Wyman-Gordon Ltd v. Proclad International Ltd (no. 2) [2007] ScotCS CSOH

"With regard to drawing dimensions and tolerances we cannot work to the tolerances on the drawing, these are for machined pipe. We can work to the following:

OD: -.032" / + 0.095"

ID: + / - 0.0 80"".

On 29 July Mr Armet sent a further e-mail, in which he stated:

"In preparing tooling for extrusion -- an FE Punch (ID mandrel and extrusion throat -- we can design a pipe to be either OD or ID controlled. However it is not possible to tolerance the ID, OD and wall so we need to agree what dimensions will be toleranced.... W-G believe they can accept the tolerances mentioned in the e-mail for pipe in the as extruded condition with the exception of the 5 1/8" ID pipe where we would propose the same as the 8" size i.e. + / - 0.060"... If we can agree on the above then the next step is to agree a tolerance on either the OD (allowing the wall to float) or the wall (allowing the OD to float). As the wall thickness is important we would suggest tolerancing this dimension as a minimum wall with a plus tolerance.... After the tolerance is agreed we will design the extrusion throat which then has to be manufactured. Can FMC advise us urgently what tolerance they would like on the wall, assuming the foregoing is acceptable".

[10 ] The e-mails of 25 and 29 July are important because they indicate that the pursuers were unable, because of the inherent limitations of their extrusion process, to tolerance more than two of the three basic lateral dimensions in a pipe, that is to say the inside diameter, the outside diameter and the wall thickness. That was the consistent position taken by the witnesses for the pursuers, and I accept that such a limitation existed and that it was made known to the defenders in the foregoing e-mails. The tolerances that were to be provided by the pursuers were the subject of further discussion and agreement. In e-mails of 30 September 2002 and 17 October 2002 (discussed below at paragraphs [12] and [14]) wall thicknesses were agreed, with minimum and maximum tolerances; in respect of the 5" pipe the wall thickness was agreed at 1.000 -0.046/+ 0.154". The formal purchase order for the 15 5" pipes ordered on or before 16 July 2002 was received on 17 January 2003. The pipes were delivered in December and paid for on 17 February 2003.

[11 ] In their e-mail of 25 July 2002 the pursuers offered to supply a further 15 blockers for 5" pipes and to extrude the pipes. The formal purchase order for those items was received on 17 January 2003 (see e-mail from the defenders' Iain Bickett of that date). The order was, however, accepted on or about 31 July 2002; that appears from the terms of the purchase order, which bears the latter date, and appears to have been faxed to the pursuers at that time. The pipes were designated as production pipes. No reference was made in the purchase order to any drawing; nor was any reference made to a Manufacturing Procedure Specification ("MPS"). Indeed, at the time of the order, no production MPS had been agreed for the 5" pipes, and the pipes had not been the subject of testing. The 15 pipes in question were delivered in December 2002 and January 2003 and paid for on 17 February and 18 March 2003.

[12 ] In the same e-mail of 25 July 2002 the pursuers offered to supply machined blockers for 8" and 12" qualification pipes and to extrude those pipes in due course. Five 8" and, ultimately, three 12" pipes were ordered; once again the formal purchase order was sent on 17 January 2003. The actual orders appear, however, to have been placed by the defenders on 31 July 2002 in respect of the 8" pipes and on 10 October 2002 in respect of the 12" pipes. The pursuers' offer of 25 July 2002 referred, in respect of these pipes, to certain drawings provided by FMC (earlier versions of the drawings Nos 7/3 and 7/2 of process respectively); those drawings were not, however, the drawings that were ultimately used. In any event, as mentioned above at paragraph [9], the e-mail indicated that the pursuers could not work to the tolerances shown in the FMC drawings. The tolerances that the pursuers were prepared to accept for all sizes of pipe were set out in an e-mail from Mr Armet to the defenders' Mr Bickett dated 30 September 2002. For the 8" pipes the wall thickness specified was 1.181 - 0.046 / + 0.154"; for the 12" it was 1.375 - 0.056 / + 0.144". All of these pipes were delivered in December and paid for on 17 February 2003. In the e-mail of 25 July 2002 the pipes were described as "qualification" pipes. That means that they were to be treated as trial pipes; the intention was that they should be subject to testing and analysis to ensure that the manufacturing process was properly set up and that it was possible to produce pipes that were satisfactory for the defenders' purposes.

[13 ] It is clear from the e-mails of 25 and 29 July 2003 that the pursuers could not work to the tolerances shown on the FMC drawings. At the same time, FMC had made it clear that they could not work to a standard set of tolerances used in the oil industry, API (American Petroleum Institute) 5 L. These were discussed at meetings among the pursuers, the defenders and FMC, but the pursuers did not change their basic position, that they could not tolerance more than two of the three dimensions, inside diameter, outside diameter and wall thickness. A project meeting took place on 12 and 13 August 2002. In the minutes prepared by FMC it is recorded that pipe tolerances were discussed (paragraphs 1898-1902). It was stated that there had been confusion on pipe tolerances, but that the latest 5" pipe drawing at revision D should be used (No 7/1 of process). The outside diameter was to be a reference dimension, and the controlled sizes were the inside diameter and wall. All pipe was to meet API 5 L tolerances. The pursuers indicated that pipe wall variation would be difficult to maintain, although they could hold the inside diameter and outside diameter of the pipe. The 8" pipe would be measured to determine what was achieved on wall thickness tolerances. Following the meeting it appears that copies of the then current drawings (Nos 7/1-4 of process) were supplied to the pursuers on 22 August 2002. Mr Armet was cross-examined about these drawings (day 3, 10.45-10.57), and stated that the figures in them were not agreed and (11.07) that the pursuers could not work to the tolerances on the drawings.

[14 ] After the meeting the pursuers gave further consideration to the question of tolerances, and decided that they could tighten up on certain of the tolerances in API 5 L. The result was Mr Armet's e-mail of 30 September 2002 which suggested tolerances for all four sizes of pipe. It concluded:

"Please advise if we can proceed on the above dimensions; we can immediately start machining the 8" Qualification blockers and proposed forging the 12" [blockers] this week".

Those were references to the 8" and 12" pipes referred to in paragraph [12] above. That e-mail was further qualified by an e-mail from Mr Iain Bickett dated 17 October 2002, in which the wall thickness for the 5" pipe was revised. Thereafter, in November 2002, a set of drawings (Nos 7/5-8 of process) was made available; the dimensions on these relating to overall wall thickness reflected the terms of the e-mails of 30 September and 17 October. Those drawings also specified certain further dimensions. The inside diameter was specified, with tolerances that were acceptable to the pursuers. The outside diameter was also specified, with tolerances, but in this case the figures were placed in brackets; this indicated that this dimension was for reference only and was not binding. In addition to those dimensions, however, a dimension with tolerances was also given for the clad thickness. In every case the dimension specified was 0.12 + 0.040/- 0.000". This was not shown as a reference dimension. There was no suggestion that this dimension had been discussed previously or was discussed subsequently. Nevertheless it appeared quite clearly in the set of drawings issued in November and had in fact appeared in the earlier set of drawings (Nos 7/1-4 of process), of which the November drawings were a revised version.

