SECOND DIVISION, INNER HOUSE, COURT OF SESSION
Lord Justice Clerk Lord Osborne Lord Emslie	[2010] CSIH 99 CA151/04 OPINION OF THE COURT delivered by LORD OSBORNE in appeal by by WYMAN-GORDON LIMITED Pursuers and Reclaimers; against PROCLAD INTERNATIONAL LIMITED Defenders and Respondents: _______

Act: Maclean, Solicitor Advocate; Tods Murray, WS

Alt: Robertson, Advocate; Brodies LLP

21 December 2010

The background circumstances

[1] The pursuers and reclaimers in this action are specialists in, among other areas, the extrusion of pipes. The defenders and respondents are engaged in the design, manufacture and supply of pipeline components, including pipes. They have developed a patented process for the manufacture of clad co-extruded pipes, known as the Proclad Wex pipe, weld extruded pipes. The exterior part of Wex pipe is manufactured from carbon steel, as in the case of an ordinary extruded pipe, but, bonded to the inside surface of the carbon steel is a cladding material, itself metallic, known as Inconel. The purpose of the cladding on the inside surface of the pipe is to protect it against the corrosion which would otherwise occur in a pipe used for the transmission of oil or gas. The reclaimers also manufacture ordinary extruded pipe, which is generally known as Ex pipe, which is manufactured from carbon steel and possesses no cladding on the interior surface.

[2] In early February 2002, the respondents approached the reclaimers 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 for the supply of these pipes was known as Project Thunderhorse. The respondents' intention was to supply FMC with both Wex and Ex pipes of various diameters.

[3] The procedure followed in the manufacture of Wex pipes was, in summary, as follows. The reclaimers ordered round steel bars, known as "blockers", from an outside supplier. Each blocker was compressed into the appropriate shape by the reclaimers and then pierced in readiness for the process whereby the blocker was extruded into a pipe. The pierced blocker was machined by the reclaimers and then supplied to the respondents, who applied a cladding process using Inconel to the inside surface of the blocker to be extruded. The blocker was then returned to the reclaimers, who fed it through their extrusion press, thus producing the clad pipe. The clad pipe was then subjected to a number of further treatments before the sections of pipe were ready for use, at which point they were supplied to FMC. The processes of manufacture were the subject of elaborate manufacturing procedure specifications for each category of pipe. Pipes were produced only after lengthy correspondence and meetings between the parties, at which representatives of FMC attended, since the pipes had ultimately to satisfy their requirements. Much of the discussion related to the acceptable tolerances for the pipe, since the extrusion process placed limits on the number of different tolerances that could be achieved. Agreement on the tolerances required by FMC was concluded on 30 September 2002 and the tolerances were set out in a fax message sent by the reclaimers to the respondents on that date.

[4] The reclaimers' 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 respondents, 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 reclaimers; the respondents paid a substantial number 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. 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. The most significant of the problems encountered in the manufacture of Wex pipes was a variation in the thickness of the cladding on the inside of the pipes along their length. It had become possible to identify that because improved methods came into use to measure clad thickness. At an earlier stage clad thickness could be measured only at the ends of a Wex pipe. As a result of the improved methods of measurement, it became possible to measure its thickness at different points along the length of the pipe. These difficulties were the subject of discussion at a meeting between representatives of the parties held on 28 October 2003, at which the respondents indicated that they considered that certain pipes had failed in a number of respects, as a result of which they sought a contribution from the reclaimers to the costs that they had incurred in consequence. The reclaimers refused to make any such contribution. Thereafter non-compliance reports were issued to the reclaimers, which indicated the defects that the respondents claimed to have identified in the pipes concerned. These reports were disputed. Following that, negotiations took place with a view to attempting to resolve the issues between the parties.

[6] During the course of these negotiations, Mr Grant Webster, of the reclaimers, sent an e-mail to Mr David Neill, of the respondents, dated 4 March 2004. Because of its significance in the context of the present action, it is right to quote it in full:

"David,

Thank you for your proposal. The changes you suggest on the throat dimensions are a positive step in helping us to 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 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 to accept the product of these extrusions at full value.

Having said all of the above, we still recognise 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 a 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. A commitment on our part to future extrusions would be contingent on the results of this run.

As you know I am available on Friday but out of the plant next week. If you need to contact someone John Harkness, our Manufacturing Director will be on-site.

Regards,

Grant".

[7] A reply to the e-mail of 4 March 2004 was sent by Mr David Neill to Mr Grant Webster on 22 March 2004. In view of its significance, once again it is appropriate to quote its terms in full:

"Grant

With reference to your e-mail of 4 March; we have reviewed the content and we 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.

David Neill

Technical Director

Proclad International Limited"

The present action

[8] Following upon the foregoing events, the reclaimers raised the present proceedings, in which they claim certain sums as payment of the unpaid price of goods supplied by them to the respondents and a further sum as damages flowing from the respondents' alleged breach of contract. The respondents have lodged a counterclaim in which they seek a certain sum in respect of damages said to flow from the reclaimers' alleged breaches of contract. The procedure followed in the action in the Commercial Court has unfortunately been long and involved. After adjustment of the parties' pleadings, the commercial judge ordered that the action should proceed to a preliminary proof on two matters: (i) the terms and conditions applicable to the parties' contract and in particular, whether the respondents' standard terms and conditions formed part of the contract; and (ii) whether or not the respondents' conduct in accepting and making payment for extruded pipes that did not conform to the tolerances agreed on 30 September 2002 precluded the respondents from relying on those tolerances. The preliminary proof took place over a period of sixteen days between 23 June 2005 and 13 September 2006. Thereafter the commercial judge issued an opinion dated 31 December 2007. In it, he found that the parties had entered into a series of individual contracts for the supply of quantities of Wex and Ex pipes. Under those contracts, the reclaimers had agreed to tolerance the inside diameter and overall thickness of the pipes as clad, to the dimensions set out in the e-mails of 30 September and 17 October 2002. However, he found that the reclaimers had not agreed to tolerance the thickness of the clad of the pipes. Nor had the reclaimers warranted that the pipes would be suitable for use by FMC. He further found that, if he were wrong in the last conclusion and if the reclaimers had agreed to tolerance the thickness of the clad, the respondents had not waived their contractual rights in respect of that obligation. In the light of his findings, after a By Order roll hearing on 22 January 2008, the commercial judge granted decree in favour of the reclaimers against the respondents for payment of the sum concluded for in the second conclusion of the summons. Thereafter, following further procedure, on 29 January 2009, the commercial judge allowed a second preliminary proof in relation to certain issues that the parties agreed had arisen. These were, first, whether the e-mail sent by the reclaimers to the respondents on 4 March 2004 was a repudiation of the parties' contract and demonstrated the reclaimers' intention not to perform fundamental contractual obligations to carry on extrusions; and, second, whether the e-mail sent by the respondents to the reclaimers on 22 March 2004 amounted to confirmation by the respondents that they were accepting the earlier e-mail as a repudiation, or whether that e-mail was itself a repudiation of the parties' contract. That preliminary proof took place over a period of eight days in April 2009. On 3 July 2009, the commercial judge issued an Opinion in which he made the following findings:

