Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca8-13-03354/USCOURTS-ca8-13-03354-0/pdf.json

Parties Involved:
Ajax TOCCO Magnathermic Corporation
Appellant
IPSCO Tubulars, Inc.
Appellee

Document Text:

United States Court of Appeals

For the Eighth Circuit

___________________________

No. 13-3354

___________________________

IPSCO Tubulars, Inc., doing business as TMK IPSCO

lllllllllllllllllllll Plaintiff - Appellee

v.

Ajax TOCCO Magnathermic Corporation

lllllllllllllllllllll Defendant - Appellant

___________________________

No. 13-3466

___________________________

IPSCO Tubulars, Inc., doing business as TMK IPSCO

lllllllllllllllllllll Plaintiff - Appellant

v.

Ajax TOCCO Magnathermic Corporation

lllllllllllllllllllll Defendant - Appellee

____________

Appeals from United States District Court 

for the Eastern District of Arkansas - Jonesboro

____________

 Submitted: December 9, 2014

 Filed: March 4, 2015

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Before WOLLMAN, COLLOTON, and BENTON, Circuit Judges.

____________

BENTON, Circuit Judge.

IPSCO Tubulars, Inc. contracted for Ajax TOCCO Magnathermic Corp. to

provide equipment to heat-treat steel pipe. IPSCO sued for breach of contract, gross

negligence, and punitive damages. The district court found Ajax liable for breach of

contract, awarding $5,162,298.55 in damagesto IPSCO. Ajax appeals. IPSCO crossappeals the dismissal of its gross negligence and punitive damages claims. Having

jurisdiction under 28 U.S.C. § 1291, this court reverses and remands the breach-ofcontract damages, and affirms in all other respects.

I.

IPSCO produces heat-treated steel pipe for use in the oil and gas industry. It

manufactures larger-diameter casing and smaller-diameter tubing at grades defined

by American Petroleum Institute (API) 5CT standards. In 2006, IPSCO took bidsfor

induction heating (“austenitizing”), quenching, and pre-tempering equipment for its

facility in Blytheville, Arkansas. IPSCO contracted for Ajax’s equipment despite

concern about the design of Ajax’s quench.

IPSCO heat-treats electric resistance welded (ERW) casing and tubing formed

according to IPSCO’s chemical recipe. Ajax’s equipment alters the structural

properties of the pipe by heating it to a specified temperature range to form austenite;

cooling it to a specified range to form martensite (which has a high degree ofstrength

and hardness); and reheating it to a specified range (adding ductility without

compromising hardness). Exiting the Ajax equipment, the pipe is tempered,

straightened, and inspected with other equipment. The contract requires Ajax’s

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equipment to convey pipe at certain speeds; for example, smaller tubing at 96 feet per

minute (fpm). Ajax Quotation, “General Specifications.” See also Technical

Specifications § 6.2 (“[The equipment] shall be capable of operating continuously

to meet the throughput requirements . . . .”).

After installation in July 2007, Ajax’s quench did not performproperly. When

IPSCO tried to process tubing at 96 fpm, the pipe had severe distortions, cracks, and

inconsistency in as-quenched hardness. Pipe sometimes distorted so badly it wrecked

in the quench and had to be removed manually. The pipe could not meet API

specifications. To produce tubingwithout distortion, cracks, orinconsistency, IPSCO

had to run the Ajax equipment at slower speeds, 35 to 50 fpm. Operating at reduced

capacity, IPSCO began producing pipe for sale on September 27, 2007.

That fall, an Ajax expert began to troubleshoot. The quench was designed with

two barrels pointing in the direction of product flow, using water to rapidly cool the

pipe. Ajax’s expert identified several design flaws with the equipment and told

IPSCO that the flume, which drains water from the quench, was not designed

correctly by IPSCO’s contractor. Because of the small flume, IPSCO operated the

quench at reduced water flows and pressures. On Ajax’s advice, IPSCO modified the

flume by June 26, 2008, allowing operation at the recommended water flow. 