[15 ] A further order for pipe appears to have been placed verbally by the defenders on 10 October 2002; it was confirmed by a purchase order received by the pursuers on 17 January 2003. In relation to inside diameter and wall thickness, this order was subject to the provisions found in the e-mails of 29 July 2002 as regards inside diameter and 30 September 2002 as regards inside diameter (see paragraphs [9] and [12] above). Seven 10" Wex pipes were ordered; these were production rather than qualification pipes, and in fact no qualification 10" pipes were ordered at any time. Of the seven pipes ordered, five were delivered on 30 July 2003 and a further two on 26 October 2003; payment was made in September 2003 and February 2004. In the same order of 10 October 2002 20 12" Wex production pipes were ordered. Of these pipes, six were delivered in March and four in June 2003, and payment was received in May and September 2003. The remaining 10 pipes had not been manufactured when the relationship between the parties broke down. Yet a further order for production pipes was placed by the defenders on 12 November 2002 and accepted by the pursuers on 13 November, with the price being quoted in the pursuers' e-mail of the latter date. This related to 17 8" Wex production pipes. The formal purchase order for these pipes was issued on 17 January 2003. The tolerances applicable to the inside diameter and wall thickness were once again as in the e-mails of 29 July 2002 and 30 September 2002. It should be noted that all of the foregoing orders except for that of 12 November were placed prior to the issue of drawings in November 2002. The formal purchase orders in respect of the pipes ordered on 10 October and 12 November made reference to manufacturing procedure specifications, although the first of the orders placed on 10 October made reference to the wrong specification. The specifications made reference to drawings; in the case of the 12" pipe ordered on 10 October the wrong drawing number was used. The drawings referred to were those found at Nos 7/5-8 of process, which include tolerances for the clad thickness. At this time, however, the equipment that was available to the pursuers did not include any device for measuring clad thickness. I will return to this matter at paragraph [33] below.

[16 ] Further orders for 5" Wex pipes were placed in January and July 2003. By e-mail dated 13 January 2003 the pursuers offered to supply the blockers for and to extrude 30 such pipes; this was accepted by a purchase order from the defenders dated 16 January. The purchase order made reference to a drawing, with a number corresponding to No 7/5 of process; it was in fact the only purchase order to do so; this is discussed further at paragraph [32] below.

[17 ] The final order that was placed for pipes was for 60 5" Wex pipes. The pursuers offered to supply such pipes by an e-mail of 26 July 2003. That offer was accepted by an e-mail from Mr Bickett dated 26 July 2003. A purchase order was sent in due course; it was dated 28 July 2003, but it was probably not received until the end of 2003 or beginning of 2004 (evidence of Mr Armet, day 6, 12.55). Neither the acceptance nor the purchase order said anything regarding tolerances or wall thickness. 10 pipes were delivered on 22 January 2004, but they were neither accepted by the defenders nor paid for. This was in fact the first occasion on which the defenders rejected any pipes. A further 11 pipes were delivered on 20 February 2004. These have not been paid for. Finally, I should record that a number of orders were placed for Ex pipe. These were fulfilled, and no complaints were made about the quality of the pipe delivered.

Contractual analysis: terms agreed by parties
[18 ] Counsel for the defenders founded his main argument on the terms of the drawings received in November 2002. He submitted that the new details on the drawings produced in November would vary anything previously produced; the details of the Wex pipes were finalized by those drawings. The significance of the drawings had to be considered against the nature of the Wex process. In applying that process, it was the pursuers who supplied the Wex pipe, and they indicated what was and was not possible in extruding that pipe; the method of extrusion was the pursuers' own proprietary process. Moreover, both parties understood the importance of the layers of carbon steel and Inconel cladding; the carbon steel gave strength and the Inconel provided resistance to corrosion. Consequently it was important that proper thicknesses of both carbon steel and cladding should be maintained. Counsel submitted that it was the pursuers who were responsible for the volumetric calculation that would produce the required dimensions shown on the drawings. In view of the critical importance of the clad thickness, the pursuers ought to have known that it was important that the two layers making up the wall should be in the respective proportions shown on the drawings. For example, it would be absurd to claim that pipes with very thin cladding and very thick carbon steel were conform to contract, and the same was true of pipes with very thick cladding and very thin carbon steel. Ultimately some agreement had to be reached on the proportions of carbon steel and cladding. It was accordingly a term of the contract that the pipes should conform to all of the tolerances shown in the November drawings produced by FMC. In addition, counsel submitted that it was an express term of the contract that the pipes should be suitable for use by FMC in the Gulf of Mexico, and that the pipes should have the chemical properties specified by FMC.

[19 ] In relation to these submissions, it was not I think seriously in dispute that the method of extrusion was the pursuers' own process, and that they indicated what was and was not possible in that process. Nor was it in dispute that the carbon steel was essential for the strength of the pipe and that the Inconel was essential to provide resistance against corrosion; that was clearly understood by the parties. Counsel for the defenders relied on certain passages in the evidence. Mr David Neill, the defenders' group technical director, gave evidence (day 12, 2.46) that if sufficient amounts of carbon steel and cladding were used and the extrusion was done correctly there should be no defect in the pipe. Mr Neill further stated in re-examination (day 13, 12.52 onwards) that the pursuers' calculations would have an effect on the drawings; it would be necessary to review the drawings as to the carbon steel and the clad section to determine the final pipe size. If the extrusion was done properly the clad thickness should conform to the drawings. The clad thickness was important, and had to be determined before the blockers were made. On that basis Mr Neill stated that the definition of the clad thickness was as per the drawing details.

[20 ] Counsel further referred to the evidence of certain of the pursuers' witnesses. Mr Armet accepted (day 1, 3.32, in relation to the manufacturing procedure specification for 5" pipes, revision 1, dated 13 August 2002) that it was crucial to the qualification process that the pipes should meet the dimensions of the drawings, including the tolerances for those dimensions; if it were found that the qualification pipes were outwith the tolerances, the qualification process would not be approved. In cross-examination Mr Armet was asked about the drawings Nos 7/5-8 of process (day 3, 11.14), and stated that the drawings were to reflect the offer contained in the e-mails of 30 September and 17 October. He stated that the pursuers had offered those tolerances, which were based on their knowledge of their extrusion process and the confidence that the defenders had in the Wex process and its previous use in the Saudi Aramco contract. Moreover, Mr Armet further stated (day 2, 3.51) that the use of drawings made it easier to dimension and tolerance the product; the drawings disclosed the diameter, the thickness and the cladding. Consequently, counsel submitted, the pursuers were aware that the cladding had to be taken into account in producing pipes; that was common sense in view of its function. Reference was also made to the evidence of Mr Derek McCallum, a design engineer for the pursuers, who stated (day 6, 11.35) that the pursuers carried out a volumetric calculation in order to produce the pipe; they did so using their expertise in extruding pipes, and in doing so they agreed what was and was not possible. Counsel sought to draw from this passage that the volumetric calculation indicates that clad thickness was an issue. He further relied on another passage in Mr McCallum's cross-examination (day 6, 2.25), where Mr McCallum, after being referred to the cladding, stated that he was confident that the pursuers' calculations had been properly carried out. I am doubtful whether this passage supports the defenders' case, however; immediately beforehand Mr McCallum had indicated that factors other than extrusion could have an influence on the way the pipes worked.

[21 ] On the basis of the foregoing evidence, counsel for the defenders submitted that the dimensions in the drawings had been accepted by the pursuers and that they were accordingly contractually binding. He further stressed that the pipes were being produced for FMC, for a specific project, and that accordingly the requirements of FMC had to govern the tolerances to which they were produced. In addition, the pursuers determined how the extrusion process was to be carried out; they considered FMC's requirements and designed the process accordingly. Thus in accepting the tolerances on the drawings the pursuers were accepting that those tolerances were contractually binding.

[22 ] I acknowledge that there is some force in this argument. Nevertheless, I am of opinion that it takes too narrow a view of the manner in which the parties reached agreement on the contractual terms that were applicable to the Wex pipes. In particular, it fails to give full effect to the history of the parties' dealings, and it fails to recognize the nature and development of the Wex process at the time of the Thunderhorse project.

[23 ] The critical question is whether the pursuers agreed to tolerance the clad thickness in the manner shown in the drawings Nos 7/5-8 of process. In my opinion they did not. A number of factors point to this conclusion. In the first place, certain elements in the background to the Thunderhorse project are relevant. First, although Wex pipes had been successfully extruded for the Saudi Aramco contract, no attempt was made to check the clad thickness of those pipes (evidence of Mr William Lawrie, day 13, 11.24, 2.17 onwards, 3.41, in questioning by the court). There was a simple reason for this: neither the pursuers nor the defenders had any equipment that was capable of giving an accurate measurement of clad thickness. Consequently, when the Thunderhorse project began, neither party actually knew whether it was possible to tolerance the clad thickness.

