NT GAS PTY LTD v G SA INDUSTRIES LTD t/as PIPELINE SUPPLIES OF AUSTRALIA SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL GLEESON CJ, SAMUELS JA and CLARKE JA 4 April 1990, 15 June 1990 [1990] NSWCA 132 CONSTRUCTION OF CONTRACT — contract for supply of pipeline fittings — dispute as to meaning of two expressions as to dimensions of fittings — HELD (Gleeson CJ dissenting) — the trial judge was in error in the meaning he gave to the relevant stipulations Gleeson CJ This appeal involves a dispute as to the meaning of certain stipulations in a Purchase Order placed in respect of the supply of certain items for use in a gas pipeline. The appellant was building a pipeline to carry natural gas from Basin to Darwin. The Engineer and Project Manager for the pipeline, on behalf of the appellant, issued the Purchase Order in question. The Purchase Order was addressed to the respondent and required the supply of "Steel Pipeline Fittings for use on the Amadeus to Darwin Pipeline". Before coming to a consideration of the nature of the dispute it is convenient to set out certain features of the background to the contract. Piping systems of the kind here in question are fabricated from lengths of straight pipe and "fittings". The term "fitting" is a generic term which is used to cover most of the components which are not straight pipe. Pipe systems are assembled by welding the ends of pipes and fittings after they have been suitably prepared. This case concerns two particular kinds of fitting, one described as a "Tee, Reducing", and the other described as a "Reducer, Concentric". A "Tee" is a fitting used at the junction between a straight length of pipe and a branch pipe which is connected, often at an angle of ninety degrees, to the straight length of pipe. If the branch pipe is the same size as the straight length of pipe the fitting in question is called a "Straight Tee" or an "Equal Tee". If the branch pipe is smaller than the straight pipe the fitting is called a "Reducing Tee" or a "Reducing Outlet Tee". A "Reducer" is a fitting used between two pipes of different diameter. In the present case the "Concentric Reducer" was for use in connecting two lengths of pipe, of different diameter, running in the same direction. The "Reducing Tee" in question has three apertures or ends, two of them being in a straight line with each other, and being of the same dimensions, each connecting to the same length or "run" of pipe, the other, of smaller dimension, being at right angles to the run of pipe and connecting to a branch pipeline. The "Concentric Reducer" has two apertures or ends, each in a straight line with the other, and each connected with a straight length or run of pipe. One end is smaller than the other, the difference in dimension being what achieved the relevant reduction. It permitted a smaller pipeline to be connected, in a straight line or run, to a larger pipeline. Although there was some disagreement about the matter, it appears reasonably clear that the term "run" in this context is used in two slightly different ways. It is used as a noun to refer to a straight length of pipeline, and when used in that 2 UNREPORTED JUDGMENTS way refers to the entire length of pipeline under consideration. It seems that it is also sometimes used as an adjective qualifying the noun "end". In the latter use of the word, when applied to a "Reducing Tee" of the kind earlier described, it would be appropriate to call the two openings or ends in a straight line with each other as the "run ends", as distinct from the "outlet end" which is at right angles to them. An example of the latter use of the term is to be found in the American National Standards ANSI B 16.9-1978 at 10 where two columns referring to the outside diameters of fittings at bevel ends are headed respectively "run" and "outlet". The words "run" and "outlet" both refer to ends of the fittings and the distinction drawn is between the ends in a straight line with each other (the run ends) and the end at right angles (the outlet end). Fittings of the kinds in question are fabricated from pipe or plate and are designed in accordance with recognised codes. For high pressures Tees and Reducers usually require greater thickness than straight pipe. In the manufacture, pipe fittings are shaped by a forging process of heating and forming under load. The bore produced through a fitting by this process has an internal diameter which reduces slightly away from the ends of the fitting. The inside are diameters at the ends of the fitting required to be of dimensions and tolerances which match accurately with the ends of the pipes to which the fitting is to be welded. There is usually no problem arising from a reduced inside diameter within the length of the fitting. There is no significant effect on the gas flow through the pipeline due to such a slight reduction in diameter. If there is a special reason for requiring a more parallel bore than the forging process can produce, then the forging process must