Even after enlarging the flume, IPSCO had problems with severe distortion,

quench cracks, and inconsistency (when processing at 96 fpm). In August 2008,

IPSCO modified the quench itself by pointing the second barrel opposite the direction

of product flow and changing the angle of the spray holes. This permitted IPSCO to

produce pipe with minimal defects at a higher line speed, but still less than 96 fpm.

Although Ajax’s expert continued to work with IPSCO to improve line speeds, Ajax

never informed IPSCO of the suspected design flaws.

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Still dissatisfied, IPSCO held a series of performance tests. Trials on casing

in October 2008 were successful. Trials on tubing throughout 2009 were not

successful due to distortion, cracks, and inconsistency at 96 fpm, even after IPSCO

used the quench as designed and performed all Ajax-requested maintenance. In 2011,

IPSCO further modified the quench without Ajax’s advice. The modified equipment

can process tubing at about 80 fpm with minimal defects. 

IPSCO sued Ajax in February 2010, alleging breach of contract and gross

negligence and seeking punitive damages. The district court granted judgment on

partial findings for Ajax on gross negligence and punitive damages. After a bench

trial, it found for IPSCO on the breach of contract claim, awarding $5,162,298.55 in

damages. Ajax appeals liability and the damages calculations. IPSCO cross-appeals

the dismissal of the gross negligence claim and punitive damages. 

II.

Ajax contests the court’s interpretation of the contract, as well as the

determination of breach and causation. After a bench trial, this court reviews a

district court’s factual findings for clear error and its legal conclusions de novo. 

Speer v. City of Wynne, Ark., 276 F.3d 980, 984-85 (8th Cir. 2002). See also Fed.

R. Civ. P. 52(a)(6) (“Findings of fact . . . must not be set aside unless clearly

erroneous . . . .”). A factual finding is clearly erroneous “only if it is not supported

by substantial evidence in the record, if the finding is based on an erroneous view of

the law, or if we are left with the definite and firm conviction that an error has been

made.” Tadlock v. Powell, 291 F.3d 541, 546 (8th Cir. 2002). “‘Where there are two

permissible views of the evidence, the factfinder’s choice between them cannot be

clearly erroneous.’” Lesch v. United States, 612 F.3d 975, 980 (8th Cir. 2010),

quoting Anderson v. City of Bessemer City, N.C., 470 U.S. 564, 574 (1985).

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A.

Ajax disputes the district court’s construction of the contract, asserting the

contract makes no guarantees on defects, including cracking and distortion. IPSCO

argues that the contract obligates Ajax to provide equipment capable of heat-treating

pipe to API 5CT specifications. The court held that “Ajax breached its contractual

obligations by failing to provide IPSCO with equipment that performed at the

contractual rates and specifications.” It found, “Ajax knew that IPSCO required

equipment that provided a uniformheating and cooling process” and “Ajax knew that

IPSCO’s intended purpose was to create higher grades of pipe, instilled with certain

qualities required for use in the oil and gas industry.”

Arkansas law governs the interpretation of the contract. See Murray v.

Greenwich Ins. Co., 533 F.3d 644, 648 (8thCir. 2008), citing ErieR.R. v. Tompkins,

304 U.S. 64, 78 (1938). A breach of contract requires a valid and enforceable

contract between the parties; an obligation on the part of the defendant; a breach of

that obligation; and damages resulting from the breach. Rabalaias v. Barnett, 683

S.W.2d 919, 921 (Ark. 1985). The construction of an unambiguous contract is a

question of law. GeoVera Specialty Ins. Co. v. Graham Rogers, Inc., 636 F.3d 445,

449 (8th Cir. 2011) (discussing Arkansas law). The court aims to “ascertain the

intention of the parties.” Id. (internal quotation marks omitted). “Under Arkansas

law, the language contained in the contract is the best evidence of the parties’

intention,” and this court interprets that language according to its plain and ordinary

meaning. Id. The court should give “reasonable and sensible effect to all clauses of

the contract, within the entire context of the agreement.” Taylor v. Hinkle, 200

S.W.3d 387, 396 (Ark. 2004). 