[24 ] Secondly, even after the Thunderhorse project began, the pursuers, to the defenders' knowledge, did not have any accurate means of measuring the clad thickness on a systematic basis. More accurate methods of measuring clad thickness were introduced prior to April 2003; that appears from the minutes of a project meeting held between the parties on 3 April, where at paragraph 4 it is recorded that "now that more accurate measurement techniques are being employed it seems that there is a wide variation in clad layer thickness"; the entry went on to record that an improvement was necessary. Automatic measurement of that thickness only became possible in August 2003, when a device known as a Dinsley machine was installed at the premises (see minutes of meeting of 1 August 2003). Mr McCallum (day 5, 2.23) stated that of the 400 pipes that were manufactured (for the Saudi Aramco and Thunderhorse projects), the majority were produced without the ability to measure that thickness in an accurate manner. With better measurement, it was discovered that there were variables in the process that had not been fully understood. This was borne out by the minutes of the project meeting held on 3 April 2003 (at paragraph 4). That evidence, which I accept, suggests that the lack of knowledge as to whether that thickness could be toleranced extended well into the Thunderhorse project. It was, moreover, borne out by the evidence of Mr David Neill, the defenders' group technical director, who gave evidence (day 13, 12.11) that initially the pursuers could not check the clad thickness of the whole length of the pipe; that was not possible until a Dinsley machine was obtained.

[25 ] Thirdly, the common assumption of the parties was in my view accurately stated by Mr Armet (day 1, 4.01): when giving evidence about the early drawings and the e-mail of 30 September 2002 that specified the tolerances applicable to wall thickness, he stated the dimensions were based on the notion that the carbon steel and the cladding would extrude together, according to a proportionate sum. The parties had assumed that. Thus it was assumed that, if the parties achieved the tolerances on the wall thickness, they would automatically achieve the tolerances on the cladding thickness as a result of the proportionate extrusion.

[26 ] Fourthly, the Wex process was the defenders' process. The pursuers were experts in extrusion, but the cladding was placed by the defenders. It is true that the pursuers carried out the dimensional calculations for the extrusion, but that did not make them responsible for the entirety of the Wex process. The process was a combined process, involving steps by both the pursuers and the defenders (Mr William Lawrie, day 13, 2.54). In these circumstances, it might be surprising if the pursuers were to warrant a tolerance that depended on the Wex process as a whole rather than the mere act of extrusion.

[27 ] Fifthly, counsel for the defenders emphasized that the pipes were being produced to meet FMC's requirements. That is no doubt correct. Nevertheless, it was fairly clear that the pursuers did not have a particularly detailed knowledge of FMC's needs, and the contracts between the defenders and FMC and the defenders and the pursuers were not entered into on a back-to-back basis. This suggests limitations to the reliance that can be placed on the requirements specified by FMC.

[28 ] In the second place, against the background described in the last five paragraphs, features of the parties' agreement itself strongly suggest that the pursuers did not undertake to tolerance the clad thickness. First, as regards timing, it is clear that no agreement on tolerances existed until, at earliest, 17 October 2002; that is the date of the e-mail from Mr Bickett to Mr Armet in which the tolerances for the wall thickness of the 5" pipe were agreed (with similar tolerances being applied thereafter to the other thicknesses). The drawings founded on by the defenders, Nos 7/5-8 of process, were not in fact produced until November 2002. Drawings had been produced earlier (Nos 7/1-4 of process, which were sent to the pursuers on 22 August 2002); these differed from the later drawings in respect of the overall wall thickness, which was modified as a result of the e-mails of 30 September and 17 October. That is a strong indication that no agreement to tolerance the clad thickness could have been reached before November 2002, as the clad thickness was clearly dependent upon the overall wall thickness. It follows that any such agreement could only have applied to the pipes ordered in November 2002 and January and July 2003 (paragraphs [16] and [17] above). Moreover, to the extent that contractual terms agreed in earlier contracts were carried through to later contracts, if the clad thicknesses shown in the November drawings were to apply it would be necessary that there should be some innovation in the contractual terms. There was no express indication that the contractual terms had been changed in November; nor was there any evidence that a change in contractual terms was discussed at that time; and in all the circumstances I consider that a change was unlikely.

[29 ] Secondly, in relation to the nature of the parties' dealings, I do not think that the contracts concluded between the parties for the purposes of the Thunderhorse project can properly be regarded as simple contracts for the sale of goods. The pipes supplied in the early stages were qualification pipes, designed for the process of qualification testing; qualification testing was to ensure that the pipes were capable of being manufactured in such a way as to meet the defenders' requirements. That in itself indicates that initially neither party was wholly confident as to the performance of the pipes; indeed, to some extent it could be said that the qualification pipes were essentially experimental in nature. Mr Armet explained (day 1, 3.33) that it was crucial to the qualification process that the pipes should meet the dimensions on the drawings, including tolerances, but that if pipes were outwith the tolerances on the drawings the qualification process would not be approved; in that event it was necessary to find out why and to modify the process. In cross-examination Mr Armet stated (day 2, 3.40) that, although an agreement had been reached in relation to the qualification pipes, it was still necessary to prove that those pipes were suitable for their purpose. In re-examination he was asked about the qualification process and stated (day 4, 3.46) that, before the end product could be marketed, the parties had to complete the qualification process to see that it worked. Mr McCallum (day 6, 11.04 onwards) was cross-examined about the manufacturing procedure specifications. He pointed out that these were all being continually updated by the parties. It was then put to him that that did not make the project one big experiment. He replied "In a sense it does". Later (day 6, 12.00) he stated that he understood that the final designs of the project had not been finalized. He was asked (day 6, 12.15), in relation to the meeting held on 12 and 13 August 2002, whether the discussions at that meeting involved a process of understanding what FMC required. Mr McCallum replied that it did, and also discussion of what could be done. That was what the pursuers were willing to commit to. In relation to the meeting held on 3 April 2003, Mr McCallum stated (day 6, 2.33 onwards) that both the pursuers and defenders intended to come up with a solution, and that at this stage, following problems that had arisen with the pipes, the parties did not understand what was going on. Subsequently (day 6, 3.18) he stated, in relation to the drawings, that the cladding material was developing, so the process was evolving. I found both Mr Armet and Mr McCallum to be careful and conspicuously fair witnesses, and I conclude from their evidence that there was an important experimental element in the parties' dealings. On that basis I am of opinion that the contracts that the parties concluded cannot be construed as simple contracts for the sale of goods, using established processes. In a contract of that nature, it is obviously less likely that a reasonable supplier would warrant particular tolerances unless it had been established that they could be met; it is also less likely that a reasonable purchaser would expect particular tolerances to be warranted until the processes had been proved.

[30 ] Thirdly, the tolerances in respect of the overall thickness were discussed specifically in the e-mails of 30 September and 17 October; the pursuers made it clear in the first of those e-mails which tolerances they could and could not achieve. By contrast, the clad thickness was not discussed in any way. In my opinion that tends to indicate that the overall thickness was warranted but the clad thickness was merely the subject of an assumption that the two materials would extrude proportionately, in the manner indicated in paragraph [25] above. Moreover, the clad thickness was part of the overall thickness, and if it were to be toleranced that would involve a tolerance within a tolerance. That indicates, I think, that if the clad thickness were to be toleranced it would have been the subject of specific discussion between the parties. In this connection I think that the evidence of Mr Armet, who was the author of the e-mail of 30 September, is significant. He stated (day 3, 11.22) that the November drawings were designed to reflect the offer made in that e-mail. The tolerances in the e-mail were offered on the basis of the pursuers' knowledge of their extrusion process and the confidence that the defenders had in the Saudi Aramco pipes and the Wex process. The pursuers came up with these figures, which were accepted by the defenders. Mr Armet further stated (day 4, 3.28) that the pursuers, in their e-mail of 30 September, only toleranced the combined wall thickness, comprising both cladding and carbon steel; they did not tolerance the cladding by itself. In my opinion that e-mail could not properly be construed in any other way, and I think that the November drawings must be construed in the light of the e-mail, in view of the specific discussions that had taken place between the parties.