be followed by a machining operation on the inside diameter. However, in most cases the reduction in diameter can be limited to an acceptable amount without the need for machining. The Standards referred to in the Purchase Order specified tolerances on the inside diameter away from the ends. Both Standards stated that special dimensions, tolerances, and materials other than those covered by the Standard could be introduced by agreement between the manufacturer and purchaser. From one point of view the critical question in the present case is whether there was, by reason of the stipulations contained in the Purchase Order, such agreement. A "pig" is a device which is pushed through a completed pipe system by the fluid pressure. It is introduced at one end by a launcher and retrieved at the other end by a receiver. A pig may be used in a gas pipeline for line cleaning or product separation. Pigs of that kind have brushes which are flexible and can accommodate irregularities inside the pipe. The problem which arose in the present case was that, after the fittings in question were supplied for use in the appellant's pipeline, a somewhat different kind of "pig", which was less flexible and was used as a measuring device being known as a "gauging pig", was introduced into the pipeline. It would not pass through the pipeline, for the reason that the internal diameter of the fittings in question did not, throughout their entire length, conform to the minimum dimension. The appellant's case is that the terms of the Purchase Order required them so to conform. The respondent's case is that the stipulations in question only related to the diameter of the fittings at their ends and not through their entire length. That is the point at issue. The relevant provisions of the Purchase Order are contained in the description of the two items in question. That description is in the following terms: WAUGAS PTY LTD v G SA INDUSTRIES LTD t/as PIPELINE SUPPLIES OF AUSTRALI& (Gleeson CJ) "Ttem 1: 10 Tee reducing, 350 x 200 NS, BW, XS, WPHY-52, wrought steel, suitable for welding to 355.6 mm OD x 8.74 mm WT API SL X-60 and 219.1 mm OD x 12.70 mm WT API SL GRB pipes. Minimum ID of run shall not be less than 328 mm. Item 5: 16 Reducer, concentric, 450 x 350 NS suitable for welding to 457.2 mm OD x 12.70 mm WT API. SL X-52 and 355.6 mm OD 8.74 mm WT API 5L X- 60 pipes. Minimum ID of small end shall not be less than 328 mm." It is the concluding sentence in each of the two descriptions which is in question. The letters "ID" mean "internal diameter'. The fittings had an internal diameter not less than 328 mm at their ends, but the gauging pig would not pass through them because at some places within the fittings the internal diameter was somewhat less than 328 mm. It is not material to this appeal to go into the detail of the consequences which flowed from the difficulty encountered with the gauging pig, or the claim for damages made. The point at issue concerns the meaning and effect the Purchase Order. It should be noted that it is common ground that the first sentence in the description of each of the items in question contains a good deal of information about the nature and dimensions of the relevant fitting. It is not necessary to go into the detail of that. It is of some importance, however, to note what the respective parties have to say as to the practical effect of the competing views as to the meaning of the critical sentences in the Purchase Order. As has been noted, the appellant contends that there was an obligation to provide fittings which nowhere had an internal diameter less than 328 mm. In relation to the Reducer Tee, Item 1, the expression "minimum ID of run" is said to mean "minimum internal diameter at any point throughout the entire length of fitting". That contention is clear enough. Somewhat more obscure, however, is the corresponding contention as to the meaning of the words "minimum ID of small end" in relation to the Concentric Reducer. Exactly where the "small end" of a fitting, which gradually narrows in dimension over its whole length, begins and ends, is somewhat puzzling. However, since what is involved in the minimum internal diameter of the "small end", whatever exactly that might be, the contention is that, once again, nowhere should the fitting at any point have an internal diameter less than 328 mm. The purpose of this stipulation is said to be to permit a gauging pig to pass through without interruption. The competing contention is that the interDal dimensions in question relate to the ends of the fittings only and that the purpose of the stipulation is to supplement the qualifications as to the dimensions and tolerances of the ends which are to be found elsewhere. The learned trial judge preferred the respondent's construction, basing his decision, not on any close textual analysis of the contract, but upon a somewhat broader commercial consideration which his Honour expressed as follows: "I find the task of interpreting the contract one of profound difficulty. It has to be interpreted with the necessary background of engineering expertise. Yet the engineers themselves differ on the significance to be assigned to the verbiage. It seems to be that in an engineering commercial document, it is asking too much of the recipient of a purchase order to construe the order by comparing the verbiage of the order for different items and then draw a conclusion to resolve an ambiguity. That is not the way to bring into existence an agreement to displace the otherwise applicable standard. For this reason, I am not prepared to accept the interpretation advanced by (the appellant)." 