Applying these principles, the contract includes a guarantee by Ajax that its

equipment will consistently produce tubing at 96 fpm without significant distortion,

cracking, or inconsistency that prevent the pipe’s conversion to higher API grades. 

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The contract reflects that Ajax intended its equipment produce API-quality

pipe. The Ajax Quotation, written by Ajax and incorporated into the contract,

provides, “The equipment covered by this quotation has been developed to provide

an improved method of producing high strength oil country tubular products. The

process has been designed for API grades of casing and tubing” and, “The proper

selection of steel analysis, hardening temperature and tempering temperatures will

produce practically any grade of heat treated tubular product.” Ajax Quotation,

“General Description” (emphasis added). See also Technical Specifications § 2.1

(stating that equipment will produce “ERW[] tubing and casing which meet API

tolerances and standards in metallurgy and chemistry” (emphasis added)); § 3.2

(providing Ajax’s equipment “is designed to process tubular products. . . into tubular

products of higher strengths and higher grades”). The Ajax Quotation also refers to

specific API grades, stating that “The production of N-80 and higher strength casing

from low carbon chemistry of the J and K grades, requires a quenching system

operating near maximum efficiency. The proprietary Ajax TOCCO Magnethermic

quench, produces the results desired for your products.” Ajax Quotation, “Quench

Delivery Equipment.” See also Tr. 2399-400 (Ajax’s expert testifies that pipe

entering heat treatment has no API requirements, while pipe exiting heat treatment

does). If the contract were read to eliminate quality standards, the provisions about

API and API grades would be surplusage. See Phila. Indem. Ins. Co. v. Austin, 383

S.W.3d 815, 820 (Ark. 2011) (“A construction that neutralizes any provision of a

contract should never be adopted, if the contract can be construed to give effect to all

provisions.”).

Additionally, the contract requires that the equipment provide controlled and

uniform temperatures. See Technical Specifications § 3.4 (“The Austenitizing Unit

will heat the full length of the product pipe uniformly to a temperature in the range

of 1650°F to 1750°F . . . .”); § 3.6 (“The Quench Unit will quickly cool the product

pipe from a maximum temperature of 1750°F (950°C) to a uniform temperature

sufficiently low as, but no greater than 300°F.”); § 3.13 (“The Tempering Unit will

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reheat the product pipe to a temperature controllable between 900°F (480°C) and

1300°F (705°C) . . . .”); § 4.13 (“The range of heating tolerance for each product pipe

shall not exceed +/- 5°C pipe-to-pipe and end-to-end.”). Experts from both Ajax and

IPSCO testified that non-uniform temperatures are a primary cause of quench cracks

and distortion. 

While the contract does not expressly mention “quench cracks,” “distortion,”

“bowed pipe,” “bent pipe,” or “end hooks,” the parties did not intend to contract for

equipment that heats pipe to a specified temperature, at a specified rate, without

regard to how distorted, cracked, or unusable it is—particularly when the contract

reflects Ajax’s representations that its equipment will produce pipe capable of being

converted to higher API grades. It is not necessary to imply a warranty of fitness or

to look at the parties’ course of performance to give “reasonable and sensible effect

to all clauses of the contract” here. See Taylor, 200 S.W.3d at 396. The most

reasonable reading of the contract as a whole obligates Ajax to provide equipment

that can uniformly heat-treat pipe, at 96 fpm, without causing distortion, cracks, or

inconsistency that prevent the pipe’s conversion to higher API grades.

B.

Ajax argues it did not breach the contract. It also asserts that it cannot breach

because (1) IPSCO did not rely on any quality guarantees when signing the contract,

and (2) IPSCO voided any guarantees by modifying the quench. 

In its findings of fact, the district court stated,

Not only did the line fail to process tubing at the contract rate of 96 feet

per minute, but attempts at running the line at higher speeds resulted in

pipe distorting so badly that it would often become stuck in the quench,

requiring IPSCO to shut down the line in order to manually cut out the

distorted pipe. Pipe processed with the Ajax equipment also

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experienced a high rate of defects, including quench cracks and

inconsistent hardness measurements throughout a single piece of pipe. 