[31 ] When the features of the parties' dealings set out in the last three paragraphs are taken together, especially in the light of the considerations discussed in paragraphs [23]-[27], I am of opinion that the reasonable inference from the parties' dealings is that the pursuers warranted tolerances on the inside diameter and the overall thickness but not on the clad thickness. In relation to pipes ordered before November 2002 I think that that result is clear, for the reasons discussed at paragraph [28]. Likewise, in relation to the qualification pipes, I do not think that there could be any warranty of clad thickness for the reasons set out at paragraph [29]. Even after November 2002, however, and even in relation to production pipes I am of opinion that the reasonable inference is that the parties did not innovate on the existing agreement, and that the position remained as set out in the e-mails of 30 September and 17 October: the pursuers did not warrant clad thickness. Instead, I consider that both parties merely assumed that the carbon steel and cladding would extrude proportionately, the matter never having been tested. That assumption in fact turned out to be wrong, for reasons that were never satisfactorily explained, but in my opinion it represents what parties understood at the relevant time.

[32 ] As mentioned in paragraph [16] above, the defenders' purchase order of 16 January 2003 relating to 30 5" pipes made mention of a drawing using a number that corresponded to that in No 7/5 of process. The relevant wording on the purchase order is "Drawing 1012DM1078543 refers". That drawing had been available since November and was obviously known to the parties. This was the only purchase order that made any reference to a drawing. The critical question is whether that reference is sufficient to incorporate the full terms of the drawing, including the tolerances relating to the clad thickness, into the parties' contract for these 30 pipes. In my opinion it is not, for three reasons. First, the reference itself was very brief; there was no attempt to state, for example, that the blockers and pipes were to be produced according to the dimensions in the drawing, or to incorporate the terms of the drawing into the contract through standard terms and conditions; nor was there any reference to drawings in the pursuers' offer, which is contained in an e-mail dated 13 January. I should note that the defenders' case as originally pled was based on the incorporation of their standard terms into the parties' contracts, but that position was departed from. Secondly, the reference must in my opinion be construed against the background set out in paragraphs [23]-[27] and in the light of the conclusions expressed at paragraphs [28]-[31]. The drawings had not previously been incorporated into the parties' contracts; consequently incorporation at this stage would involve an innovation on the terms that had previously been agreed. Where there has been a course of dealing, the reasonable construction is in my view that fairly clear wording is required to innovate on previously agreed terms. In the present case I consider that the wording was not sufficiently clear to achieve this result. Thirdly, it is significant that the pursuers had repeatedly indicated that they were only prepared to tolerance two of the three principal lateral dimensions for the pipes, namely the inside diameter and the overall wall thickness; that appeared in particular in the e-mails of 30 September and 17 October 2002, although there were other references in the e-mails of and 29 July and at the project meeting held on 12 August. For these reasons I am of opinion that the order placed in January 2003 is in exactly the same position as the earlier orders.

[33 ] As indicated in paragraph [15] above, the formal purchase orders in respect of the pipes ordered in October and November 2003 referred to manufacturing procedure specifications, which in turn referred to inspection to drawing standards; in one case the wrong manufacturing procedure specification was referred to and in another the wrong drawing number was used. In my opinion the reference to the manufacturing procedure specification does not affect the reasoning set out in paragraphs [23]-[31] above, which applies to these orders in exactly the same way as it does to the earlier orders. It is significant that all of these orders except that of 12 November were placed before the drawings Nos 7/5-8 of process were available. That was agreed in evidence by the defenders' Mr David Neill (day 13, 12.17). In any event, the formal purchase orders were sent by the defenders after agreement had been reached, which indicates that their terms could not normally have been incorporated into the contract. Finally, at the time when these orders were placed the pursuers had no means of measuring clad thickness; the Dinsley machine was only made available some months later. According to the manufacturing procedure specifications, however, it was the pursuers who were to inspect the pipes according to the standards in the specified drawings. It would be remarkable to say the least if a tolerance were imposed that could not be accurately measured by the party who bore responsibility for it. This is compounded by the fact that any reference to a tolerance proceeds obliquely, through a formal purchase order issued after consensus was reached which refers to a manufacturing procedure specification which in turn refers to a drawing at the stage of inspection. I am accordingly of opinion that the orders placed in October and November 2003 were in exactly the same position as the earlier orders.

[34 ] The defenders' position was set out in evidence by Mr David Neill (day 12, 3.44). He stated that if the blockers were incorrectly machined by the defenders or the cladding applied by the defenders was not sufficient to provide the finished product to the drawing requirements, the defenders would accept responsibility. If, however, the volumetric analysis showed that sufficient carbon steel and cladding material had been used to provide the finished product, the defenders would expect the pipes to meet the drawing tolerances, since extrusion was the pursuers' responsibility. I do not doubt that that was Mr Neill's understanding at the time. The pursuers' understanding, as explained by Mr Armet and Mr McCallum, was to the contrary. The task that the court must perform is to decide which of the two approaches a reasonable man would consider that parties would adopt in the whole circumstances of the case. On that basis, for the reasons that I have given, I consider that the pursuers' approach should be preferred.

[35 ] I should also mention the evidence of Mr William Lawrie on this matter. It was put to him (day 14, 11.14) that the pursuers claimed that the process was an experiment. He replied, in very definite terms, that it was not; it was never an experiment, and the defenders would not have put a purchase order on an experimental process. On the whole I was impressed by Mr Lawrie as a witness. On this point, however, I think that there is some ambiguity in the meaning of the word "experiment". I do not think that it was suggested by the pursuers' witnesses that the process was experimental in the sense that there was uncertainty about whether the basic processes were possible; that had been established in the Saudi Aramco contract. What was not clear, however, was precisely how exactly the processes could be extended to different sizes of pipe. In addition, the question of clad thickness had never been tested, and all that the parties had to go on there was an assumption that the carbon steel and the cladding would extrude proportionately. Objectively considered, these factors meant that there was a substantial element of uncertainty about what was and was not possible.

[36 ] Finally, counsel for the defenders submitted that, if the pursuers' argument were correct, pipe that consisted entirely of carbon steel or entirely of cladding would be conform to contract; that would be an absurd result. I do not think that this follows. The Wex process was for the production of a clad pipe, and that implies that there should be both carbon steel and cladding throughout its length. 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 is in dispute in the present case is whether the pursuers agreed to tolerance the cladding; the absence of any tolerances does not mean that the absence of cladding or of carbon steel would be acceptable. No doubt cases can be imagined where the absence of cladding or of carbon steel is almost complete, but those are borderline cases of the sort that can exist on any definition in a contractual term; the existence of borderline cases does not invalidate the definition.

[37 ] I accordingly conclude that the pursuers agreed to warrant the tolerances of the inner diameter of the pipes and the overall wall thickness of the pipes. The pursuers did not, however, warrant the tolerances of the clad thickness, either to the standard shown on the drawings Nos 7/5-8 of process or in any other way. At one time it was in dispute between the parties as to whether the pursuers warranted that the extrusion process would yield a particular percentage of usable pipe or that the pipes would be free from internal scoring in the bore of the pipe. Ultimately, however, the defenders accepted that nothing turned on the question of yield for present purposes; they accepted that there was no agreement that a precise percentage of yield should be achieved. The defenders further conceded that no agreement was reached as to any specific term in the contract about the absence of scoring. Two further matters were in dispute, however. First, the defenders contended that it was a term of the contract that the pipes should be suitable for use by FMC in the Gulf of Mexico. Secondly, the defenders contended that the parties concluded a single contract to provide pipe of different dimensions.