4 UNREPORTED JUDGMENTS The reference to the views of engineers as to the meaning of the contract relates to the circumstance that his Honour had before him, apparently with the consent of both parties, elaborate written opinions from engineers as to the merils of the dispute. Those opinions are useful in two ways. First, they contain a good deal of technical information, an understanding of which is necessary in order to understand the language of the contract. Secondly, they are useful in identifying the issue or issues. The conclusions of the engineers as to the meaning of the contract are not in themselves of relevance. However it is of interest and some comfort to note that although this is a contract written by engineers for the purpose of being read and applied by engineers, the engineers are sharply divided as to its meaning. In effect, what his Honour WdS saying was that, prima facie, the Standards referred to in the Purchase Order concern themselves only with the dimensions and tolerances of fittings at their ends, and that if a purchaser wanted to put a manufacturer to the significant expense of conforming to a minimum internal diameter throughout the whole of the fitting then that intention should be expressed with a great deal more clarity than is to be found in this Purchase Order. That is certainly a legitimate consideration. Much the same point can be expressed in a different way, somewhat more closely related to the actual language of the contract, by observing that the specifications referred to in the Purchase Order are concerned with dimensions at ends, and that they used the word "run", in relation to ends, in the adjectival sense earlier described. The reference in Item 5 to "minimum ID of small end" can easily be related to this concentration upon end dimensions, and the reference in Item | to "minimum ID of run", although with somewhat greater difficulty, can similarly be made to conform to the contractual pattern by treating the reference to "run" as a reference to run ends as distinct from the outlet end. The strongest argument in the respondent's favour, from the point of view of textual analysis, relates to the wording of the stipulation concerning the concentric reducer. If the "small end" is not a reference to the extremity of the unit, then it is impossible to explain why it is mentioned at all. By hypothesis, the internal diameter of what the appellant says is the small end will be smaller than the internal diameter of what the appellant presumably calls the big end. To refer to the "minimum diameter of the small end" is, on the appellant's argument, tautologous. On the appellant's argument what is intended is a reference to the minimum internal diameter of the fitting. On that approach the words "Minimum ID of small end" mean, simply, "Minimum ID". Indeed, paradoxically, on the appellant's argument, the words "Minimum ID of small end" in relation to the concentric reducer have exactly the same meaning as the words "Minimum ID of run" would have. In my opinion the conclusion of the learned judge was correct. The emphasis in the relevant parts of the Standards is consistently upon ends. The language of the critical provisions, although ambiguous, is perfectly capable of being in a manner consistent with that emphasis, and, in the context, the construction contended for by the respondent, is to be preferred to that contended for by the appellant. The appeal should be dismissed with costs. Samuels JA I agree with Clarke JA. WAUGAS PTY LTD v G SA INDUSTRIES LTD t/as PIPELINE SUPPLIES OF AUSTRALIA (Clarke JA) Clarke JA This appeal concerns the proper construction of a number of clauses in a purchase order in respect of Hi Test Steel Pipe Fittings for use on the Amadeus Basin to Darwin pipeline. In particular the Court is concerned to determine the meaning of the underlined words in the following two clauses: "1. Tee reducing, 350 x 200 NS, BW, XS, WPHY -52, wrought steel, suitable for welding to 355.6mm OD x 8.74mm WT API 5L X-60 and 219.1, OD x 12.70mm WT API 5L GRB pipes. Minimum ID of run shall not be less than 328mm." "S. Reducer, concentric, 450 x 150 NS, BW, XS, WPHY -52, wrought steel, suitable for welding to 457.2mm OD x 12.70mm WT API X-52 and 355.6mm OD 8.74mm WT API 5L X-60 pipes. Minimum ID of small end shall not be less than 328mm." The critical words in CL1 