they could not continue with the contract on the terms proposed in that e-mail, and in consequence he had drafted the e-mail of 22 March.

[18] The defenders' response to the pursuers' e-mail of 4 March 2004 was contained in an e-mail sent by Mr Neill to Mr Webster on 22 March 2004 (page 348) in the following terms:

"With reference to your e-mail 4^th March; we have reviewed the content and cannot agree to the terms you have outlined, and following our internal discussions you left us with no alternative but to advise our customer of the situation that exists between our companies.

Due to the seriousness of the situation we have since had a visit from our customers senior management, and with regret they have cancelled the remainder of the contract on us. This situation has had a negative impact on the Thunderhorse project, and left them with no alternative. I must also advise you that the contractual status between our customer and Proclad International is irreversible.

Due to the seriousness of the situation we must advise you to expect that any invoices that are due payment are on hold pending compilation of our claim reflecting materials and products supplied which did not comply to the agreed specifications. We anticipate the value of the claim will be substantially more than the value of the unpaid invoices and the balance of the contract price".

The applicable legal principles

[19] The first issue between the parties is whether the e-mail of 4 March 2004, read in context, amounted to a repudiation of the contracts between the parties. The requirements of a repudiation have been considered in a number of cases; most of these are English, but the Scottish cases indicate that similar principles are applied in Scots law. The relevant principle is stated by Lord Hamilton in Edinburgh Grain Ltd v Marshall Food Group Ltd, 1999 SLT 15, at 22D:

"What, in my view, is required for repudiation is conduct demonstrative of an intention not to perform fundamental contractual obligations as and when they fall due. That intention may have its origin in a choice by the obligant not to fulfil his contract or in an inability on his part to do so".

In that case the pursuers had stated to the defenders that they did not have any grain for onward delivery to the defenders, pursuant to contractual obligations, and that it would be very difficult to secure grain for any continuing contracts. It was held that that amounted to repudiation. Lord Hamilton's formulation of the principle is similar in substance to the leading statement of the law in England, which is found in the opinion of Lord Coleridge CJ in Freeth v Burr, (1874) LR 9 CP 208, a case involving a refusal by one party to a contract to deliver an instalment on the ground of an alleged right of set off. Lord Coleridge CJ stated (at 214):

"The principle to be applied in these cases is, whether the non-delivery or the non-payment amounts to an abandonment of the contract or a refusal to perform it the part of the person so making default".

A slightly more elaborate discussion of the relevant principles, which places the concept of repudiation in the general scheme of contractual obligations, is found in the opinion of Lord Dunpark in Monklands District Council v Ravenstone Securities, 1980 SLT (Notes) 30, at 31:

"The concept of [an onerous consensual] contract is that the undertaking of a duty (i.e. the promise of performance) by an obligant creates a corresponding right of the obligee to demand performance when that becomes due; but that is not all. In my opinion, the undertaking to perform at the due date binds the obligant not only to perform at the due date, but also to adhere to that undertaking from the conclusion of the contract until performance. Accordingly, if at any time during that period the obligant informs the obligee that he will not perform his contractual duty when the time comes, that, in my opinion, is a breach of contract. Indeed, it is so material a breach that the law entitles the obligee to treat that statement as a repudiation by the obligant of his contractual obligations and at once to declare the contract terminated and to claim damages, without waiting for the date when performance is due".

[20] In Edinburgh Grain Lord Hamilton indicated two other aspects of the law relating to repudiation. First, "profession by words or conduct either of unwillingness or inability to perform is... enough to constitute renunciation" (page 22K, under reference to the opinion of Devlin J. in Universal Cargo Carriers Corporation v Citati, [1957] 2 QB 401, at 436-438). Secondly, the parties' communications require to be viewed objectively (page 22L). That means that they must be construed according to the standards of a reasonable person who is experienced in the particular trade that is under consideration and who is duly informed of the salient features of the contract at the material time (page 23B-C). Older Scottish cases emphasize the principle that renunciation should be judged objectively, according to what a reasonable man would take from the acts and utterances of the party who is alleged to have repudiated the contract. In Carswell v Collard, 1893, 20 R. (HL) 47, LC Herschell stated (at 48):

"Of course, the question was not what actually influenced the defender, but what effect the conduct of the pursuer would be reasonably calculated to have upon a reasonable person".