[38 ] In relation to the first of these, counsel for the defenders relied on the discussions that took place at the project meeting held on 12 and 13 August 2002. He submitted that on the basis of the minutes of that meeting and the evidence of Mr Armet and Mr Bickett details of what was involved were produced at those meetings; in particular, it was indicated what FMC's requirements were in relation to manifolds and well jumpers. Counsel also relied on the evidence of Mr McCallum (day 6, late morning), to the effect that any pipe produced had to be fit for the purpose of use in the Gulf of Mexico. I am bound to say that I was unable to discover such a passage in my own notes of evidence, although Mr McCallum did give extensive evidence (12.44 onwards) in relation to the meeting of 12 and 13 August. In my opinion it is clear that the pursuers were aware that the pipes were required for supply to FMC. FMC's requirements were explained to them to some extent, in particular at the meeting held on 12 and 13 August 2002. Nevertheless, I do not think it possible to conclude that the pursuers warranted that the pipes would be in a condition suitable for use by FMC. My reasons are broadly those set out in relation to the tolerance of the clad thickness. In particular, it is significant that the defenders' contracts with the pursuers and with FMC were not on a back-to-back basis, and that the pursuers' knowledge of FMC's requirements was not especially detailed (paragraph [24]). It is also important that, for the reasons stated at paragraph [26] above, the parties' contracts cannot be regarded as simple contracts for the sale of goods, but contained an experimental element. Moreover, it was not suggested that the pursuers expressly agreed at any point to provide pipes that would satisfy the specific requirements of FMC. Indeed, given the somewhat experimental nature of the processes that were being used, I am of opinion that it would have been most surprising if they had been willing to do so.

[39 ] In relation to the defenders' contention that the parties concluded a single contract for the supply of pipe of different dimensions, I am of opinion that the parties' dealings involves a series of distinct contracts for the supply of particular quantities of pipe of particular diameters. Individual orders were placed by the defenders for specific quantities of pipe of different diameters; those orders were accepted individually by the pursuers. Moreover, the orders involved quantities of both Wex and Ex pipes. The fact that separate orders were placed of itself strongly suggests a series of contracts. The point is even clearer if the essential terms of a contract are considered. These obviously include the identification of the goods, the quantity and the price. All of these varied from one order to another. When the first order was placed, it was quite impossible to say how many further pipes would be ordered, what their sizes would be and what the price would be. The lack of agreement on these matters which existed at the outset is in my opinion a decisive consideration against any argument that a single contract was involved; instead, this factor strongly suggests that the parties concluded a series of individual contracts.

Contractual analysis: terms implied under Sale of Goods Act
[40 ] The defenders further contended that the parties' contracts included the terms implied by section 14(2) and (3) of the Sale of Goods Act 1979. Section 14 states the implied terms regarding the quality or fitness of goods supplied under a contract of sale. So far as material, it is in the following terms:

"(2) Where the seller sells goods in the course of a business, there is an implied term that the goods supplied under the contract are of satisfactory quality.

(2A) For the purposes of this Act, goods are of satisfactory quality if they meet the standard that a reasonable person would regard as satisfactory, taking account of any description of the goods, the price (if relevant) and all the other relevant circumstances.

(2B) For the purposes of this Act, the quality of goods includes their state and condition and the following (among others) are in appropriate cases aspects of the quality of goods --

(a) fitness for all the purposes for which goods of the kind in question are commonly supplied,

...

(e) durability.

...

(3) Where the seller sells goods in the course of a business and the buyer, expressly or by implication, makes known --

(a) to the seller,...

any particular purpose for which the goods are being bought, there is an implied term that the goods supplied under the contract are reasonably fit for that purpose, whether or not that is a purpose for which such goods are commonly supplied, except where the circumstances show that the buyer does not rely, or that it is unreasonable for him to rely, on the skill or judgment of the seller...".

[41 ] Counsel for the defenders submitted that section 14(2) was applicable. Whether goods supplied were of satisfactory quality required objective assessment. The pipes in question were supplied for use in an offshore installation; consequently, under subsection (2B), the pipes should be fit for such use and sufficiently durable for such use. In relation to section 14(3), counsel submitted that the purpose of the pipes was made known to the pursuers by the defenders; at the meetings held in 2002, in particular the meeting held on 12 and 13 August, the defenders had made it clear that the pipes were for onward supply to FMC, for use by them in an offshore installation in deep water in the Gulf of Mexico. In the whole circumstances of the case it was reasonable for the defenders to rely on the skill and judgment of the pursuers as to the extrusion of the pipes. Reference was made to evidence that the design of the blockers was the pursuers' responsibility. Thus Mr Bickett had stated (day 9, 12.16) that designing the blockers was the responsibility of the pursuers. Mr David Neill had stated (day 10, 3.11) that the volumetric calculation for a pipe was designed to give a specific length of pipe with a particular wall section. That calculation was done by the pursuers in order to provide a reduction ratio for the material. The calculation should provide the overall wall section shown in the drawings and the section that was shown there. The volumetric calculation had a bearing on the thickness of both carbon steel and cladding. The pursuers had the reduction ratios that they had to work to, and worked from these dimensions to give the blocker size. Subsequently (day 11, 10.33 onwards) Mr Neill referred to the performance of the extrusion process by the pursuers, in a manner that suggested that it was under their control. He further gave evidence, in relation to the meeting held on 12 and 13 August 2002 (day 11, 2.27), that the pursuers had made clear that the information regarding the extrusion was proprietary; it could be viewed by the defenders and FMC at the pursuers' premises. Finally, counsel relied on the evidence given by Mr Neill that is summarized at paragraph [29] above (day 11, 3.44). On the basis of that evidence, counsel submitted that the extrusion process was the pursuers', and was under their control. In these circumstances reliance on the pursuers was justified.

[42 ] The solicitor for the pursuers submitted that the defenders' case based on the Sale of Goods Act was misconceived. He submitted, under reference to Benjamin on Sale of Goods, paragraphs 11-087-11-089, that section 14(3) required a potentially higher standard from the seller than section 14(2), but might be inapplicable because the purchaser did not rely on the seller or reliance was unreasonable. No such reliance was required under section 14(2). I should add that these propositions were not disputed by counsel for the defenders. The solicitor for the pursuers went on to submit that, if it were held that the pursuers agreed only to warrant two dimensions, the inner diameter and the overall wall thickness, that became a description of the goods for the purposes of section 14(2A). On that basis the pipes would be of satisfactory quality if they satisfied those two dimensions. If on the other hand the pursuers were unsuccessful in arguing that the warranty was so limited, the goods supplied would not match the express contractual terms and hence the contractual description. In that event there would be no need for the defenders to rely on the Sale of Goods Act. It was further submitted that the defenders had failed to lead any evidence as to what a reasonable person would regard as satisfactory in relation to pipes for use in an oil installation, and had failed to lead any evidence in relation to the factors set out in subsection (2B). In relation to the defenders' case based on section 14(3), the specification that was actually agreed between the parties was once again relevant. The pursuers accepted that where an article is manufactured for a purchaser to the purchaser's specification, it is possible for section 14(3) to apply where there has been partial reliance. In such a case, however, the reliance had to relate to matters outwith the specification: Cammell Laird & Co Ltd v Manganese Bronze & Brass Ltd, [1934] AC 402. In the present case, it was submitted, there was no reliance on the pursuers. The manufacture of the pipes was a matter undertaken jointly by both parties. The pursuers' expertise related to the extrusion; consequently they were willing to tolerance the dimensions created by the extrusion process. So far as the proportionate extrusion of the clad material and the base steel was concerned, however, the pursuers relied upon the defenders.

[43 ] It was further submitted for the pursuers in relation to section 14(3) that on the evidence the buyer did not rely on the skill and judgment of the seller. First, the Wex process was the defenders' patented process, and they were responsible for lining the blocker. Secondly, the parties' dealings had been based on the experience of the Saudi Aramco contract; in that contract, however, there were no criteria relating to clad thickness. It would, it was submitted, be quite unreasonable to allow the defenders to place reliance on the pursuers on the basis of a previous transaction which did not contain the critical condition relating to uniform clad thickness. Any reliance on the seller by the buyer must be "such as to constitute a substantial and effective inducement which leads the buyer to agree to purchase the commodity": Medway Oil and Storage Ltd v Silicon Gel Corporation, (1928) 33 Com. Cas. 195; Benjamin, op. cit., paragraph 11-076. That was not satisfied in the present case. Moreover, the defenders had failed to lead any evidence as to the purpose of the pipes, and in particular why the pipes required a uniform coating of clad material to the depth of 3 mm.

