Rolls Royce Power Engineering Plc v Ricardo Consulting Engineers Ltd
Citations:  EWHC 2871 (TCC);  2 All ER (Comm) 129;  CLY 657.
The litigants were parties to a dispute over the development of the ‘Allen 500’ range of diesel engines. Allen was the company in charge of designing and developing the engine. Rolls-Royce was their parent company.
Rolls-Royce appointed Allen as their agent in managing certain aspects of its business. In the written contract, these including placing orders and entering into ‘commitments and liabilities of any description with third parties’. Rolls-Royce agreed to indemnify Allen for any liability they suffered. In practice, the agreement was solely intended to enable Rolls-Royce to use a cost-effective single accounting system for all the companies in its corporate group. The parties never applied it outside of the accountancy context.
Allen sub-contracted part of the design and development work to the defendant. Allen’s business structure subsequently went through several changes. Eventually, it essentially became part of Rolls-Royce’s business, though in law it remained a separate company. When the Allen engine was complete, Rolls-Royce began producing and selling it. The engine suffered catastrophic failures in the field due to defects in the defendant’s design work. Both Allen and Rolls-Royce sued the defendant for breach of contract and negligence.
The defendant argued that it was not liable to pay for any of Rolls-Royce’s losses. This was because Rolls-Royce was not a party to the sub-contract. Allen, meanwhile, had not suffered any substantial loss. As such, it could only get nominal damages in its own right. The claimants contended that Rolls-Royce’s losses could be recovered if any of the following were true:
- The defendant had assumed responsibility for Rolls-Royce’s business. They knew that Rolls-Royce would rely on their services, and so owed them a duty of care in tort. This would allow Rolls-Royce to recover damages in their own right.
- Allen enter into the sub-contract as Rolls-Royce’s agent. This made Rolls-Royce the other party to the sub-contract (either as a disclosed or undisclosed principal). This would allow Rolls-Royce to recover damages in their own right.
- Allen was the other party to the contract. However, they could recover Rolls-Royce’s damages because they were acting as agents or trustees of the contract for Rolls-Royce. This would allow Allen to recover damages on behalf of Rolls-Royce.
- Allen was the other party to the contract. However, the contract was made for Rolls-Royce’s benefit and Rolls-Royce’s losses were a foreseeable consequence of the breach. As such, Allen could recover Rolls-Royce’s damages on trust for Rolls-Royce.
- The ‘broad ground’ in Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd  1 AC 85 applied and allowed Allen to recover substantial damages in their own name. These damages were equivalent in value to Rolls-Royce’s losses.
The court was asked to determine whether any of these scenarios applied.
The Court found in favour of the defendant.
- The defendant did not owe Rolls-Royce a duty of care in tort. All they knew was that Allen was part of the same corporate group as Rolls-Royce. They did not know that Allen was acting as Rolls-Royce’s agent or would later substantially merge into Rolls-Royce. There was therefore no evidence that they assumed responsibility for Rolls-Royce’s business. The claimant’s suggested duty would require the defendant to have assumed responsibility to anyone who ended up manufacturing the engine or bought Allen’s assets. This was an impermissible extension of the duty of care concept.
- Allen entered into the sub-contract as the principal. Rolls-Royce was neither a disclosed or undisclosed principal. The mere fact that Allen had an agency relationship with Rolls-Royce did not prevent them from making contracts in their own right. There was insufficient evidence that Allen intended to act on Rolls-Royce’s behalf when they made the contract.
- Allen was not Rolls-Royce’s trustee in any relevant sense. This argument was untenable since the defendant did not know or intend that the contract would benefit Rolls-Royce. The same reasoning was also used to dismiss Allen’s fourth argument.
- The ‘broad ground’ in Linden has never been applied by the majority in an English case and is subject to considerable uncertainty. As such, the court declined to apply it.
The effect of the ruling was that neither Allen or Rolls-Royce were entitled to substantial damages.
This Case is Authority For…
The structure of the parties’ contractual relations is a relevant factor when determining whether a duty of care exists in tort. The court should not, however, assume that parties owe each other a duty merely because they are parties to a contract.
Normally, a party can only recover damages for their own losses. There are some exceptions to this. The court discussed one such exception stemming from the ruling in Linden Gardens Trust Ltd v Lenesta Sludge Disposal Ltd  1 AC 85. This exception concerns cases where the contracting party suffers no loss, while the third party the contract was supposed to benefit has suffered loss but has no right to sue.
The majority’s ‘narrow’ ground in Linden was that there is an exception to the ‘own losses’ rule where the parties knew or intended that the contract was for a third party’s benefit. In such cases, parties to the contract can sue and recover damages on behalf of the third party.
The court in this case noted that this exception cannot apply if one of the parties to the contract does not know that the contract is being made for the benefit of a third party. The general rule that parties may only recover their own losses ‘cannot be circumvented by circumstances of which one of the contracting parties is unaware.’
A minority of the judges in Linden decided the case based on the ‘broad ground’. This states that a contracting party can sue for substantial damages in his own right where a third party suffers loss. These are calculated to reflect the loss of the contracting party’s ‘performance interest’. They are normally valued as equivalent to the third-party’s loss, on the assumption that the contracting party will use them to rectify the third-party’s losses.
The court noted that the minority view in Linden has not been adopted by any English case. They argued that the broad ground was undesirable as a legal principle because it could lead to double recovery and was impractical to apply.
The Court also discussed the instances in which contributory negligence is available in a breach of contract claim. They identified three different kinds of case:
- In the first case, liability does not depend on negligence but arises from the breach of a strict contractual duty;
- In the second case, liability arises from breach of a contractual obligation requiring reasonable care which does not correspond to a independent common law tortious duty of care;
- In the third case, the defendant has breached a ‘reasonable care’ clause, and this breach ‘is mirrored by a liability in the tort of negligence.’
The court explained that contributory negligence is available in the third kind of case, but not the first two.