appear in five other clauses of the purchase order and relate to fittings, which have been described by the Chief Justice in his judgment, known as tee reducers or tee equals which join pipes with the same diameter but have an additional outlet at right angles to the main body of the fitting. The relevant words in CLS appear also in CL12. In both those clauses the fitting concerned is a reducer concentric which is a fitting used for connecting two lengths of pipe of different diameter running in the same direction. It is important at the outset to observe that the fittings were required to be manufactured in conformance with the industry standards specified in the purchase order viz MSS SP -75 and ANSI B16.9. The appellant's contention is that the words in question should be understood as laying down a requirement that the entire run of the internal diameter (ID) of the fitting should be no less than 328mm. The opposing argument is that the words laid down a requirement that the extremity of the fitting should have an ID of no less than 328mm. According to the latter argument the words said nothing about the internal diameter of the fitting along its length. The problem is placed in perspective once it is understood that the provision of a minimum ID of 328mm at the extremity of the fitting will not lead to an identical minimum ID throughout the fitting. On the contrary it will lead to a smaller ID along the length of the fitting. That is because, as the Chief Justice has explained, the bore produced through a fitting by the forging process employed during manufacture has an ID which is greater at the extremity than in the body of the fitting. This is graphically illustrated by a diagram which was tendered in evidence and which, because it is helpful to an understanding of the fittings, the splaying out of the ID at the extremity and the competing arguments, I will annex to this judgment. In my opinion the construction for which the appellant contends should be accepted. There are two reasons which have led me to this conclusion. First that construction accords more readily with the ordinary meaning of the words in an engineering context. In his judgment the trial judge noted that the respondent accepted that the word "run" in engineering parlance meant the entire length of the fitting. Although the respondent has sought to withdraw that concession during the appeal it is apparent that it was properly made. The evidence from the engineering experts, which was important insofar as it provided the background against which the question of construction must be decided, indicated that that was not a matter of controversy. If that is so why should the word not be given its ordinary engineering meaning in the context of the clauses under examination? In my opinion no reason appears. 6 UNREPORTED JUDGMENTS The respondent sought to argue that the word was used, as it sometimes is, by engineers, in an adjectival sense as describing the "run end". However that was not the expression used in the purchase order and I can see no compelling reasons for, in effect, adding the word "end". The particular reason which was advanced in argument is that the expression "small end" clearly referred to the smaller extremity of a reducer and that in order to achieve consistency between the clauses in the purchase order those clauses which referred to run should also be understood as speaking of extremities. I do not find this argument persuasive. While I accept that there is superficially more force in the respondent's submission that the small end in CLS means the smaller extremity I do not think it is correct. End is a word of ambiguous meaning. It can mean "the extremity" or it can mean "the last section or portion". In ordinary language it is not unusual to describe the smaller section of an object with end sections of different sizes as "the small end". The choice in this case is between "end" as meaning "extremity" and as meaning "the smaller section of the reducer". Upon the latter view the specification of a minimum ID for the smaller section provides a minimum ID for the whole fitting, as the diagram plainly demonstrates. My approach is, in effect, the reverse of the respondents. "Run" should be given its ordinary meaning in this engineering context and "small end" should be understood in the sense which leads to the provision of a minimum ID through the length of the fitting. Upon this view the word "run" provides an indication of the sense in which "end" is used in the two clauses in question. The other consideration which has influenced me is that the minimum ID of the extremities was specified by each of the clauses without the addition of the underlined words. On the respondent's construction of the underlined words they created internal conflict in the clause or, at least, served no useful purpose. The statement that the extremity ID was specified in each of the clause requires some explanation. Taking CLI as an example, it required that the fitting