"1. The reclaimers' e-mail of 4 March 2004, read in context, was a repudiation of the contract between the parties and demonstrated the reclaimers' 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 respondents' 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; and

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

In the light of those findings the case was put out on the By Order roll for a discussion of further procedure. That hearing took place on 10 July 2009. On that occasion, the commercial judge pronounced an interlocutor in which he (i) sustained the respondents' first plea-in-law and excluded from probation certain averments in articles 3 and 4 of Condescendence, (ii) sustained the respondents' third plea-in-law to the extent of holding irrelevant the defence on the merits in Answers 8, 9 and 10 to the counterclaim, and (iii) restricted proof of the averments in Statements of Fact 8, 9 and 10 in the counterclaim to quantum. He then granted leave to reclaim against that interlocutor. As a consequence, he also discharged a further diet of proof which had been due to commence on 25 August 2009. Against that interlocutor and the interlocutor of 3 July 2009 the reclaimers have now reclaimed to this court. Review of the commercial judge's interlocutors is sought on two bases. The first basis is that he erred in the application of the law relating to repudiation to the facts established by the evidence. The second basis is that he erred in basing his decision on an implied term that was not contended for by either party, upon which no evidence had been led, and which had not been the subject of submissions to him.

The submissions of the reclaimers

[9] When this matter came before us, the solicitor advocate for the reclaimers moved the court to recall the interlocutor of 10 July 2009 and to pronounce an interlocutor (i) sustaining the pursuers' fifth plea-in-law in the principal action to the extent of holding irrelevant the defenders' averments regarding the pursuers' e-mail dated 4 March 2004 amounting to a repudiation of the contract and that by deleting the averments in Answer 3 from "On 4 March 2004, the pursuers intimated by e-mail ...." to "... substantially in excess of the sums sued for by the pursuers.", (ii) sustaining the first plea-in-law for the pursuers in the counterclaim and excluding from probation the defenders' averments in Statements of Fact 8, 9, and 10 in the Counterclaim, and (iii) restricting the proof to the claims made in article 4 of Condescendence in the principal action, and Statements of Fact 3, 4, 5, 6, 7 and 11. Alternatively, it was submitted that the commercial judge's interlocutor of 10 July 2009 should be recalled and the cause remitted to a different commercial judge to consider the issue of the implied term de novo in the light of further pleadings and further argument. As an alternative to this motion, the solicitor advocate for the reclaimers suggested that the court might express its opinion on the controversial issues to be discussed, following which the form of the interlocutor to be pronounced in implement of that opinion could be the subject of further discussion at a By Order roll hearing.

[10] In developing his submissions, the solicitor advocate for the reclaimers relied upon the extensive written submissions which had been lodged, which, on account of their length and character cannot conveniently be summarised here. However, he indicated that certain aspects of those written submissions would be elaborated in argument. He opened his submission by making a number of detailed points regarding the process of the extrusion of blockers, with a view to the production of clad pipes. It was a feature of the background that the thickness of the cladding metal had only been capable of being measured accurately since August 2003 along the length of the extruded pipes. Prior to that time, its thickness could be measured only at the ends of such pipe. It would be wrong to say that the process of extruding clad pipes was wholly experimental, but, on the other hand, there was an element of uncertainty as regards the outcome in any particular case. The extrusion process was based upon an assumption that the extrusion would affect both metallic elements of the blocker equally. Also, it had to be recognised that the temperature at which extrusion took place was a compromise figure, based on the optimum temperature for each component of the clad blocker. In this connection reference was made to passages in the commercial judge's Opinion dated 31 December 2007 at pages 31, 33, 34 and 35 of Appendix A. It was submitted that this aspect of the background tended to undermine the commercial judge's finding of an implied term in the contract in paragraph [24] of his Opinion of 23 July 2009. What was said in paragraph [17] of the written submissions had to be emphasised. The reclaimers had not been in a position to warrant the thickness of the cladding material after extrusion: that immediately was inconsistent with the implied term found by the commercial judge. The reclaimers had agreed to tolerances for the inside diameter of the extruded pipe after cladding and the overall thickness of the pipes, as set out in the e-mails of 30 September and 17 October 2002; but they had not agreed to tolerances for the thickness of the cladding.

[11] The Dinsley machine, which was capable of measuring the thickness of the cladding material in extruded pipes along their length, had become available only after the contract had been entered into. Plainly that circumstance bore upon the question of whether any condition, such as contemplated by the commercial judge, could be implied into the contract. These matters were referred to by the commercial judge in paragraph [24] of his Opinion of 31 December 2007, at page 30 of Appendix A.

[12] The solicitor advocate for the reclaimers then proceeded to examine in detail the several contracts between the parties dealt with in paragraphs [8] to [17] in the commercial judge's Opinion of 31 December 2007. The final order was for sixty 5-inch Wex pipes, as described in paragraph [17] of that Opinion. It was uncontroversial that the correspondence which passed between the parties in March 2004 related to the final contract.

[13] On the subject of the implied term, it was submitted that it had been inappropriate for the commercial judge to have resorted to the implication of a term in the relevant contract in a context in which the existence and content of such a term had not been explored in the normal way in adversarial proceedings. The fact was that there were no averments bearing directly on the implied term, no evidence had been led relating to it, and no submissions had been made in relation to it. The commercial judge had been in error in resorting to an implied term in these circumstances. If that were correct, the question then would become what the effect of that error was on his decision. He would consider that later.

[14] Turning to the reclaimers' position in relation to the e-mails of 4 March and 22 March 2004, it was submitted that the former of these, read in context, was not a repudiation of the contract between the parties; rather its terms demonstrated that the reclaimers' intention had been to adhere to their contractual obligations. Furthermore, read in context, the latter of the two e-mails did amount to a repudiation of the contract on the part of the respondents. It was necessary to a proper interpretation of these e-mails that the evidential background to them should be understood. That was dealt with in paragraphs [56] to [117] of the written submissions.