[44 ] The critical question for present purposes is not the general issue of whether the provisions of section 14(2) and (3) were incorporated into the contract; it is rather whether the obligations arising out of those two subsections had the effect that the pipes must be of substantially uniform clad thickness. In my opinion those obligations did not have that effect. My reasons for this conclusion are as follows. In relation to subsection (2), satisfactory quality, the central point is that critical dimensions of the pipe had been determined by the parties' agreement; in particular, the inside diameter and overall wall thickness had been toleranced; but other warranties as to dimensions were not agreed. That of itself tends to exclude any further implied terms as to the lateral dimensions of the pipe; the fact that the parties agreed that certain of those dimensions should be toleranced indicates that those were the requirements of satisfactory quality. It follows that, if pipe meets the dimensions that have been agreed, it will satisfy the quality that the parties have determined should be applicable. In addition, it is important to bear in mind that the contract was not a simple contract for the sale of goods but had a certain experimental element, as described in paragraph [29] above. It is also significant that the procedures for the production of the pipes involved the defenders' Wex process as well as the pursuers' extrusion process (paragraph [26] above), and that the Saudi Aramco contract had been concluded without any warranty of clad thickness, but with apparently successful results (paragraph [23] above). Indeed, in the Saudi Aramco contract and during the early stages of the Thunderhorse project it was not even known how the cladding was distributed. In these circumstances I am of opinion that section 14(2) does not impose an obligation that the pipes should be of substantially uniform clad thickness.

[45 ] In relation to section 14(3), fitness for a purpose made known to the seller, I am of opinion that similar considerations apply. Once again, because critical dimensions of the pipe had been determined by the parties' agreement, that is likely to be sufficient to render the pipes fit for purpose; if more had been required the defenders ought to have insisted, clearly, upon additional specification. They did not do so, however. The experimental element in the contract is also important for these purposes, as is the fact that the production procedures involved the defenders' Wex process and the fact that the Saudi Aramco contract had been concluded without any warranty of clad thickness. In addition, section 14(3) does not apply in cases where the buyer does not rely, or it is unreasonable for the buyer to rely, upon the skill or judgment of the seller. In my opinion any reliance placed by the defenders on the pursuers was necessarily confined to the extrusion process itself; it did not extend to aspects of the Wex process that were under the control of the defenders. That simply reflects the fact that the process was a complex one, involving important input from both parties. In a case of that nature, section 14(3) will only apply to the extent that reliance is placed on the seller by the buyer; to the extent that the production of goods is specified by the buyer, reliance, and hence section 14(3), will only exist in respect of matters falling outwith the specification. Thus if the buyer specifies the dimensions of goods to be manufactured by the seller, he can be regarded as relying on the seller's skill and judgment in respect of the manufacturing process, but not in respect of the dimensions: Cammell Laird & Co Ltd v Manganese Bronze & Brass Ltd, supra, at [1934] AC 427-429, per Lord Wright. In the present case the defenders' reliance upon the pursuers must accordingly be confined to the acts carried out by the pursuers rather than the Wex process as a whole. The defenders did not, however, lead any evidence that was satisfactory to establish that the problems with clad thickness related to matters under the pursuers' control rather than the clad thickness as a whole; in particular, they did not in my opinion lead evidence that established that the problem lay with either the volumetric calculation carried out by the pursuers or the extrusion process in itself.

[46 ] Finally, the defenders did not in my opinion lead evidence to establish why the discrepancies in clad thickness meant that the pipes were either of unsatisfactory quality or unfit for purpose. There was evidence that they were not accepted by FMC, but that is not the same thing. Even though the pipes were for use by FMC, the implied terms only relate to the objective question of whether the pipes were of satisfactory quality and fit for purpose for use in a deep water oil installation. It might be that the requirements imposed by FMC on the defenders were unnecessarily strict for these purposes. For that reason it is in my opinion essential that the evidence should go beyond the simple assertion that FMC were not satisfied with the pipes; instead, it is necessary to establish that the pipes were objectively of unsatisfactory quality or objectively unfit for purpose. That evidence was in my opinion lacking.

[47 ] For the foregoing reasons I am of opinion that the terms implied by section 14(2) and (3) of the Sale of Goods Act did not require that the clad thickness should be substantially uniform.

Waiver
[48 ] The pursuers' secondary position proceeded on the hypothesis that the clad thickness was warranted, either expressly or under the provisions of section 14 of the Sale of Goods Act. In that event, they contended that the defenders, through their conduct, waived that term, with the result that they were no longer entitled to insist on performance of the obligation to provide pipes with the clad thickness between the agreed tolerances. Put briefly, the pursuers' position was that pipes were delivered and tested, and it was discovered that the clad thickness was variable. Despite this, the defenders continued to order further pipes and to make payment for pipes that had been delivered. They did not at that stage reject any pipes, or copy non-compliance reports to the pursuers. On the basis of such conduct by the defenders the pursuers, it is said, entered into further contracts for the supply of pipes. Had they known that the defenders were making an issue of the variations in clad thickness, they would not have entered into such contracts, or would have ceased to manufacture further pipes for the defenders.

[49 ] The relevant law was not in dispute. The principle of waiver is explained by Lord Fraser of Tullybelton in Armia Ltd v Daejan Developments Ltd, 1979 SC (HL) 56, at 68-69: the primary meaning of the word is the giving up or abandonment of a right. It is not necessary, however, that the party relying on the waiver should have suffered prejudice by his reliance; instead it is enough if he has conducted his affairs on the basis of the waiver. In the same case Lord Keith of Kinkel defined the concept in broadly similar terms (at 71-72); he said:

"The word 'waiver' connotes the abandonment of a right.... The abandonment may be express, or it may be inferred from the facts and circumstances of the case. I am of opinion that certain of the Scottish cases cited as being concerned with the latter aspect are disclosed, upon close examination, to be cases where one party to a contract has plainly accepted as being conform to contract performance tendered by the other party which he might, if so minded at the time, have rejected as defective".

It seems clear from these statements of the law that matters must be looked at objectively. On that basis I am of opinion that it is not necessary that the person waiving a right should actually intend to do so; it is sufficient if his conduct would lead an objective observer to consider that the right was being abandoned.

The evidence relating to waiver
[50] The orders placed by the defenders for pipes are set out in paragraphs [11]-[16] above. The first order, for five qualification pipes, was placed on 3 May 2002, and the pipes were delivered on 29 September 2002 and in January 2003. Further orders were placed in July 2002. The first was for 15 pipes, which were delivered in December and paid for on 17 February 2003. A further 23 pipes (fifteen 5" production pipes, five 8" qualification pipes and three 12" qualification pipes) were ordered on or about 31 July 2002; these were delivered in December 2002 and January 2003 and paid for on 17 February and 18 March 2003. The next order was placed on 10 October 2002, for seven 10" production pipes and twenty 12" production pipes; these pipes were delivered in March, June, July and October 2003, and payment was made in May and September 2003 and February 2004. A further order was placed on 12 November 2002, for seventeen 8" production pipes. 13 of those pipes were delivered on 2 March 2003; the other four were not delivered. Payment for the pipes that were delivered was made on 5 June 2003. Yet further orders for thirty 5" pipes and sixty 5" pipes were placed in January and July 2003. These were delivered in part on 22 January and 20 February 2004; the defenders did not accept the first of these deliveries, and none of these pipes were paid for.