The Lord Chancellor further indicated (at 49) that it is necessary to look at matters of business from a business point of view. In Forslind v Bechely-Crundall, 1922 AC (HL) 173, the last case was followed, in particular by Lord Dunedin (at 190) and Lord Shaw of Dunfermline (at 191). Lord Shaw continued:

"If, in short, A, a party to a contract, acts in such a fashion of ignoring or not complying with his obligations under it, B, the other party, is entitled to say: 'My rights under this contract are being completely ignored and my interests may suffer by non-performance by A of his obligations, and that to such a fundamental and essential extent that I declare he is treating me as if no contract existed which bound him.' The accent of the psychology is not upon the mind of the person who is defiant or heedless of his obligation, but, as Lord Herschell put it, upon the mind of the person who is suffering from the defiance".

[21] A number of English cases were cited. Two of these, James Shaffer Ltd v Findlay Durham & Brodie, [1953] 1 WLR 106, and Sweet & Maxwell Ltd v Universal News Services Ltd, [1964] 2 QB 699, do not appear to me to add a great deal to the principles discussed in the Scottish cases. In Federal Commerce & Navigations Ltd v Molina Alpha Inc, [1978] QB 927, shipowners had sought to justify a threat not to perform on the ground that they had taken the advice of lawyers and had been advised that they could properly do so. Lord Denning MR stated (at 979):

"I have yet to learn that a party who breaks a contract can excuse himself by saying that he did it on the advice of his lawyers: or that he was under an honest misapprehension. Nor can he excuse himself on those grounds from the consequences of a repudiation.... I would go by the principle... that if the party's [conduct] -- objectively considered in its impact on the other party-is such as to evince an intention no longer to be bound by his contractual obligations, it is open to the other party to accept his repudiation and treat the contract as discharged from that time onwards".

In Woodar Investment Development Ltd v Wimpey Construction UK Ltd, [1980] 1WLR 277, purchasers of property purported to rescind a contract of sale in terms of a condition of the contract that permitted rescission in the event that an authority having a statutory power of compulsory purchase began to negotiate for the acquisition of the subjects of sale. The House of Lords held by a bare majority that the purchasers had taken action relying simply on the terms of the contract, and had not manifested by their conduct an intention to abandon it; consequently they were not to be treated as repudiating it. The facts were distinct from those in the present case in that an express contractual power of rescission was relied on. Nevertheless, the speeches contain interesting discussions of the relevant principles. Lord Wilberforce, part of the majority, stated (at 280-281):

"[I]n considering whether has been a repudiation by one party, it is necessary to look at his conduct as a whole. Does this indicate an intention to abandon and to refuse performance of the contract? ... [S]ubjective intention is not decisive: it supplied the motive for serving the notice of rescission: there remains the question whether, objectively regarded, their conduct showed an intention to abandon the contract".

Lord Keith, also in the majority, referred to the opinion of Lord Coleridge CJ in Freeth v Burr, and emphasized that matters must be considered objectively and that it is important to look at the whole circumstances of the case. Consequently, the critical question was whether, having regard to all the circumstances, the conduct of the purchasers in relation to the invocation of the condition relating to compulsory purchase "was such that a reasonable person in the position of the [sellers] would properly infer an intention ... to refuse to perform the contract when the time came for performance". Woodar, which was approved in Scotland in Blyth v Scottish Liberal Club, 1982 SC 140, at 143, emphasizes that the conduct of the party alleged to have repudiated the contract must be looked at as a whole, and must be looked at objectively. Subject to that, the critical question is whether that party's conduct demonstrates an intention to abandon the contract, or to refuse further performance under the contract. It is obvious that for this purpose performance under the contract must be performance according to the existing terms of the contract. If a party proposes to continue on terms that are fundamentally different from the existing terms, that too will amount to a repudiation.