[15] While it was thought unlikely that there would be serious dispute about the applicable legal principles relating to repudiation of a contract, it was nevertheless submitted that the commercial judge had erred in holding that the test for whether or not there had been a repudiation of the contract was whether the party's conduct demonstrated an intention to abandon the contract, or to refuse further performance. Instead, he ought to have concluded that the test was whether or not the party's conduct demonstrated a clear and unequivocal intention to abandon the contract, or to refuse further performance under it. The formulation of the test favoured by the reclaimers was derived from the relevant authorities. In particular, it was based heavily upon what was said in Woodar Investment Development Ltd v Wimpey Construction UK Ltd [1980] 1 W.L.R. 227. Reliance was placed on the observations of Lord Keith of Kinkel at page 294 and of Lord Wilberforce at page 281. That case emphasised just how clear words or actions had to be in order to constitute a repudiation and how reluctant the courts were to hold that a contract had been repudiated before the time for performance had arrived. If a party proposed to perform a contract on terms different from those agreed, that would be a repudiation of the contract only if it were also said that that party would not perform except on the new basis proposed. Reliance was placed on Blyth v The Scottish Liberal Club 1982 SC 140, at page 143 and on the observations of Lord Hamilton, as he then was, in Edinburgh Grain Ltd v Marshall Food Group Ltd 1999 S.L.T. 15, at page 23. It was accepted that the commercial judge had been correct when he said that e-mails were plainly commercial documents, drafted by commercial men, and had to be construed as such. Further, it was submitted that an alleged repudiation had to go to the root of the contract; it had to amount to a clear indication that a party had renounced its obligations under the contract; and that the words or conduct must amount to an absolute refusal to perform its part of the contract. In addition, it was necessary to look at the whole circumstances of the case when considering the actings of a party alleged to have repudiated the contract. An allegedly repudiatory act might take on a wholly different complexion when viewed in its proper context. Finally, words or actions had to be viewed objectively through the eyes of a reasonable person, who was one experienced in the particular industry, trade or profession in question and duly informed of the salient features of that industry, trade or profession, and of the terms of the contract in question, at the material time.

[16] Turning to the issue of the implied term found by the commercial judge, it was said that the Privy Council had recently considered issues relating to implied terms in Attorney General of Belize & Others v Belize Telecom Ltd [2009] 1 WLR 1988. Many of the traditional and well-known authorities relating to implied terms were considered, including The Moorcock (1889) L.R. 14 P.D. 64. In that latter case, Lord Esher, M.R., made it clear that, in a case where a condition had to be implied, the question was what was the least onerous duty which could be implied. On any view, the commercial judge's implied condition fell foul of this principle. In that connection reference was made to paragraph [24] of his Opinion of 3 July 2009. However, in the absence of pleadings, evidence and submissions on the topic, he should not have implied any condition at all.

[17] The solicitor advocate for the reclaimers then proceeded to address the application of the law relating to repudiation of contract to the facts of the case. He relied on what was said in paragraphs [118] to [142] of his written submissions. The conclusion reached by the commercial judge in paragraph [29] of the Opinion of 3 July 2009 was erroneous. In paragraph [24] of his Opinion, the commercial judge had reached the conclusion that a term had to be implied in the contract to give it business efficacy and he had stated his conclusion as to the content of that term. It was submitted that that conclusion was central to the case and, in particular, to the conclusion that repudiation had resulted from the e-mail of 4 March 2004. It was quite evident that problems had occurred in relation to the level of cladding in the pipes being extruded. However, the root cause of that problem was never investigated. There might have been a number of explanations for the problem, which had been the subject of a discussion between the parties and of e-mails, in particular those of 19 February 2004 and 24 February 2004. There was a level of misunderstanding during the course of the correspondence and associated discussions. Against that background, the implication of any contractual term would have been a matter of great delicacy.

[18] Turning to the language of the e-mail of 4 March 2004 itself, it was quite evident from the first and second paragraphs that the parties were considering positive steps towards the resolution of the problem being encountered. That undermined the whole idea of a repudiation. In the third paragraph, the problem of clad adhesion was considered. The reclaimers had stated that they could not accept liability for pipes suffering in that respect. That proceeded upon a proper view of the contract, in which there was no implied term of the kind identified by the commercial judge.

[19] The fourth and fifth paragraphs of the e-mail had to be read together and in the light of the relevant background circumstances. Reading these two paragraphs in that way, a reasonable man would have concluded that the reclaimers were seeking to identify those parts of the process which they could control and which might have a bearing on the defects being reported. The reclaimers had indicated a preparedness to control those variables. In addition, they would continue to meet the overall dimensional requirements of the contract. Reference was made to the detailed submissions in paragraphs [134] to [137] of the Written Argument. It could not be said that the content of those paragraphs amounted to repudiation of the contract, as properly understood.

[20] The contents of the sixth paragraph of the e-mail were important. In it there was advanced an alternative proposal for the future with an offer to conduct a further extrusion run on the basis there described. That was quite inconsistent with the notion of repudiation. While the seventh paragraph of the e-mail was an indication of opportunities for further discussion, again it was inconsistent with repudiation.

[21] Turning to the e-mail of 22 March 2004, the respondents' position was that it amounted to an acceptance by them of the reclaimers' repudiation, which thereby resulted in the rescission of the contract. Their alternative contention that that e-mail did not terminate the contract was erroneous. If the e-mail of 4 March 2004 was not to be seen as a repudiation of the contract, then undoubtedly that of 22 March 2004 was a repudiation of it by the respondents, which was accepted by the actings of the reclaimers.

