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

This action arises out of the ill-fated development of a range of new medium-speed diesel engines for power generation, marine propulsion and pumping applications. The range of engines in question was initially designated “AX500”. Subsequently it became known as the “Allen 5000” range. For present purposes it is convenient to refer to the engines in the range simply as “the Engines” or “Engines”.

The design and development of the Engines commenced sometime in 1993. That work was undertaken by the Second Claimant, Allen Power Engineering Ltd. (“Allen”). It seems that Allen was originally incorporated in 1880 under the name W.H. Allen and Sons Ltd. Since 1977 Allen, under different names at different times, has been a wholly-owned subsidiary of the First Claimant, the company now called Rolls-Royce Power Engineering Plc (“RRPE”). Until 10 September 1993 RRPE was called first Northern Engineering Industries Ltd. and then Northern Engineering Industries Plc. From 14 September 1981 Allen was called NEI-A.P.E. Ltd. Between 12 January 1989 and 18 December 1992 Allen was called NEI Allen Ltd. In May 1989 RRPE and its subsidiaries were acquired by the Rolls-Royce Group.

An agreement (“the First Management Agreement”) dated 29 January 1982 was made between RRPE, at that time called Northern Engineering Industries Ltd., and Allen, at that time called NEI-A.P.E. Ltd. For the purposes of that agreement the business formerly carried on by a number of companies listed in the Schedule to the First Management Agreement was called “the Business”. The First Management Agreement included these provisions:-

“1.

As from the date hereof NEI hereby appoints NEI-A.P.E. as its managing agent to undertake, carry on and conduct the management of the Business on behalf of NEI.

2.

The Business shall be and remain the property of NEI.

3.

As agent of NEI NEI-A.P.E. shall, subject to any directions given from time to time by NEI, perform and do such transactions dealings acts and things as may be necessary or expedient for carrying on the Business to the best advantage and shall in particular ….

(b)

place orders with and enter into commitments and liabilities of any description with third parties for the operation of the Business, ….

but all such operations shall be on behalf of NEI who will at all times indemnify NEI-A.P.E. in respect thereof. …

5.

NEI-A.P.E. shall on behalf of NEI discharge and meet all the liabilities and obligations arising from the conduct of the Business and NEI shall hold it fully indemnified against all liabilities and obligations of any description which NEI-A.P.E. may incur to the intent that NEI and not NEI-A,P.E. shall bear and incur any liabilities and losses of the Business. …

10.

All the activities of NEI-A.P.E. in respect of the Business will be on behalf of and for the account of NEI ….”

It seems that, as a result of a reorganisation of its activities, by the beginning of 1992 RRPE, by now called Northern Engineering Industries Plc, wished Allen, at this time called NEI Allen Ltd., to act as its agent in relation to a wider range of matters than that covered by the First Management Agreement. A further agreement (“the Second Management Agreement”) dated 9 October 1992 was made between RRPE and Allen. The range of matters in respect of which RRPE wished Allen to act as its agent as from 1 January 1992 was called, for the purposes of the Second Management Agreement “the Activities”. The Activities included businesses carried on under the names W.H. Allen and Crossley Engines. The following were the material terms of the Second Management Agreement:-

“1.

With effect from 1^st January 1992 NEI appoints Allen to act as its agent in conducting the Activities on the terms hereof.

2.

The Activities shall be and remain the property of NEI.

3.

As agent of NEI, Allen shall, subject to any directions given from time to time by NEI, perform and do such transactions dealings acts and things as may be necessary or expedient for carrying on the Activities to the best advantage and shall in particular:

3.1

conduct the management and administration of all tenders, quotations, contracts and other aspects of the Activities;

3.2

place orders with and enter into commitments and liabilities of any description with third parties for the operation of the Activities, …

3.5

hold to the order and account of NEI all goods, monies and other property of whatever nature which shall come into its possession or which it may receive in carrying out the Activities under this Deed with full power and authority subject to any directions which it may receive from NEI from time to time to deal with and dispose of the same in any manner for any purpose connected with the Activities to the intent that the beneficial ownership of all such goods, monies and property shall at all times be vested in NEI and not in Allen and so that all profits accruing from the Activities shall belong to NEI and not to Allen.

4.

Allen shall on behalf of NEI discharge and meet all the liabilities and obligations arising from the conduct of the Activities and NEI shall hold Allen fully indemnified against all liabilities and obligations of any description which Allen may incur to the intent that NEI and not Allen shall bear and incur any liabilities and losses of the Activities. …

7.

NEI shall pay to Allen all salaries wages and incidental payments in connection with its employees as shall be required by Allen on monthly account or otherwise as agreed and ensure that at all times Allen is funded to meet all its financial obligations.