be suitable for welding to pipes with an OD (outside diameter) of 355.6mm and a WT (wall thickness) of 8.74mm. According to Mr Hale, the engineer called for the respondent, and as a matter of simple mathematics, this meant that the fitting was required to be suitable for welding to a pipe with an ID of 338.12mm. In note 9 of the purchase order, which is headed "End Preparations", it was provided that "The Vendor shall supply high test fittings described herein with end preparation in conformance with MSS SP-75 Figures 1, 2 and 3". Figure 3 details the design geometry for the end of a fitting, ie the bevelled end, in relation to the pipe to which it is to be welded. It shows that the ID of the fitting at its extremities must match the ID of the pipes to which the fitting is to be welded. Accordingly, the clause under consideration, omitting the underlined words, in requiring that the fittings be suitable for welding to the defined pipes specified an ID at the extremity of 338.12mm. It follows that the clause effectively specified an ID at the fitting extremities to match the pipes and this ID exceeded by 1Omm the minimum ID in the underlined words. Furthermore the evidence demonstrated that it is not possible to weld a fitting with an extremity ID of 328mm to a pipe with an extremity ID of 338.12mm in accordance with the contractual requirement without machining of the fitting. For this reason I would not regard the supply of fittings with a minimum ID of 328mm at the extremity as complying with the respondent's contractual requirement to supply fittings suitable for welding to the specified pipes. To WAUGAS PTY LTD v G SA INDUSTRIES LTD t/as PIPELINE SUPPLIES OF AUSTRALIK (Clarke JA) supply fittings which could not be welded to the pipes without the purchaser carrying out further work on them (ie machining) would not, in my opinion, satisfy the requirement that the fittings supplied be suitable for welding to the pipes. Accordingly I would conclude that upon the construction for which the respondent contends there is a conflict, as Mr He pointed out, between the requirements in the two parts of the clauses. Even if that were not so what purpose would the underlined words serve? In the respondent's submission they were inserted to tighten tolerances by substituting a minimum ID at the extremity of 328mm rather than 327mm which, on its submission, the clause otherwise allowed. My difficulty in accepting this argument is that no sensible reason appears why that limitation on tolerance should be required. If machining of the extremity was necessary to achieve an ID of 388.12mm why bother with such a miniscule tightening of tolerances? Upon the appellant's construction, however, there is no conflict and the specific requirement embodied in the underlined words serves the purpose of ensuring that the minimum ID of the fitting be not less than 328mm at any point. If the fitting has that minimum at its narrowest point then, consistently with the requirements of the balance of the clause, the splaying or widening of the ID at the extremity would enable its internal diameter to be of a size suitable for welding the fitting to the pipe without the need for machining. This is, I think, made clear by the diagram. A similar argument, or the same argument put in a slightly different way, leads to the same result. The basic specification of the fittings was to accord with the standards set out in MSS -SP-75 or ANSI B16.9. Neither those standards nor the clauses in question, the underlined words apart, required the nomination of the minimum ID along the length of the fitting or the smaller section of the fitting. The ID at the end of the fitting was, however, specified by the nomination of the size of the fitting and the outside diameter and wall thickness of the pipe to which the fitting was to be welded when regarded in the light of Note 9 and MSS SP-75 Figure 3. The specifications in the underlined words were provided as supplementary requirements in respect of some only of the fittings ordered. The words clearly served a purpose which is more reasonably understood as imposing a requirement in addition to those set out in the standards rather than as one giving rise to an internal conflict in the clause. I would allow the appeal and make the following orders: (1) Appeal allowed. (2) Judgment for the Respondent, verdict for the respondent on the cross-claim and order for costs in its favour set aside. (3) Direct judgment for the appellant in the action and cross-action. (4) Respondent to pay appellant's costs of the appeal and at first instance. Respondent (if qualified) to have a Suitors Fund Certificate in respect of the costs of the appeal. (5) Refer the proceedings to the Commercial Division for the assessment of damages. Counsel for the Appellant: T Jucovic QC and D Feller Solicitors for the Appellant:Westgarth Middletons 8 UNREPORTED JUDGMENTS Counsel for the Respondent: C Gee QC and P Hallen Solicitors for the Respondent: Champion and Partners