[22] Turning to the commercial judge's treatment of the implied term which he found to be part of the contract, submissions had already been made concerning the illegitimacy of the implication of a term in the absence of pleadings, evidence, if necessary, and submissions on the topic. However, if for a moment it was assumed that it was proper in the circumstances of this case to consider the implication of the term found by the commercial judge, it was submitted that having regard to the evidence in the case, no such term could properly be implied. Production of Wex pipe was different from the production of a mono-wall pipe, principally because the extrusion involved two different metals at the same time. They would not necessarily have the same optimum extrusion temperature. It might even have been the case that there was no temperature at which the two metals would extrude proportionately and in which the metallurgical bond would remain intact. Similarly there was an element of uncertainty regarding the time for which it was necessary to heat the blockers prior to extrusion. There had been an assumption underlying the parties' dealings that in the Wex process, the two metals would extrude proportionately, but the fact was that that could not be guaranteed by the pursuers. While it was maintainable that the reclaimers had been obliged in the case of Wex pipes to warrant certain aspects of the process of extrusion, the evidence suggested that the carrying out of extrusion in that particular manner did not guarantee a particular result in relation to clad adhesion and thickness. Thus the implication of the term selected by the commercial judge was in conflict with the evidence. If a term was to be implied in the contract, which the reclaimers did not necessarily accept, it could not be the term identified by the commercial judge. A term to be implied would require to refer to the tolerances within which the process variables were to be held. It would have to recognise the fact that the process was, to some extent, an experimental one. In that context the term implied by the commercial judge, in effect, placed the whole risk of the project upon the reclaimers, for which there was no justification. That circumstance highlighted the necessity for the issue of the possible implication of a term to be explored firstly in the pleadings, then in the evidence, and then in the submissions. None of that had been done. If the term was one on which the respondents required to rely, they should have pled it and endeavoured to support their contention.

[23] There remained for consideration the consequences of the commercial judge's decision to imply the term that he had selected. In particular, the question arose of whether that decision could be shown to have affected the outcome of this part of the case. In that connection it was submitted that the interpretation of the vital e-mail of 4 March 2004 depended upon the terms which were properly to be seen as part of the contract. Whether a contract was repudiated by the adoption of a certain position necessarily depended upon the contractual terms. In all the circumstances, the effect of the commercial judge's implication of the term selected by him was so fundamental that it should be seen as undermining his reasoning in relation to the primary issue in the case, which was the question of the proper meaning and effect of the e-mail of 4 March 2004. For these reasons also, the reclaiming motion should be allowed.

[24] The solicitor for the reclaimers went on to deal with certain miscellaneous matters raised during the course of his submissions. It had been held at an earlier stage that there had existed between the parties not a single contract but a series of separate contracts. The question had been raised as to which particular contract might be affected by the alleged repudiation. As at March 2004 only four pipes from an earlier order remained to be completed. The remaining work to be done related to the 5-inch pipes which were the subject of the final order. The reclaimers' submission was that the respondents' repudiation affected those groups of pipes.

[25] There had been some discussion concerning what the commercial judge had said in his second Opinion in this case at paragraph [36], where he referred to the Wex process being for the production of a "clad pipe". That simply reflected the assumption that had been made that extrusion of a clad blocker would be proportionate. That assumption unfortunately had proved to be wrong. Thus it might be that the conclusion of the contract had been affected by that error, but that particular characterisation of the situation was not relied upon by either party.

[26] In relation to the interpretation of the e-mail of 22 March 2004, James Schaffer Ltd v Findlay Durham & Brodie [1953] 1 W.L.R. 106 was of assistance, containing as it did a definition of what was involved in repudiation. Reference was made particularly to page 115.

[27] In the event that the court considered that it was appropriate that the question of an implied term should be considered, it was submitted that the procedure identified in Kennedy v Norwich Union Fire Insurance Society Ltd 1993 S.C. 578 should have been followed. If the commercial judge considered that an issue concerning a possible implied term had arisen in the case, he ought to have taken steps to indicate that to the parties before reaching a decision on it, perhaps by putting the case out By Order for consideration of what should be done in relation to the matter. Following such a procedure would have given the parties the opportunity to consider and make submissions about the matter in question. That type of procedure was approved in Macphail's Sheriff Court Practice 3^rd Ed., paragraph 17.28. The adoption of the course followed by the commercial judge here was similar to the course taken by the Lord Ordinary and disapproved in Kay's Tutor v Ayrshire & Arran Health Board 1987 S.C. 145 at pages 153 and 162. In these circumstances, if the reclaimers' primary contentions were rejected, it was submitted that the commercial judge's interlocutor of 10 July 2009 should be recalled and the cause remitted to a different commercial judge to consider the issue of the implied term de novo, in the light of further pleadings, and, if necessary, evidence and argument.

Submissions of counsel for the respondents

[28] Counsel moved the court to refuse the reclaiming motion and adhere to the two interlocutors of the commercial judge, dated 3 and 10 July 2009. If the court were not prepared to follow his decision in relation to the implied term, it should hold that his reasoning did not wholly depend on that term. He went on to draw attention to the terms of the respondents' written submissions, which, because of their extent, cannot conveniently be summarised here.

[29] Criticism had been directed against the judgment of the commercial judge in respect of the test which he had employed in relation to the issue of whether or not there had been repudiation of the contract. That controversy was sterile. It was submitted that the commercial judge had adopted the appropriate test. In this connection reference was made to section 3 of the written submissions. The commercial judge had relied upon the formulations of the concept of repudiation found in Edinburgh Grain Limited v Marshall Food Group Limited 1999 S.L.T. 15 which did not use the qualifying expression "clear and unequivocal". In any event, in relation to the facts of this case and, in particular, to the terms of the e-mail dated 4 March 2004, there was nothing referred to in the judgment that could be described as equivocation on the part of the reclaimers.

[30] Turning to the matter of the contractual obligations of the parties, it was submitted that plainly the respondents were responsible for the preparation, including welding, of the blockers to be extruded. The later stages of the process of preparation of a clad pipe were the responsibility of the reclaimers, whose obligation it was to carry out effectively the extrusion process so as to produce a clad pipe. However, the terms of the e-mail of 4 March 2004 and the evidence which had been led at the preliminary proof concerning the context of it indicated that the reclaimers were not in fact prepared to perform the contract upon that basis. That amounted to a repudiation, as the commercial judge had found. What the reclaimers were offering to do in that e-mail was simply to produce pipes from the blockers supplied that conformed to certain tolerances as regards their dimensions. Counsel then proceeded to discuss the commercial judge's findings in detail. It was submitted that there was no flaw in his reasoning. Essentially the reclaimers' obligation had been to undertake extrusions in order to produce a clad Wex pipe which conformed to the agreed tolerances. Thus they required to carry out properly the processes for which they were responsible. As regards problems in adhesion, there might be more than one cause for them. An examination of the evidence showed that there had been a clear acceptance that failure on the part of the reclaimers to carry out the processes for which they were contractually responsible was a breach of their contractual obligations. That was the background to the e-mail of 4 March 2004.

[31] There was no difference of view between parties in relation to the law regarding the implication of contractual terms. It was to be found in the Attorney General of Belize & Others v Belize Telecom Ltd, particularly paragraph 27 of the judgment of the Board. Reference was also made to The Moorcock (1889) L.R. 14 P.D. 64, and the observations of Bowen, L.J. at page 68. Applying these principles to the circumstances of this case, it was submitted that what the commercial judge had done was to look at the structures of the contract and, in particular, the allocation of responsibilities in relation to the Wex process and to set out an implied term which expressed what the contract actually meant in the business context involved. Reliance was also placed on Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd
[1997] AC 749, at page 771.