[22] Finally, I should mention two further matters that bear on the construction of the parties' e-mail correspondence. First, those e-mails are plainly commercial documents, drafted by commercial men, and must be construed as such. The writers were not lawyers, and the e-mails cannot be expected to display a detailed concern with the rules of the law of contract. For that reason I consider that the e-mails must be construed in a relatively broad and commercial manner, without undue concentration on the niceties of wording. Secondly, the fact that the parties chose to communicate by e-mail rather than letter is in my opinion irrelevant. E-mail is now the normal method of communication in commercial dealings, and an e-mail must in my opinion be construed in the same way as any other written correspondence.

The e-mail of 4 March 2004

[23] The first issue in the present proof is whether the e-mail of 4 March 2004 amounted to a repudiation of the contract between the parties and demonstrated the pursuers' intention not to perform fundamental contractual obligations to carry on extrusions. The starting point must in my opinion be the parties' contractual obligations, because if there is a repudiation it is those obligations that are repudiated. Following the earlier proof I held (at paragraph [65]) that the parties entered into a series of individual contract for the supply of quantities of Wex pipe. Under those contracts the pursuers agreed to tolerance the inside diameter and overall clad thickness of the pipes, to dimensions set out in e-mails of 30 September and 17 October 2002, but did not agree to tolerance the clad thickness of the pipes. I further held (at paragraph [36]) that, because the Wex process was for the production of a clad pipe, it was necessary that there should be both carbon steel and cladding throughout its length. Consequently, if either the carbon steel or the cladding were absent in a significant part of the pipe, that would involve a breach of contract, although the responsibility for such breach might be in dispute, depending on its cause.

[24] The foregoing terms deal with the dimensions of the finished product and the need to conform to the description of a clad pipe, but they do not deal with other defects that might arise as a result of the way in which the pursuers' or defenders' processes were carried out. Liability for defects of the latter sort does not appear to have been considered in the parties' discussions prior to February of 2004, and it was only in that month that the parties' obligations in relation to other defects came under serious consideration. In my opinion, in the absence of any express term, a term must be implied into the parties' contracts to deal with the allocation of risk in such circumstances. I reach this conclusion for two reasons. First, the allocation between the parties of a risk that has actually come to pass is plainly of critical importance, because one or other of the parties must bear that risk. Secondly, the only alternative to an implied term is that the risk is simply allowed to remain where it falls. That would in my view be unsatisfactory, because it involves allocating risk on an arbitrary basis that does not have regard to the structure of the contract or the circumstances in which the risk falls to be allocated. For these reasons I am of opinion that the implication of a term is necessary on the ground of business efficacy. So far as the content of the term is concerned, I am of opinion that the reasonable and natural implication is that each party was liable for the consequences of any defects that might arise as a result of the manner in which it carried out its own processes. Thus if, for example, a defect arose because of the manner in which the defenders applied cladding to the blocker, the consequences would be the defenders' responsibility, and they would be liable for any resulting losses. Likewise, if a defect arose because of the manner in which the pursuers carried out the extrusion, for example because of inadequate lubrication, the contrary would hold, and the pursuers would be liable for any resulting losses. That appears the proper allocation of risk because it involves holding each party liable for the processes that are under its control and within its peculiar expertise. While the approach to implication of terms is strictly objective, I note that in their evidence Mr Armet, Mr Webster and Mr Neill all gave some indication at least that they would agree with an allocation of responsibility according to whose processes were involved.

[25] A further feature of the parties' relationship is also in my view relevant. In paragraph [29] of my earlier opinion I expressed the view that there was an important experimental element in the parties' dealings. That statement related to the earlier stages of the parties' relationship when the basic contractual terms were being agreed, but inherent in the whole of the parties' dealings was an understanding that manufacturing processes would require to be developed in a spirit of mutual co-operation. I think that that was very obvious from the evidence for both parties; Mr Armet and Mr Webster for the pursuers and Mr Rodger and Mr Neill for the defenders all agreed that parties should try to keep their relationship going and reach a solution to any difficulties that arose. The Wex process was potentially very lucrative, and both parties stood to benefit if it were commercially successful.