[51 ] The evidence disclosed that testing of the pipes began at an early stage, although the means of testing the clad thickness were not very effective until about February or March 2003. Mr William Lawrie, the defenders' quality assurance manager, gave evidence (day 14, 3.06) that it had been known that there was a problem with clad thickness at the start. The overall thickness of the pipes was mentioned as a problem in an e-mail of 9 January 2003 from Mr Bickett to Mr Armet. In cross-examination, Mr Bickett stated (day 10, 12.08) that by 17 January 2003 it was clear to the defenders that the pipe had problems in relation to among other things the distribution of cladding. An e-mail of that date from Mr Armet to the defenders (including Mr Bickett) mentioned the distribution of cladding; in this connection it stated that the parties should carry out certain steps to discover the extent of the variation in cladding thickness and possible means of rectifying matters. That indicates that the existence of variable cladding thickness had been made known to the pursuers by that time; moreover, the pursuers realized that the defenders considered it to be a problem. An order for further 5" production pipes was in fact placed on that date. Payments continued to be made for pipes that had been delivered. On 17 May 2003 payment was made for the remaining part of the pipes delivered on 29 September 2002 and for the pipes delivered in December 2002. By that time it was clear that the problems with the clad thickness of the pipes were known.

[52 ] Within the engineering industry it is common practice to make use of non-compliance reports ("NCRs") and reject notes ("RNs"). These were explained in the evidence of Mr Lawrie (day 13, 3.46). If a product does not meet the contractual requirements, the supplier may issue a notice (the NCR) specifying the manner in which it does not comply. If it is appropriate, the notice is accompanied by a concession request, in which the supplier asks its customer to accept the product even though it is not in strict conformance with the contractual specification. At that point the customer has a choice: it may either accept or reject the product. If the product is rejected, the standard practice is to issue an RN. If the customer discovers that the goods do not conform to contract but there is no NCR, the usual practice is to send an RN; at that point the supplier may ask for a concession. In the present case the pursuers were unable to send NCRs in relation to the thickness because they did not have the means to test the thickness until the Dinsley equipment was available; the appropriateness of sending an NCR obviously depends on the assumption that the clad thickness was warranted.

[53 ] As between the defenders and FMC, the position was spoken to by Mr William Neill, who was the defenders' manufacturing director at the time of the events in question (day 15, 11.43 onwards). He stated that under normal circumstances, if a product did not conform to specification, an NCR would be sent to the customer or an RN would be sent to the supplier. In this case, however, the project was subject to specific requirements imposed by FMC, and FMC had to be involved in the NCRs. Thus the acceptance or rejection of a pipe was not the defenders' decision but FMC's. Mr Neill accepted that that was a matter between FMC and the defenders. Mr Lawrie stated (day 14, 2.29) that, if the pursuers could not deliver the requisite clad thickness, the normal practice would have been to issue an NCR or RN; if an RN had been issued, payment would have been halted. That had not happened in the present case. He went on (2.38) to say that in normal circumstances the defenders would have rejected the pipes, but did not because of their delivery schedules agreed with the purchasers. He accepted (day 5, 3.09) that the defenders had known of pipe that was, in his words, "no good" from January or February In fact prior to February 2004 no NCR or RN was ever submitted to the pursuers.

[54 ] The first two NCRs were issued by the defenders to FMC on 5 February 2003 (Mr Lawrie, day 14, 12.56). A schedule of NCRs was produced (No 7/11 of process), which indicates that thereafter NCRs were issued to FMC by the defenders on a regular basis until April 2004. Clad thickness was raised specifically in an NCR dated 20 February 2003, and it was stated as the reason in a substantial number thereafter. Reject notes were finally issued on 2 February 2004. The reason for that was explained by Mr Lawrie; he stated (day 13, 12.39) that at that stage FMC had no further use for small pieces of pipe because the manifolds were complete; longer lengths were required for the "jumper" pipes, which connected the manifolds to the point where oil was transferred to a tanker.

[55 ] Mr Lawrie gave a detailed explanation of the defenders' position in relation to NCRs and rejection notices. He explained (day 13, 12.45) that normally reject notices would have been sent at an earlier stage, but FMC was desperate for pipe and would have got nothing if the pipe had been rejected. So far as NCRs were concerned, Mr Lawrie stated (day 13, 2.06) that the defenders carried out a full inspection of pipes; the pipes were then passed to FMC who might come back with further defects. The first deliveries had been made in December 2002 and January 2003, and it took seven or eight weeks to get the full picture. In cross-examination Mr Lawrie accepted that normally, if a product did not conform to the contractual specification, an NCR or rejection notice would be issued, and in that event there would be a halt on payment (day 13, 2.28). That had not happened in the present case. The defenders were obtaining concessions, and the NCRs had not been copied to the pursuers at the time. He was asked why the defenders had not said that there was a breach of contract and refused to pay for the pipes that had been delivered; he replied (2.37) that the parties were trying to reach a solution, and the pursuers had been well aware of the problems. That is supported by the documentary evidence. Thus in Mr Armet's e-mail of 17 January 2003 the distribution of cladding is discussed, and various steps are suggested to investigate its extent and to solve the problem. Discussion clearly continued, because in the minutes of a project meeting held on 3 April 2003 reference is made to clad thickness: paragraph 4 is in the following terms:

"Cladding Thickness Discussion -- now that more accurate measurement techniques are being employed it seems there is a wide variation in clad layer thickness and an improvement is necessary".

Possible means of resolving the problem are discussed in the following paragraphs of the minute. At a further meeting held on 21 April 2003 clad thickness was also discussed at some length. Mr Lawrie went on to state that in normal circumstances the defenders would have rejected the pipe, but did not because they had contractual and delivery schedules to meet with their customer. He disagreed with a suggestion (2.41) that no reject note had been issued because the defenders were afraid that it would prompt the pursuers to stop production. He accepted (2.44) that no document had been produced asserting that the pursuers were in breach of contract, but he stated that the parties had to work through the problem. Mr Lawrie further accepted (2.49) that, if matters had come to a head and the pursuers had refused to supply more pipe because they disagreed about the contractual terms, that would have created a significant problem for the defenders, in particular in relation to their delivery commitment to their customer. Finally, Mr Lawrie stated (3.06) that the defenders were obliged to provide pipe to FMC in specific lengths, and had difficulty in meeting those lengths from January or February onwards; he stated that the defenders "knew of pipe that was no good from January or February". I found Mr Lawrie to be a careful witness, and I accept his evidence on the above matters.

[56 ] The defenders paid for the pipes that had been delivered to them by the pursuers, apart from certain of the last pipes to be manufactured. Evidence on this matter was given by Mr Alan Rodger, the defenders' group finance director. He stated (day 15, 2.08 onwards) that the pursuers' payment terms were 30 days from the date of invoice. The pursuers' requests for payment were usually accompanied by a threat that that deliveries would be stopped, or had been stopped, and would restart on payment. That would have caused problems for the defenders. The non-delivery of blockers would have meant that the defenders' welders had no work; pipes that had been extruded would not have been released for collection by the defenders, which would have had a direct effect on the defenders' customers; and pipes in the process of extrusion would have been put on hold, which would cause problems because pipes were needed urgently. When difficulties arose with the pipes supplied by the pursuers, Mr Rodger had recommended to the defenders' board that they should hold back sufficient from the sums payable to the pursuers to meet any claim, but the board had disagreed (day 15, 2 .38). It was pointed out that problems would have been created if deliveries and production stopped, and the defenders could not afford that. I found Mr Rodger to be a straightforward witness who gave clear evidence, and I accept his evidence on the above matters.

[57 ] On the pursuers' side, Mr Armet (day 2, 12.03) referred to the shipping of substantial quantities of pipe after January 2003, when the pursuers were aware of the problems with the 5" pipes. The defenders had not given any rejection notices or NCRs. If the pursuers had received either of those, they would have been forced to review the whole situation. The defenders had not said that the pursuers were manufacturing at their own risk, at a time when there was no agreed process. If they had, the pursuers would have stopped manufacturing.

Analysis of parties' dealings
[58 ] Waiver involves the abandonment of a legal right, on a permanent basis. In arguing that waiver had occurred, the pursuers relied in particular on three matters: the fact that payment was made for pipes that had been supplied, even though that pipe displayed variable clad thickness, the placing of further orders for pipe, and the failure of the defenders to issue any rejection notices in respect of such pipes until February 2004, despite the fact that it was known that the clad thickness was variable from January 2003 onwards. In relation to the rejection notices, reliance was placed on the fact that the defenders were sending NCRs to FMC from February 2003 onwards and on the practice in the engineering industry. There is undoubtedly some force in these arguments. Nevertheless, I am of opinion that the matters relied on must be placed in context, and when that is done I am of opinion that they are not sufficient to amount to the abandonment of the defenders' rights.