[32] It had been said on behalf of the reclaimers that the contractual term implied by the commercial judge had "come out of the blue". The answer to that point lay in the pleadings and, in particular, in what was stated in Statement 4 for the respondents in the counterclaim at page 31B-D of the reclaiming print. Those averments, although not expressly referring to an implied term, amounted to an assertion of the existence of the term identified by the commercial judge. The situation was dissimilar to that which existed in Kay's Tutor v Ayrshire & Arran Health Board, (supra). However counsel accepted that no submissions had been made to the commercial judge, prior to his issue of his Opinion dated 3 July 2009, to the effect that a term was properly to be implied into the contract. He accepted that there had been no submissions relating to any tolerances affecting the cladding element of the pipes.

[33] Even if the commercial judge was in error in reaching the conclusion that the contractual term identified by him was to be implied, it was submitted that his conclusion relating to the character of the e-mail of 4 March 2004 could and should survive. In that connection, reference was made to the detailed points made in paragraph 9.1 of the respondents' written submissions and following. The commercial judge's conclusion in paragraph [27] of his Opinion that the e-mail of 4 March 2004, taken as a whole, involved statements by the reclaimers which proceeded on the basis that they were not bound by any obligation to make further extrusions. It was that feature of the e-mail in question that led to the conclusion that the contract had been repudiated. That did not depend on any requirement to imply a term in the contract. Furthermore, in paragraph [27] of his opinion, the commercial judge had drawn attention to the sixth paragraph of the e-mail in question. It offered one more extrusion run on the basis there suggested. That was plainly inconsistent with the existing contractual terms, as was what was identified in the latter part of the same paragraph. These conclusions were consistent with the commercial judge's implied term, but did not require that implied term to be recognised before they could be seen as valid. It was pertinent to notice that what was said concerning the implication of the term in paragraph [24] of the Opinion of 3 July 2009 was quite consistent with what had previously been said in paragraph 36 of his Opinion, dated 31 December 2007. In all the circumstances, the reclaiming motion should be refused.

Conclusions

[34] It appears to us that the three principal issues which arise in this reclaiming motion are these: (1) whether the e-mail from Grant Webster to David Neill, dated 4 March 2004, properly construed in its context, amounted to a repudiation of the parties' contractual relationship by the reclaimers; (2) on the assumption that the e-mail of 4 March 2004 did not amount to such a repudiation, whether, properly construed, the e-mail from David Neill to Grant Webster, dated 22 March 2004, amounted to a repudiation of the parties' contractual relationship by the respondents, which was accepted by the reclaimers' subsequent actings; and (3) whether the decision by the Lord Ordinary, expressed in paragraph [24] of his Opinion, dated 3 July 2009, that on the ground of business efficacy it was necessary to imply a term in the contract between the parties to the effect that each party was liable for the consequences of any defects that might arise as a result of the manner in which that party carried out its own processes, was sound. We shall deal with each of these issues in turn.

[35] Dealing then with the first of the issues just mentioned, in our judgment, the law on repudiation, as an anticipatory breach of contract, is well settled and, for present purposes, we see no need to innovate upon those statements of principle which have been deemed sufficient in the past. Where verbal or written communications are in issue, the key requirement, as we understand it, is that before a repudiation can be held to have occurred, there should be an objectively clear indication that, for whatever reason, material contractual obligations are not going to be performed at the due date. The other party to the contract would then have the option, either to accept the repudiation and consequently to rescind the affected relationship, or alternatively to insist on continued performance of the contract in its existing form. It is only where such an anticipatory breach of contract is clearly established following an objective assessment of the circumstances that the relevant option can arise at all.

[36] As Lord Wilberforce put it in Woodar Investment Development Ltd v Wimpey Construction UK Ltd, (supra), at page 283: "... Repudiation is a drastic conclusion which should only be held to arise in clear cases of a refusal, in a matter going to the root of the contract, to perform contractual obligations". Many judicial statements to substantially the same effect are to be found elsewhere. In Freeth & Another v Burr (1874) L.R. 9 C.P. 208, Lord Coleridge C.J. said at page 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 on the part of the person so making default." This echoed a passage on the previous page of his opinion, in which he described the search as being for "... Intimation of an intention to abandon and altogether to refuse performance of the contract." In Scotland, nearly two decades after the decision in Woodar Investment Development Ltd v Wimpey Construction UK Ltd, (supra), was approved by the Second Division of the Court of Session in Blyth v Scottish Liberal Club, the matter was again considered by Lord Hamilton, as he then was, in the Outer House in Edinburgh Grain Ltd v Marshall Food Group Ltd. At page 22 he said this: "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."

[37] Objective analysis of a claimed repudiatory statement will require the court to consider its terms in the light of the whole surrounding circumstances, and, from the perspective of what a reasonable person in the position of the recipient might legitimately understand. Evidence of what individual participants may subjectively have thought or intended is of little or no relevance, in our opinion. What really matters is the tenor of the communication, as objectively ascertained by the court. In Woodar Investment Development Ltd v Wimpey Construction UK Ltd, Lord Keith, at page 297, desiderated "... a clear indication by [a contracting party] that he does not intend to perform his obligations under it when the time for performance arrives", and Lord Wilberforce, at page 281, confirmed that "... subjective intention is not decisive: ... there remains the question whether, objectively regarded, [the appellants'] conduct showed an intention to abandon the contract." Similarly in Edinburgh Grain Ltd v Marshall Food Group Ltd, Lord Hamilton, at page 23, confirmed that in this context the issue was always whether a party's conduct, "... viewed objectively as a whole", conveyed a clear intention that he would not or could not perform. In a commercial context, of course, documents and communications must normally be construed in a commonsense way and by reference to the reasonable understanding of commercial men.

[38] Against that background, the reclaimers contended, somewhat tentatively, that in approaching the issue of repudiation, the commercial judge had misdirected himself by applying the wrong test. The suggestion was, in brief, that any statement of principle must include the combined adjectives "clear and unequivocal" with reference to a demonstrated intention, and that, in failing to acknowledge this, the commercial judge had fallen into error and had been too ready to identify a repudiation where none existed. In our view, this argument is without merit, and we are unable to accept that in paragraphs [19] to [21] of his Opinion, the commercial judge misdirected himself as to the proper test to be applied. For a given intention to be "demonstrated", "indicated", or "shown", it is self-evident that an equivocal lack of clarity will not suffice, and, in bearing to follow settled lines of authority, we do not think that the commercial judge's approach can be criticised in that respect.