Ajax does not dispute that pipe became so distorted it had to be cut out of the quench.

The record supports the court’s findings on quench cracks and distortion. Ajax

contests only the court’s finding on inconsistent hardness, arguing the pipe

consistently exceeded the minimum required martensite levels after quenching. But

IPSCO’s employee Daren Joyner—whom the district court found credible—testified

that hardness inconsistencies were frequent, not limited to one performance test. 

Joyner also testified that inconsistency was worse with Ajax’s unmodified quench

design. The court’s findings are not clearly erroneous, and sufficiently support that

Ajax breached its obligation to provide non-defective pipe at the contractual rate.

Ajax responds that it cannot breach this obligation because IPSCO was unsure

from the start that the equipment could perform. The Arkansas cases cited by Ajax

do not establish reliance as essential to a contractual warranty claim. See Ciba-Geigy

Corp. v. Alter, 834 S.W.2d 136, 146-48 (Ark. 1992) (noting reliance is relevant to

whether express warranty was created, and finding no warranty when farmer did not

read materials containing warranty before purchasing product), citing Currier v.

Spencer, 772 S.W.2d 309, 311 (Ark. 1989) (analyzing creation of express warranty). 

IPSCO’s doubts before negotiating do not render ineffective the bargained-for

guarantees in the contract. 

Ajax also claims that IPSCO voided any guarantees when it modified the

quench in August 2008. Ajax pointsto General Conditions of Contract § 11.4, which

provides that if Ajax fails to promptly proceed with required remedial work IPSCO

can complete it. This section also provides “[Ajax] provides no warranty or guarantee

for work performed by or on behalf of [IPSCO] pursuant to this section 11.4.” 

General Conditions § 11.4. The plain reading of this disclaimer is that Ajax does

not guarantee specific remedial work by IPSCO. Contrary to Ajax’s assertions,

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IPSCO did not implement its own quench system; it made non-permanent

modifications to Ajax’s design. Ajax is not being held liable for poor remedial work

by IPSCO (IPSCO’s modificationsimproved line speed and limited damages), but for

the failure of its equipment to process tubing without significant defects at 96 fpm.

C.

Ajax disputes causation on two bases. First, Ajax contends that there is

insufficient evidence that Ajax’s equipment, rather than other variables(for example,

the small flume, poor maintenance, or improper material chemistry), caused the

defects in the processed pipe. 

The record supportsthe district court’s finding that defects in the pipe were not

caused by any “failures to develop proper operating parameters and material

chemistry or to properly maintain the equipment.” IPSCO permitted Ajax to dictate

maintenance before the performance tests. As for material chemistry, an IPSCO

employee testified that outside processors did not experience similar defects in their

pipe. Significant distortion and quench cracks continued even after the flume’s

enlargement, indicating flume size was not the cause. Moreover, IPSCO’s technical

experts testified that Ajax’s equipment was likely the primary cause of the defects. 

There was also testimony that Ajax’s quench failed to uniformly cool the pipe, and

non-uniformity is “perhaps the greatest contributor” to distortion and cracking. The

court properly credited this testimony. Ajax points to no evidence, besides reciting

other variablesin heat treatment, to support its claim. The court did not err in finding

Ajax’s breach caused IPSCO’s damages.

Second, Ajax argues that the district court improperly shifted the burden of

proof from IPSCO on causation, relying on the court’s statement that Ajax’s

testimony on this issue was “unconvincing.” However, the court stated that Ajax’s

testimony was “unconvincing when considered alongside the trial exhibits and other

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more credible testimony.” The court examined the full record, and did not shift the

burden of proof.

III.