[26] Against the foregoing background, I am of opinion that Mr Webster's e-mail of 4 March 2004 must be regarded as a repudiation of the parties' contract. In the first place, the fourth and fifth paragraphs of the e-mail involve a clear and unequivocal statement that the pursuers will not carry out further extrusions except at the defenders' risk. The first three paragraphs refer to the difficulties that had arisen, and in the third paragraph Mr Webster states that the remedial steps that had been taken did not remove basic problems, notably lack of clad adhesion, which is described as the main reason for rejecting the pipe on the last two runs. The opening words of the fourth paragraph make it clear that it follows on from the third paragraph. The critical sentence in the fourth paragraph states "As a consequence therefore we can only commit to further extrusions at your risk". That statement is expanded upon in the fifth paragraph, where Mr Webster states that the pursuers will commit to controlling forge temperature and soak time and will provide access to the defenders' representatives; he then continues "but given these are within tolerance we would require you accept the product of these extrusions at the full value". In my opinion those statements negate the implied term that responsibility for defects will depend upon whose process has caused the defect, and instead allocate risk entirely to the defenders provided that the pursuers have adequately controlled forge temperature and soak time. That is in my opinion a major innovation on the parties' contractual terms, and it is one that would have very obvious commercial implications for both parties; in particular it was liable to have a major effect on the profitability of the contracts for the defenders. The significance of the change can be illustrated by an example. If the cladding did not adhere to the carbon steel, and it was proved that the lack of adhesion was caused either by inadequate lubrication or by the application of an incorrect load (both matters identified by Mr Neill as possible causes of failure of clad adhesion), the defenders would still require to pay the pursuers for the full price of the pipe, even though the pipe was unusable. That is in my opinion a major change in the parties' contractual relationship, and in view of the implications that it has for the profitability of the contracts it can be described as fundamental to those contracts. The importance of the change in contractual terms is especially evident because the last three extrusion runs had all resulted in a large number of pipes that the defenders considered failures, and it was clear from the evidence of Mr Neill that he had serious concerns about the pursuers' procedures. In these circumstances the allocation of risk was obviously of great importance.

[27] In the second place, the sixth paragraph of the e-mail offers "one more extrusion run" on the basis that the defenders' liability to pay for pipes in the event of failure would be limited to 85% of the current sales value; that was intended to represent the pursuers' manufacturing cost. That is once again clearly an innovation on the terms of the parties' existing contracts. While that is optional, it represents an offer to continue extrusions on the basis that is clearly inconsistent with the parties' existing contractual terms. If the offer is not taken up, according to the terms of the fifth paragraph the defenders are obliged to accept the product of all extrusions at their full value. In the third place, the e-mail of 4 March, taken as a whole, involves statements by the pursuers which proceed on the basis that they are not bound by any obligation to make further extrusions. That is particularly clear from the sixth paragraph, which offers one further extrusion run on altered terms and makes further extrusions contingent on the results of that run. The pursuers were, however, obliged by the existing contracts to exclude a further 30 or so blockers, which is considerably more than the number that was likely to be extruded in a single run. Consequently this part of the e-mail involves a refusal to perform the remainder of the contracts on the existing terms, and is accordingly fundamental to the parties' relationship. In the fourth place, the sixth paragraph offers the defenders a limitation of their liability to pay the contractual price in the event of a "failure". That clearly proceeds on the assumption that the pursuers had no pre-existing liability for any failure arising out of their processes. That once again is an innovation on the parties' contractual terms, in a fundamental respect.