[39] There are, however, two inter-related areas of concern to which we must now advert. The first is the commercial judge's unqualified assertion at the end of paragraph [21] of his Opinion that: "If a party proposes to continue on terms that are fundamentally different from the existing terms, that too will amount to a repudiation." To our mind, that statement, as it stands, goes too far. We consider that a contracting party must always be entitled, especially in altered circumstances, to propose or suggest a future variation of the relevant contractual terms for the other contracting party to consider. Provided that a refusal to perform on existing terms is not simultaneously demonstrated, it does not seem to us that the mere tabling of such a proposal or suggestion will necessarily amount to repudiation of the contract. In this particular respect, therefore, we consider that that the commercial judge may have approached the critical e-mail of 4 March 2004 on a wrong footing. Especially where the respondents' constructive e-mail of 27 February 2004 apparently contained a radical proposal which was not held to jeopardise the continuing validity of the parties' contractual relationship, it is difficult to see why apparent counter-proposals in the reclaimers' response of 4 March 2004 should have been treated in a different way.

[40] The second related concern is the uncertain state of the parties' pre-existing contract. On the one hand, e-mails of 30 September 2002 and 17 October 2002 confirmed that the reclaimers were contractually obliged to achieve certain dimensional tolerances in all finished pipes. Further, in the e-mail of 27 July 2003, the reclaimers also undertook responsibility for the proper conduct of the extrusion process as such. This, it was agreed, would include such features as adequate furnace "soak time", appropriate extrusion pressures and temperatures and a sufficient level of lubrication. Following the preliminary proof held at an earlier stage, however, the commercial judge declined to hold that the reclaimers were bound, expressly or by implication, to deliver an acceptable end product in relation to "clad thickness" or "clad adhesion". On the contrary, as confirmed at paragraph [2] of his Opinion of 3 July 2009, the commercial judge held

"... The pursuers warranted that the inside diameter and overall wall thickness of the pipes would meet certain dimensions and tolerances ... 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."

[41] On the evidence, both parties had assumed that the clad layer would extrude proportionately with the surrounding carbon steel component, and there was no certainty whether this could or would be achieved. At paragraph [36] of his Opinion of 31 December 2007, moreover, in considering the hypothesis of an extruded pipe proving to incorporate either no steel or no cladding, the commercial judge expressed the view that:

"If, accordingly, 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 the breach might be in dispute, depending on its cause)."

What the commercial judge appeared to be saying in that passage is that the situation envisaged would amount to a breach of contract, but that it was not possible, in the absence of knowledge of the cause of the situation, to say whether the breach was on the part of one party or the other - a somewhat odd position. However, the passage does confirm the ongoing uncertainty as to responsibility for such a situation in the context of the contract in question. By February 2004, moreover, the parties appear to have had no clear idea as to who should bear responsibility for pipes rendered unusable by "tearing", that is, separation of the clad layer from the surrounding carbon steel. That was apparently because the cause might lie either with the features inherent in or limitations of the reclaimers' extrusion process, or alternatively with welding or clad-quality defects attributable to the respondents. In any event, as recorded at paragraph [10] of his Opinion, dated 3 July 2009, the commercial judge was not in a position to decide whether pipes rejected by the respondents were in fact defective. All that could be said was that the respondents had expressed dissatisfaction on certain grounds, and that this was known to the reclaimers.

[42] So far as appears from the commercial judge's Opinions of 31 December 2007 and 3 July 2009, the parties' contractual arrangements contained no express provision as to which of them must bear the risk of or responsibility for the phenomenon of "tearing", or separation of the clad bond, were that to materialise. It may be that, for this reason, the commercial judge felt it necessary to search for some implied term to fill that void, with which we deal later in this Opinion; but, for present purposes, we are inclined to regard the contractual uncertainty in this area as having a particularly significant bearing on the proper construction of the critical e-mail of 4 March 2004. In these circumstances of uncertainty as to contractual obligations just described, in our view it might be wholly understandable and not unreasonable for parties to table proposals or suggestions designed to cater for emerging difficulties which the terms of the contract did not contemplate and the precise cause of which remained uncertain. It seems to us that such a course of action must be harder to characterise as repudiatory conduct than would be the making of proposals or suggestions for deviation from contractual terms that were clear. In reaching his conclusions, the commercial judge failed, in our view, to give due weight to these particular considerations.

[43] Against the background of the developments summarised above, the respondents' e-mail of 27 February 2004 seems to us to merit particular attention as part of the context in which the subsequent e-mail of 4 March 2004 was sent. Previous communications between the parties had been amicable and constructive despite the emergence of "clad adhesion" and other problems on the last three extrusion runs. A meeting held between the parties on 24 February 2004 seems to have been cordial and, as the commercial judge acknowledges in paragraph [14] of his Opinion of 3 July 2009, the e-mail which followed it was generally conciliatory in tone. However, it can be seen to contain an overt stipulation by the respondents which sought, on the basis of allegations of mechanical damage and tearing, to blame lubrication problems on the reclaimers and thus to hold them responsible for any pipe deemed unusable due to recurrence of this damage. The relevant passage is in the following terms:

"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 re-occurrence of this defect resulting in scrap would also be Wyman-Gordon's liability."

The respondents then followed that up with defect notes and a covering e-mail on 29 February 2004, relative to seven out of eleven affected pipes, and these were augmented under cover of another e-mail on 14 March 2004.

[44] With all of these factors in mind, we consider that the commercial judge erred in construing the reclaimers' response in the e-mail of 4 March 2004 as an outright repudiation of the parties' contractual arrangements. As already observed, the parties' contractual documents were silent on the subject of responsibility for "clad thickness" and "clad adhesion" problems. As we explain later in this Opinion, we consider that the commercial judge fell into error in seeking to fill that void with a purported implied term. His decision to do so, it appears to us, must inevitably have affected his approach to the interpretation of the e-mail of 4 March 2004. Over and above that, the terms and the tone of that critical e-mail, read fairly and in context, do not strike us as having the character of repudiation. At most, the e-mail may be thought to contain counter-proposals to those advanced in the e-mail of 27 February 2004 for the regulation of past and future clad adhesion problems.