Ajax raises a variety of challenges to the $5,162,298.55 damages award. The

court granted four types of damages: (1) $3,967,954.73 outside processing costs; (2)

$784,964.82 costs from selling downgraded pipe; (3) $306,379 modifying the Ajax

equipment; and, (4) $103,000 hiring outside consultants (which Ajax does not

appeal). The court noted, “The documents offered by IPSCO to prove its damages

have been reviewed and appear to accurately reflect the costs incurred by IPSCO

because it was unable to produce quality heat-treated pipe.” It reduced IPSCO’s

requested outside processing costs to account for the eight months IPSCO would have

needed to maximize productivity had the Ajax equipment worked immediately. On

the last three categories of damages, the court found, “Based on the trial testimony

and the documents submitted into evidence, these damages are credible and should

be awarded to IPSCO.” It made no additional findings.

In a bench trial, the district court must “find the facts specially and state its

conclusions of law separately.” Fed. R. Civ. P. 52(a). Although the court need not

specifically decide every disputed fact, it must “set forth its reasoning with enough

clarity that the appellate court may understand the basis of the decision.” Lesch, 612

F.3d at 981. See also Duffie v. Deere & Co., 111 F.3d 70, 73 (8th Cir. 1997) (“If an

appellate court does not know what facts the trial court took into consideration in

drawing its conclusions, its findings become suspect.”). Factual findings “should be

clear, specific, and complete, without unrealistic and uninformative generality on the

one hand, and without an unnecessary and unhelpful recital of nonessential details of

evidence on the other.” Lesch, 612 F.3d at 981.

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The court’s order here does not permit this court to “understand the basis of the

decision.” The court did not explain its rationale or make factual findings about

damages (except on the outside-processing-costs reduction), although it noted that

“certain factual determinations were necessary to determine the proper assessment of

damages.” There is insufficient information for this court to evaluate whether the

damages were properly granted. See Cody v. Hillard, 139 F.3d 1197, 1199-200 (8th

Cir. 1998) (noting court’s findings did not meet Rule 52 when they were “too cryptic”

to determine whether court applied required legal test, and whether it did so without

clear error or abuse of discretion).

For example, Ajax claims several errorsin the court’s determination of outside

processing costs. The court properly supported its decision to reduce outside

processing costs, referring to testimony it deemed credible and explaining why it

chose an eight-month reduction from the time of start-up. However, the court made

no finding whether outside processing costs should—or did—include costs for

processing casing and seamless (as opposed to ERW) pipe. The court made no

finding whether outside processing costs are consequential damages, although

General Conditions § 12.1 bars consequential damages. See Dickson v. Delhi Seed

Co., 760 S.W.2d 382, 389 (Ark. Ct. App. 1988) (noting whether damages are

consequential is question of fact); Williams v. Mueller, 13 F.3d 1214, 1216 (8th Cir.

1994) (remanding when district court failed to state grounds for its conclusion,

although noting conclusion wasimplicit in court’s decision). The court also made no

finding whether downstream equipment could process pipe at 96 fpm, and, if not,

whether IPSCO would create work-in-process pipe (impacting whether some outside

processing costs would be incurred regardless of Ajax’s slower equipment). The

parties point to differing testimony on these points, and it is the role of the factfinder

to determine whose testimony to credit. Without these findings, this court cannot

assess Ajax’s argument that these costs were improperly granted. Cody, 139 F.3d at

1200 (noting appellate court cannot make “findings of fact or exercise discretion in

the district court’s stead”).

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The second category of damages, described by the court as “costs incurred as

a result of selling pipe downgraded as a result of the Ajax equipment at a reduced

price,” is also unclear. It might include revenue lost from selling downgraded pipe

at a reduced cost, or costs of shipping pipe or finding new buyers for the lower grade

of pipe. IPSCO describes this category as “revenue lost because IPSCO had to

downgrade pipe.” But the contract prohibits liability for “loss of revenue.” General

Conditions § 12.1. Ajax also argues that the eight-month refinement period applied

to outside processing costs should be applied to this category of damages, because

refinement is necessary to maximize productivity and to minimize defects causing

downgraded pipe. The court did not explain why it did not apply the refinement

period. 

The lack of findings here stands in contrast to the court’s reasoning on the

contract obligations, breach, and causation, which is sufficient under Rule 52. The

court made specific findings on the failures of the quenching equipment (on the

defects and the speed of the equipment), the remedial work done by Ajax and IPSCO,

the causes of defects in the pipe, and the expectations of the parties when entering the

contract. The court identified particular experts it relied upon and judged credible. 