[59 ] This part of the case proceeds on the hypothesis that the pursuers agreed to tolerance the clad thickness. Some time elapsed after the start of the Thunderhorse project before the discrepancies in the clad thickness became apparent, but by January 2003 the defenders were aware of them. At this point they brought the problem to the attention of the pursuers. That is quite clear from Mr Armet's e-mail to the defenders of 17 January 2003, in which the distribution of cladding was discussed and possible means of correcting the problem were suggested. The issue of cladding was also discussed at some length at the two project meetings held on 3 and 29 April 2003; once again methods of rectifying the problem were suggested. When the defenders' payments and failure to issue rejection notes are looked at in this context, I do not think that it is reasonable to infer that they were abandoning their rights. They were rather concerned to draw the problem to the pursuers' attention and to try to arrive at a solution. At this stage (that is to say January to April 2003) they obviously thought that a solution ought to be possible; that was not unreasonable, because if the clad thickness was toleranced that indicated that it was capable of being controlled. Moreover, so far as the NCRs issued to FMC were concerned, it is clear from the schedule of these that was produced that the majority of them were closed, often after a fairly short period. That indicates that FMC were accepting that usable pipes could be produced. It follows that the pursuers' failure to meet the contractual tolerances could not at that stage be considered either irremediable or so serious as to prevent the defenders from fulfilling their contract with FMC. On that basis, it is easy to understand why rejection notices were not issued and payments continued to be made for pipes supplied.

[60 ] In addition, it is clear that testing of the pipes took some time; that is clear from the general evidence of Mr Lawrie on the morning of day 14. Proper testing would be necessary before the pipes were dispositioned. That of itself suggests that the defenders could not rush into rejection. In any event, they required to send NCRs to FMC and to obtain FMC's reaction; in many cases concessions were made and the pipe was accepted by FMC. That again suggests that the process of assessing the suitability of the pipe would inevitably take a considerable time. A further factor was that initially FMC required shorter lengths of time for the construction of manifolds, and such sections were available from the pipes supplied by the pursuers. It was only at a later stage, when FMC moved on to the construction of jumpers, that longer lengths of pipe were required, and it was at that stage that problems with clad thickness became acute (evidence of Mr Lawrie, day 14, 11 .07). These factors indicate that the scale of the problem did not become instantly apparent, but developed over time. In those circumstances I think that it is particularly difficult to construe the actings of the defenders in the early part of 2003 as constituting waiver of their contractual rights. That is particularly so in view of the fact that, as mentioned in the last paragraph, the pursuers were made aware of the problems and asked to devise solutions.

[61 ] The pursuers attached considerable importance to the fact that the defenders found themselves in a very difficult position with FMC. They were obliged to supply pipes to FMC but did not have back-to-back contracts with the pursuers and with FMC; consequently they required pipes but had little leverage against the pursuers. Consequently, the pursuers' solicitor submitted, the defenders decided not to make use of the usual procedures involving rejection notices, in the hope that they would thereby induce the pursuers to continue supplies of pipe. If the pursuers had known the true position they would have refused to provide any further supplies. I think that it was clear on the evidence that the defenders were in a difficult position as against FMC, and that they were anxious to ensure that supplies of pipe continued. That does not, however, mean that they waived their contractual rights. Instead, I am of opinion that the proper construction of their actings is that they tried to induce the pursuers to improve the consistency of clad thickness but at the same time made their difficulties known. I accept that if the pursuers had known the true position they would have declined to make further supplies; nevertheless, that is relevant to reliance on waiver, not to the fact of waiver itself.

[62 ] The pursuers placed reliance on the older Scottish cases that are referred to by Lord Keith in Armia Ltd v Daejan Ltd, supra, at 1979 SC (HL) 72. These were described as "cases where one party to a contract has plainly accepted as being conform to contract performance tendered by the other party which he might, if so minded at the time, have rejected as defective". In the present case, standing the fact that in the period from January to April 2003 the problems of clad thickness were made known to the pursuers, I do not think that it can be said that the defenders "plainly accepted" the pipes as conform to contract. Moreover, when the cases cited by Lord Keith are examined individually, it is clear that none was similar to the present case. In Macdonald v Newall, 1898, 1 F 68, objections to title were taken and cleared up, and the purchaser took entry; thereafter a wholly separate and clearly trivial objection which was apparent on the face of the title was taken. That was a clear case where performance was accepted as conform to contract notwithstanding an apparent defect. In Davies v City of Glasgow Friendly Society, 1935 S. C. to 24, salary had been accepted and receipts granted over a period of 12 years, and it was held that that amounted to waiver of a claim for additional remuneration. A clearer case can hardly be imagined. In Donnison v Employers' Accident & Live Stock Iinsurance Co Ltd, 1897, 24 R 681, a case involving a policy of assurance against accidental injury, notice was not given timeously under the policy but the insurers requested a post-mortem examination under another provision of the policy. That was held to amount to waiver, a result that is hardly surprising in the circumstances of the case. In my opinion none of these cases assists the pursuers in the present case.

[63 ] I conclude, therefore, that the pursuers had not established the case based on waiver, essentially on the ground that the defenders' actings in the early part of 2003 cannot be construed as amounting to the permanent abandonment of their rights under the contract in respect of clad thickness. Those actings nevertheless appear to me to be entirely consistent with the view that clad thickness was never warranted. They cannot of course be used directly as an aid to the construction of the contract, because they followed the time when the parties reached agreement on tolerances. The actings can, however, be used to assess the reliability of the defenders' witnesses when they asserted that securing a toleranced clad thickness was clearly the pursuers' responsibility (for example, Mr David Neill on day 11 at 3.44; Mr Lawrie on day 14 at 11.13). In my opinion the absence of any clear statement in either January or April 2003 that the variations in clad thickness were the pursuers' contractual responsibility casts considerable doubt on the statements by the defenders' witnesses as to their understanding of the contractual position. It may well be that by the time they gave evidence they had reached a definite view, but that was not apparent in the early part of 2003. This must I think cast considerable doubt on the reliability of the defenders' evidence on this aspect of the case.

[64 ] Finally, I should mention that the dispute regarding waiver related to the pursuers' claim that the defenders' had waived their right to insist on toleranced clad thicknesses in general terms. It did not relate to the supply of individual pipes, many of which were accepted even though they did not strictly conform to the contractual specification. I should also mention that I was invited to find that Mr David Neill and Mr William Neill were not credible witnesses. I did not form any impression that these witnesses were not credible. Mr William Neill's evidence was generally rather vague, however, and I do not derive assistance from it to any significant extent. I have rejected substantial parts of Mr David Neill's evidence, but that is for reasons other than credibility.

Conclusion
[65 ] For the reasons stated I find that the parties entered into a series of individual contracts for the supply of quantities of Wex and Ex pipes. Under those contracts the pursuers agreed to tolerance the inside diameter and overall clad thickness of the pipes, to the dimensions set out in the 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 the pursuers warrant that the pipes would be suitable for use by FMC. I further find that, if I am wrong in the last conclusion and the pursuers did agree to tolerate clad thickness, the defenders did not waive their contractual rights in respect of that obligation. This is, however, without prejudice to the acceptance of individual pipes. I will now have the case put out by order to discuss further procedure in the light of these findings.

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	Scottish Court of Session Decisions
You are here: BAILII >> Databases >> Scottish Court of Session Decisions >> Wyman-Gordon Ltd v. Proclad International Ltd (no. 2) [2007] ScotCS CSOH_209 (31 December 2007) URL: http://www.bailii.org/scot/cases/ScotCS/2007/CSOH_209.html Cite as: [2007] CSOH 209, [2007] ScotCS CSOH_209

Scottish Court of Session Decisions