[45] Looking now at the detail of the critical e-mail of 4 March 2004, the opening paragraph is self-evidently positive and constructive, and the closing paragraph bears to offer special arrangements for a response from the respondents. After a discussion of clad thickness and overall wall tolerances in paragraph two, the third paragraph then makes it clear that, while dimensional tolerances were still for the reclaimers to address, they could not accept liability for all clad adhesion problems as stipulated by the respondents in their e-mail of 27 February 2004: "This [lack of clad adhesion] is something we cannot accept as our liability - either for future business or on the most recent extrusions." Importantly, the fourth paragraph begins with the words "As a consequence, therefore...", thereby linking what follows to what had gone immediately before, and the reclaimers then proceed to confirm unwillingness to accept the respondents' proposed "arrangement" given the level of uncertainty involved in the manufacture of the product. On a fair reading, the "arrangement" in question would appear to be the stipulation regarding clad adhesion in the respondents' e-mail of 27 February 2004.

[46] In that overall context, we do not think that the first sentence of the fourth paragraph can reasonably be read as referable to anything other than what was plainly under discussion, namely the problem of clad adhesion. That was what the reclaimers were, by way of counter-stipulation, suggesting should be at the respondents' risk, and it is highly significant that the whole of the fifth paragraph confirms the reclaimers' continuing commitment to controlling "... the process variables of forge temperature, soak time etc." Full value acceptance of extrusions by the respondents was predicated on "these " being within tolerance and, like the previously suggested allocation of risk, this proposal does not appear to us to undermine the reclaimers' established contractual responsibilities for the future.

[47] Up to this point in the e-mail, we can detect no demonstrated intention on the part of the reclaimers to withdraw from all of their obligations under the contract. Even if relevant, therefore, the respondents' evidential claims regarding the e-mail of 4 March 2004, summarised by the commercial judge at paragraphs [17], [27] and [28] of his Opinion of 3 July 2009, strike us as entirely unwarranted. Ex facie the reclaimers were not refusing to meet dimensional tolerances, nor were they seeking to abdicate responsibility for controlling the extrusion process as such. They were not, in other words, threatening non-performance of any of the obligations which the contract placed on them, and we do not see how any reasonable commercial recipient of the e-mail could properly have concluded otherwise.

[48] As regards the sixth paragraph of the e-mail of 4 March 2004, once more, it starts off on a positive note, looking to the future of the Proclad product and proposing a special extrusion run to see if the emergent problem could be resolved by adopting certain measures which had been under discussion. To our mind, the "failure" there mentioned, taken in context, related to the matter of clad adhesion, and not, as the respondents asserted, and the commercial judge found, to any failure of the extrusion process from whatever cause. If all went well, the respondents would pay the full price, but if clad adhesion still proved to be a problem, despite all contractual tolerances and process requirements being met by the reclaimers, the respondents would pay the reclaimers' on-costs only. In that latter case, of course, the respondents could no longer seek to blame lack of lubrication or mechanical damage, and the cause of the clad adhesion problem might then rest with them. With these possibilities in mind, it is perhaps unsurprising that, in the final sentence of the paragraph, the reclaimers should have wished to defer further commitments until the results of the special run were known.

[49] Taking all of these considerations into account, there is, in our opinion, every reason to regard the e-mail of 4 March 2004 as containing a combination of (i) reassurances that the reclaimers would continue to adhere to their established contractual obligations regarding dimensional tolerances and process variables; and (ii) counter proposals for consideration as to how the parties might best regulate the emergent problems with clad adhesion for which no contractual provision had yet been made. From beginning to end, as it seems to us, the general tone of the communication was constructive and forward-looking, and, without ignoring or misreading its major contents, we can see no way in which the respondents or, in turn, the commercial judge, could legitimately have treated it as a repudiation of the parties' contractual relationship. If the contract was so obviously repudiated as the respondents ultimately maintained, it is hard to see why they followed it up with the apparent contractual intimation of rejection notes ten days later. It is equally hard to see why their purported "acceptance" of the alleged repudiation was delayed for a further eight days during which they apparently acquiesced in the determination of their principal contract with FMC. What is clear is that the respondents, at some point over a period of nearly three weeks, determined to treat the e-mail of 4 March 2004 as a repudiation of the parties' contract, and that they did so without taking any steps to try to clarify the position with the reclaimers. They must therefore, in our view, be taken to have assumed the risk of their purported reading of the reclaimers' e-mail being deemed untenable, and consequently of their own e-mail of 22 March 2004 being considered repudiatory in its own right.

[50] We turn next to consider the second of the principal issues which we see as arising in this reclaiming motion, namely that concerning the character and effect of the e-mail of 22 March 2004. In our view, that e-mail must be construed as independently repudiatory of the respondents' obligations under their contract with the reclaimers. While the e-mail of 22 March 2004 is couched in somewhat opaque and oblique language, and while it does not expressly bear to terminate anything, in our opinion, the whole tenor of that communication is negative. It commences with a rejection of "the terms you have outlined". It then goes on to narrate that the respondents considered that they had no alternative but to advise their customer, FMC, of the situation existing between the parties. In the second paragraph, it narrates that FMC had "cancelled the remainder of the contract on us". It informs the reclaimers that the "contractual status between our customer and Proclad International is irreversible". We take that to mean that, so far as the respondents were concerned, their contract with FMC was at an end.

[51] The third paragraph of the e-mail contains warnings regarding the expected value of the claims being compiled by the respondents against the reclaimers. We consider that the language of the third paragraph of the e-mail amounts to a clear indication that the respondents considered that their contractual arrangements with the reclaimers, save for the assertion of claims of damages, were at an end.

[52] Since the contractual arrangements between the reclaimers and the respondents were admittedly not directly dependant on the continuance of the respondents' contract with FMC, and while the respondents could, no doubt, have chosen to proceed with the former notwithstanding the loss of the latter, that was not what was done. The e-mail of 22 March 2004, in our view clearly indicated a decision not to proceed in that way. It is quite evident that the respondents intended to proceed on the basis that the contractual arrangements between them and the reclaimers were finally at an end, and in our view, the reclaimers were then left with no realistic alternative but to accept that as a repudiation of the contract.

[53] We turn now to the third of the principal issues requiring consideration, the matter of the term implied into the contract between the parties by the commercial judge. He deals with this matter in paragraph [24] of his Opinion of 3 July 2009. After considering the conditions of the contract dealing with the dimensions of the finished product and other matters he states:

"... 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 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."