Besidesthe refinement-period reduction in outside processing costs, the court did not

provide similar explanation for its damages decision.

Because this court’s review is “hindered” without additional explanation from

the district court, the case is remanded. See King v. United States, 553 F.3d 1156,

1162 (8th Cir. 2009) (noting district court is in better position to find material fact). 

On remand, the court “need not specifically decide each and every disputed fact.” Id.

at 1161. But it must enter findings of fact and conclusions of law that enable this

court to review its decision.

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IV.

IPSCO claimed Ajax was grossly negligent for using faulty “rules of thumb”

to design its equipment and for concealing identified design flaws from IPSCO. The

district court granted judgment on partial findings to Ajax. See Fed. R. Civ. P. 52(c). 

Following a Rule 52(c) judgment, this court reviews factual findings for clear error

and conclusions of law de novo. Clark v. Runyon, 218 F.3d 915, 918 (8th Cir. 2000).

For a negligence claim, IPSCO must prove duty, breach, and causation. 

Branscumb v. Freeman, 200 S.W.3d 411, 416 (Ark. 2004). Gross negligence is “the

failure to use even slight care.” Spence v. Vaught, 367 S.W.2d 238, 240 (Ark. 1963). 

See also Doe v. Baum, 72 S.W.3d 476, 487 (Ark. 2002) (defining gross negligence

as “intentional failure to perform a manifest duty in reckless disregard of the

consequences as affecting the life or property of another” (citing Black’s Law

Dictionary 1033 (6th ed. 1990))).

IPSCO asserts that Ajax relied upon rules of thumb typically used to make

equipment capable of processing tubing at 32 fpm. IPSCO claims that Ajax did no

analysis to determine whether equipment made with the rules of thumb could process

tubing at 96 fpm, even after an Ajax engineer determined the rules of thumb were

flawed. IPSCO also argues that Ajax concealed the quench design flaws identified

by Ajax’s expert in August 2008. 

Dismissing these claims, the district court found, “Ajax employees continued

to come to the plant and try over and over and over to repair the equipment.” The

court highlighted that an IPSCO employee said Ajax was trying to fix the equipment. 

Discussing punitive damages in the same ruling, the court stated, “If I got the

impression that Ajax went into this case not caring and just really trying to get over

on you, then that would be a different story. But I don’t get that impression.” It

found that Ajax “really wanted to and they were trying” to fix the equipment. It also

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found that Ajax’s silence on the design flaws was not unusual business practice or

proof of “misrepresentations.” 

IPSCO does not argue that the court’s findings are clearly erroneous. These

findings sufficiently establish that Ajax did not act intentionally, with reckless

disregard, or without slight care for IPSCO. IPSCO cites to several out-of-circuit

opinions that found gross negligence based on a failure to conduct due diligence in

investigating and verifying data. Even if one Ajax employee questioned the rules of

thumb, that does not establish that the rules were faulty or that Ajax had a duty to

perform extensive engineering analyses to confirm its design parameters. And while

IPSCO disputes the district court’s reference to “misrepresentations,” it acknowledges

that concealment is a form of misrepresentation. The court expressly found any

concealment by Ajax was not improper. IPSCO had the burden of demonstrating

gross negligence, and the court’s findings that Ajax sincerely and consistently

attempted to fix IPSCO’s equipment support the dismissal of this claim. 

Because IPSCO asserts punitive damages only on the gross negligence claim

(not the breach of contract claim), the punitive damages claimmust also be dismissed. 

See Ark. Code Ann. § 16-55-206 (noting to recover punitive damages, plaintiff must

demonstrate compensatory damages as well as aggravating factor). See also In re

Aircraft Accident at Little Rock, Ark., 351 F.3d 874, 877 (8th Cir. 2003) (finding

under Arkansas law that punitive damages require more than gross negligence). 

* * * * * * *

The judgment is affirmed in part and reversed in part. The case is remanded

for proceedings consistent with this opinion.

______________________________

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