[28] In the fifth place, as mentioned above at paragraph [25], the parties' relationship to some extent involved an experimental element and clearly proceeded on the basis that they would co-operate in order to deal with any difficulties that arose. That co-operation is evident in the parties' dealings during the period from the emergence of difficulties in about October 2003 until the end of February 2004. It is especially obvious in the e-mails sent by the defenders in late February. Thus the defenders' e-mail of 24 February requested co-operation in completing the project and looked forward to productive discussion at the meeting to take place later that day. That meeting had been arranged to try to find solutions to the problems, and its results are found in Mr Neill's e-mail of 27 February. In that e-mail Mr Neill summarised the agreement reached on opening up the throat die, checking wall thickness, lubrication, witnessing of extrusions and the provision of temperature records and applied load data. That is clearly designed to achieve a solution to the problems that had become apparent in the last three extrusion runs. The latter part of Mr Neill's e-mail developed the themes in the earlier part. Lubrication is mentioned as a potential problem. While the relevant paragraph (the second after the bullet points) ends "Any reoccurrence of this defect resulting in scrap would also be Wyman Gordon's liability", that is in accordance with the implied term discussed at paragraph [24] above, because the provision of adequate lubrication was a feature of the pursuers' extrusion process. It is fair to say that the general tone of the e-mail of 27 February is constructive, working towards a solution. The e-mail of 4 March, by contrast, involves a straightforward attempt to impose liability for all defects on the defenders. In that respect it represents a clear change of attitude from the parties' earlier dealings. In my opinion that makes it all the more reasonable to treat that e-mail as a repudiation.

[29] In the light of all of the foregoing factors, I am of opinion that the e-mail of 4 March must be treated as a repudiation of the contract by the pursuers. It was suggested for the defenders that, in view of the literal terms of the e-mail, the pursuers were seeking to impose liability for failed extrusions on the defenders even if the pursuers failed to meet the agreed dimensional tolerances relating to inside diameter and overall clad thickness. I do not rely on such an argument in reaching the foregoing conclusion; the agreed dimensional tolerances were of fundamental importance, and I consider that it might reasonably be implied into the e-mail that those tolerances were still to be met by the pursuers. Nevertheless, the uncompromising terms of the e-mail support the view that it amounts to a repudiation of the contract.

[30] For the pursuers it was suggested that the e-mail of 4 March, read in context, related only to clad thickness. In this connection the terms of the meeting held on 24 February were relied on. It is true that clad thickness had been identified as a problem, and that it was discussed at the meeting on 24 February; that is clear from Mr Neill's e-mail of 27 February. Nevertheless, that e-mail deals primarily with other matters. Thus the first two bullet points deal with the thickness of the carbon steel, the third deals with lubrication and tearing, and the fifth and sixth are concerned with tearing and other damage to the cladding layer. Likewise, the later paragraphs do not mention the issue of clad thickness. In these circumstances I am unable to draw the inference that the e-mail of 4 March was concerned with clad thickness. Moreover, the latter e-mail only refers to clad thickness in the second paragraph, and in the third paragraph identifies clad adhesion as the main problem on the last two runs. That strongly suggests that clad thickness was not the main issue.

[31] For the pursuers it was submitted that on the defenders' side Mr Neill was the person best placed to give a view as to the meaning of the e-mail of 4 March 2004, in particular as he had been the author of the defenders' e-mail of 27 February 2004 to which the later e-mail was the reply. Mr Neill had misunderstood certain aspects of the e-mail; in particular, he thought that the pursuers had warranted clad thickness, and that the offer of a further extrusion did not involve new contractual terms. In addition, it was pointed out that Mr Neill did not interpret the fifth paragraph as involving the removal of the previous warranty relating to inside diameter and overall wall thickness (although that is of no consequence because I have not adopted that argument). Overall, however, I am of opinion that it is wrong to focus on the views of Mr Neill in the manner suggested for the pursuers, even though his understanding of the technical processes involved was probably better than any of the defenders' other witnesses. Two reasons exist for this approach. First, the test for repudiation is plainly objective, and that means that the court must form its own view, based on the understanding of a reasonable person with a proper understanding of the business and technical processes that are in issue. The views of any one witness cannot be decisive. Secondly, it was clear from the evidence of the defenders' witnesses, in particular Mr Neill and Mr Rodger, that the decision to treat the e-mail of 4 March as a repudiation was a board decision, taken collectively. Mr Neill and Mr Rodger were both involved in that decision, as were other directors, and advice was taken from the defenders' solicitors. In these circumstances it is simply factually incorrect to treat Mr Neill's views as being in any way decisive.