[54] It would appear to us correct to observe, as the commercial judge did, that liability for defects in the extruded pipes that might arise as a result of the way in which the parties' processes were carried out was not dealt with in the existing contractual arrangements. We would also agree that the issue does not appear to have been considered in the course of the discussions between the parties prior to February 2004. Against that background, the commercial judge appears to reach the conclusion that in that state of affairs it was necessary to imply a term into the parties' contract to deal with the allocation of such risk. Thereafter he gives two reasons why he considers that such a conclusion is justified. For those specified reasons he is of the opinion that the implication of a term is necessary to give the contract business efficacy. Thereafter, he states his view as to a term relating to these matters that he considered might reasonably and naturally be implied into the contract.

[55] We do not think that it is either appropriate or necessary to examine the reasons that the commercial judge gives for reaching that conclusion, save to say this, that it is quite plain that the reasons which he states for reaching his conclusion on this matter must be seen as potentially controversial. That much was confirmed to us during the course of the hearing of the reclaiming motion.

[56] In these circumstances, we consider it surprising that the commercial judge concluded that it was proper for him to reach his conclusion regarding an implied term in the absence of any pleadings in relation to the matter, in the absence of any evidence which either party might have wished to lead in relation to the matter and without having heard any submissions on the matter from the parties. In normal circumstances, if a party to a contractual dispute considered that, for example, in order to give the contract business efficacy, it was necessary for a particular term to be implied in the contract, that party could be expected to make an averment to that effect in the pleadings and, if appropriate, then to lead evidence concerning the basis for the implication of such a term and to make submissions in relation to the issue. The other party would then be given fair notice of what was contended for and have a full opportunity of engaging in any evidential consideration of the need for the implied term and of making submissions to the court about it. None of that happened in the present case, despite the fact that the commercial judge had previously held a preliminary proof on the subject of the terms of the contract or contracts between the parties. In these circumstances, we are driven to conclude that the course which he followed must inevitably be seen as productive of unfairness and injustice to the parties.

[57] As was said by the late Lord Macphail in his work, Sheriff Court Practice, 3^rd Ed. at paragraph 17.28:

"It is generally incorrect to decide any matter raised on record which the parties have declined to argue. It is incorrect to decide any matter in dispute on a ground which has not been explored in evidence or argument."

In support of that proposition, with which we agree, the case of Kay v Ayrshire & Arran Health Board is cited. In that connection the observations of Lord President Emslie at page 153 are apt. There he said:

"It is one thing for a judge to lend his assistance to a party litigant to present his case in evidence. That is entirely proper. It is quite another thing and wholly improper for a judge to neglect the principle of doing justice between the parties and of fairness to both parties by going further and giving a decision in favour of one party upon a ground of his own devising which has not been the subject of consideration and exploration at the proof, and of which the opposing party has had no notice whatever. The result, and the inevitable result, of what the Lord Ordinary has done in this case is that the judgment which he has given in the pursuer's favour is quite indefensible and must be recalled."

[58] In our view, if, following a legal debate or a proof, some matter, whether it be an authority not relied upon, or some issue not the subject of any submissions before him, occurs to a judge to be material to his decision, the proper course would be, before giving judgment, to put the case out By Order, explaining to the parties why he has taken that course and affording to them the opportunity to make any motion, or present any submission, to him on the topic in question before he reaches his conclusions and delivers judgment. That is a course which could and should have been followed in the present case, if the commercial judge considered that it was necessary to enter into consideration of the possibility of the implication of a term in the contract between the parties.

[59] In the light of what we have said regarding the matter of the term implied by the commercial judge, the question arises of how the course of action followed by him affects the decision under review. The answer to that issue must depend upon the bearing that his conclusion as to the existence of the implied term has had upon his decision in the case. In Kay's Tutor v Ayrshire & Arran Health Board, the Lord President considered that the consequence of the Lord Ordinary having devised a ground of decision in favour of one party, of which the opposing party had no notice whatever, was that the judgment given in the pursuer's favour was "quite indefensible and must be recalled". In that case the effect of the conclusion that the Lord Ordinary reached on the matter of his own devising was very clear. However, in the present case, in which the circumstances are different, it is necessary to consider what impact the commercial judge's conclusion about the implication of the term of his own devising may have had upon his decision overall. In our opinion, having reached the view that a term with the content described in paragraph [24] of his Opinion was to be implied in the contract between the parties, that must inevitably have coloured his approach to the e-mail of 4 March 2004. As we have held, that e-mail properly fell to be considered against a background of contractual uncertainty as to responsibility for the kind of problems in extrusion that were under consideration at the time. The commercial judge, however, bears to have approached the question of interpretation in a different way and, in particular, on the footing that a term of the kind he describes was to be implied in the contract. For that reason we are driven to conclude that, on this ground also, his conclusion as to the interpretation of the e-mail of 4 March 2004 cannot stand.

[60] Before parting with this aspect of the case, we should record that it was tentatively submitted that the respondents had made averments which could justify the course which the commercial judge took. In that connection, our attention was drawn to the averments at page 31B-D of the reclaiming print, appearing in Statement 4 for the respondents in their counterclaim. Looking at those averments, we cannot conclude that they give fair notice of a contention by the respondents that an implied term of the kind devised by the commercial judge was to be seen as part of the contract between the parties. It would appear from the manner in which the second preliminary proof was conducted that those averments were not, in any event, understood in that way.

[61] For all of these reasons we consider that the commercial judge's findings 1, 3 and 4, which appear in paragraph [36] of his Opinion are erroneous; Finding 2 may be seen as correct, but ultimately irrelevant. Thus we consider that the interlocutors of 3 and 10 July 2009 must be recalled and the case remitted to him to proceed as accords.

[62] We recall that a secondary motion was made to us, upon the basis that the reclaimers' primary motion was not to be acceded to, to the effect that the cause might be remitted to a different commercial judge to consider the issue of the implied term de novo in the light of further pleadings, evidence and argument upon that topic. In view of the conclusion which we have reached upon the reclaimers' primary motion, it is unnecessary to express any view upon that. However, we would simply say that, having regard to the ample opportunity previously available to both parties, if so advised, to raise the issue of an implied term, we do not consider that such a course would have been appropriate. In our view the remaining stages of this litigation must now proceed upon the basis of the conclusions we have reached in relation to the e-mails of 4 March and 22 March 2004. In accordance with the suggestion made to us by the solicitor advocate for the reclaimers, we shall order that a By Order roll hearing should now be held for the purpose of settling the form of the interlocutor to be pronounced.

[63] Finally, I would wish to express my appreciation for the assistance which other members of the court have given to me in the preparation of this Opinion.