Rolls-Royce Power Engineering Plc & Anor v Ricardo Consulting Engineers Ltd.

An undisclosed principal may sue on an agent’s contract only where the agent intended to act for that principal and the third party was willing to contract with an undisclosed principal. That exception does not apply to a collaborative professional services contract where the contractor’s identity is material.

A contractual obligation to provide services of first class quality is conceptually more onerous than a duty to exercise reasonable skill and care. A defence of contributory negligence is unavailable for breach of such a strict contractual obligation. A later transfer of a business does not generally extend the contractor’s duty of care to the transferee or permit recovery for the transferee’s losses through agency, trust or the rule in Dunlop v Lambert.

The claim arose from the development and subsequent failure of a range of diesel engines. Allen Power Engineering Limited contracted with Ricardo Consulting Engineers Limited for definitive design and analysis services. Rolls-Royce Power Engineering Plc later acquired the relevant business and claimed losses arising from engine failures.

The court tried preliminary issues concerning the contractual parties, incorporation and construction of standard conditions, contributory negligence, duties of care, contribution and alternative routes to recovery. The central questions included whether Allen contracted as agent or trustee for Rolls-Royce, and whether Rolls-Royce could recover losses sustained after the business transfer.

1. Contract formation and agency. The Definitive Design Contract was made when Allen accepted by conduct Ricardo’s counter-offer in its letter of 31 August 1994. The DDC Order incorporated the DDC Proposal. Allen contracted as principal. Under Siu v Eastern Insurance Co Ltd [1994] 2 AC 199, an undisclosed principal must show that the agent intended to act on its behalf. That intention was subjective. The Second Management Agreement did not prove Allen’s contemporaneous intention. Further, the collaborative nature of the work, involving Ricardo’s personnel working with and training Allen’s personnel, meant that Ricardo was not willing to contract with anyone other than Allen. Rolls-Royce therefore could not sue on the contract, nor could Allen recover losses suffered by Rolls-Royce.
2. Duty of care. Ricardo owed Allen a duty to perform the contracted services with reasonable skill and care. It owed no equivalent duty to Rolls-Royce. The losses arose because the business was transferred to Rolls-Royce in 1999, not because Rolls-Royce was the parent company or had funded, supervised or approved the project. Extending the duty would create a transmissible warranty in favour of whoever later operated the business. The court considered the approaches in Smith v Bush [1990] 1 AC 831, Caparo Industries plc v Dickman [1990] 2 AC 605, Henderson v Merrett Syndicates Ltd [1995] 2 AC 145 and South Australia Asset Management Corporation v York Montague Ltd [1997] AC 191, but the result was the same under each approach.
3. Conditions and performance standard. The standard conditions were incorporated. Clause 4.1 required performance strictly in accordance with the contract and, where no specific standard was stated, services of first class quality. The former expression does not itself define a quality standard. The latter imports a comparative standard exceeding, at least conceptually, reasonable skill and care. The relevant comparison is with another consultant who could have been retained when Ricardo was engaged.
4. Contributory negligence. Under the classification in Forsikringsaktieselskapet Vesta v Butcher [1986] 2 All ER 488, as applied in Barclays Bank Plc v Fairclough Building Ltd [1995] QB 214, contributory negligence is unavailable for breach of a strict contractual obligation which does not consist of want of reasonable skill and care. Clause 4.1 therefore excluded that defence.
5. Contribution and alternative recovery. Allen owed no duty of care to Rolls-Royce because the Management Agreement allocated the risks of the business to Rolls-Royce. The trust argument failed because Ricardo did not know, and had no reason to know, that Allen contracted as trustee for Rolls-Royce. The Dunlop v Lambert exception requires, at the time of contracting, contemplation that an identified third party or identified class might suffer loss. That requirement was not met. The proposed broader loss-of-bargain approach had not been adopted decisively and was not extended.
6. Disposition. The preliminary issues were answered: Allen contracted as principal; no duty of care was owed by Ricardo to Rolls-Royce; the Conditions were incorporated; first class quality was a more onerous obligation but strict compliance was not; contributory negligence was unavailable; Allen owed no duty of care to Rolls-Royce; and all alternative recovery routes failed. Neither claimant could recover substantial damages, although Allen theoretically remained able to pursue nominal damages.