[32] For the pursuers it was also submitted that the witnesses had in their evidence given five different interpretations of the e-mail of 4 March, the defenders' four witnesses having given four different reactions. It is quite true that there were differences of emphasis among the constructions that the various witnesses placed on that e-mail. Nevertheless, the e-mail is a commercial document issued in the course of continuing negotiations about the parties' contracts, and the defenders' reaction was a commercial reaction. In the circumstances I do not think that any useful purpose is served by considering the detailed reactions of the individuals concerned. The fundamental question as to whether there is a repudiation must be answered objectively. The text of the e-mail is available, and it is for the court to construe that according to the standards of a reasonable recipient with the appropriate business and technical knowledge. The detailed views of individual witnesses have little or no relevance to that issue. In the present case, however, it is notable that all of the defenders' employees who considered the e-mail appears to have regarded it as a repudiation of the pursuers' contractual obligations.

[33] The pursuers also founded on the evidence of Mr Neill in relation to the e-mail of 27 February. According to the pursuers, he stated that in that e-mail the expression "thin wall" in the first paragraph under the bullet points related to the carbon steel component, not the overall wall thickness On that basis Mr Neill had suggested that losses caused as a result of the carbon steel's being too thin were the pursuers' liability, but that was an error as to the parties' true legal position. Even if that is correct, the general context must be considered. It is clear from the terms of the e-mail taken as a whole that Mr Neill was well aware that the carbon steel must be thick enough to ensure the stability of the pipe, and was concerned that, if the outside surface of a pipe had to be ground, there should still be enough carbon steel left to provide that stability. Consequently he wanted the pursuers to err on the side of over-thick pipe rather than over-thin pipe. That was his primary concern in the paragraph in question, and it is a concern that I consider must have been obvious to any reasonable recipient of the e-mail. In the circumstances I am not inclined to attach significance to the error in this paragraph.

The e-mail of 22 March 2004

[34] Repudiation of a contract gives the non-repudiating party the right to accept or reject it. If it is rejected that party can insist on further performance. If it is accepted, however, that party's future obligation to perform comes to an end. No particular form is required for acceptance, which may be either express or implied from words or conduct. The defenders claim that their e-mail of 22 March 2004 amounted to an acceptance of the pursuers' repudiation on 4 March. In my opinion that contention is correct.

[35] The construction of the defenders' e-mail of 22 March 2004 must follow on from the construction of the earlier e-mail of 4 March 2004. I have construed the earlier e-mail as a repudiation of the contract. In the light of that construction, it was obviously necessary for the defenders to decide what they were going to do in future. In those circumstances the only sensible analysis of the e-mail of 22 March is in my opinion that it amounted to an acceptance of the repudiation. Mr Neill, the writer of that e-mail, states in it that the defenders are unable to agree to the terms put forward in the pursuers' e-mail of 4 March; that the pursuers have informed FMC of the situation that existed, and that FMC have with regret cancelled the remainder of the Thunderhorse contract. That situation is described as irreversible. The obvious implication from that statement is that the repudiation of the contract between the pursuers and defenders is accepted; it would plainly make no sense for the defenders to continue with that contract when their customer had pulled out. In the circumstances the e-mail of 22 March cannot amount to a repudiation of the contract by the defenders.

Conclusion

[36] I accordingly make the following findings on the issues raised in the parties' joint statement of issues:

1. The pursuers' e-mail of 4 March 2004, read in context, was a
repudiation of the contract between the parties and demonstrated the pursuers' intention not to perform fundamental contractual obligations to carry on extrusions.

2. The e-mail of 4 March 2004, read in context, did not relate only to clad
thickness.

3. The defenders' e-mail of 22 March 2004 amounted to confirmation by
the defenders that they were accepting the e-mail of 4 March 2004 as a repudiation of the contract.

4. The e-mail of 22 March 2004 did not amount to a repudiation by the
defenders of the parties' contract.

In the light of these findings I will put the case out by order to permit further procedure to be discussed.