8.

Allen shall enter into any contracts and other obligations necessary for the Activities ordinarily in its own name acting as the agent for the undisclosed principal NEI or, in special circumstances with NEI’s consent, in the name of NEI acting as NEI’s disclosed agent. NEI undertakes to ratify any contracts made or actions taken by Allen in the management of the Activities and, where necessary, to provide a parent company guarantee to third parties in respect of obligations undertaken by Allen under or pursuant to such contracts or actions. …

10.

All the activities of Allen in respect of the Activities shall be on behalf of and for the account of NEI. …

11.

Unless NEI shall otherwise agree, NEI shall arrange to have all insurance policies whether by way of indemnity guarantee or for any other purpose endorsed to the effect that the policies shall enure to the benefit of Allen for its rights, interests and obligations.”

The Second Management Agreement remains in force as between RRPE and Allen.

According to the evidence of Mr. John Brown, formerly Commercial and Projects Director of RRPE, in January 1996 the business carried on by Allen under the name W.H. Allen was re-organised and combined with the business carried on by Allen under the name Crossley Engines. Thenceforth the combined business (“the Allen Diesels Business”) was carried on under the name Allen Diesels as a division of Allen. On or about 18 February 1999 the Allen Diesels Business was transferred to RRPE. The precise mechanism and nature of the transfer did not emerge in evidence, but as from about 18 February 1999 the Allen Diesels Business was carried on as a part of the business of RRPE itself. It seems that an effect of the transfer of the Allen Diesels Business to RRPE was that that business ceased to have any separate identity, divisional or otherwise, with the name “Allen” simply being used as a brand name.

Performance Validation testing of two Engines commenced on 11 September 1997. Endurance Validation testing of the two Engines started on 4 June 1998. Following apparently successful completion of these tests, Engines went into production. That production was undertaken by RRPE. The first production Engine completed Factory Acceptance testing on 30 July 1999. Contracts for a total of 21 Engines were obtained by RRPE in 1999. By 16 November 2000 it seems that only those 21 Engines had been sold, of which 18 had been delivered. 25 Engines were, at that date, in various stages of assembly in factories. On 16 November 2000 one of the Engines which had been delivered and put into service suffered a catastrophic failure. The cause was a fatigue failure of a connecting rod. In April and May 2001 there were a further five catastrophic failures of connecting rods in Engines which had been delivered and put into service. Subsequent investigation revealed that there were two types of failure of a connecting rod which might occur. However, it is unnecessary for the purposes of this judgment to consider the technical details of those types of failure. Apart from the problems with the connecting rods, difficulties were also experienced with cylinder heads. Again there were two types of failure, but again it is unnecessary for the purposes of this judgment to consider the technical details. It was contended on behalf of the Claimants that as a result of the problems experienced with the Engines losses of in excess of £50,000,000 had been suffered.

The Defendant, Ricardo Consulting Engineers Ltd. (“Ricardo”), specialises, amongst other things, in the provision of Computer Aided Engineering services (“CAE”), and in particular in what is called Finite Element Analysis (“FEA”). Ricardo was engaged, in circumstances to which I shall have to return, to undertake work in connection with the development of the Engines. Shortly, it is contended on behalf of the Claimants in this action that the causes of the problems encountered with the Engines in service are all attributable to the deficiencies of Ricardo in performing the tasks which it agreed to undertake in respect of the development of the Engines.

It was common ground that, so far as was relevant to this action, Ricardo entered into two contractual arrangements concerning its involvement in the development of the Engines. It is convenient to refer to these arrangements, respectively, as “the Concept Design Contract” and “the Definitive Design Contract”. It was also common ground that a relevant document in relation to the Concept Design Contract was an order numbered 529/655 dated 20 December 1993 (“the CDC Order”) written on a standard printed form of order (“the Standard Form”) used at that time by Allen. Further, it was common ground that a relevant document in relation to the Definitive Design Contract was an order numbered 529/688 dated 31 August 1994 (“the DDC Order”) again written on the Standard Form. There was, however, an issue raised on the statements of case of the parties as to whether the CDC Order and the DDC Order amounted to offers on the part of Allen which were accepted by Ricardo, or acceptances on the part of Allen of offers made by Ricardo. Moreover, there was an issue as to whether the conditions printed on the reverse of the Standard Form (“the Conditions”) were incorporated into the Concept Design Contract or the Definitive Design Contract. Although both the Concept Design Contract and the Definitive Design Contract were pleaded in the statement of case of the Claimants, the claims for damages were said to lie only for breach of the Definitive Design Contract. No breach of the Concept Design Contract resulting in recoverable damage was alleged.

Paragraph 4.1 of the Conditions was in these terms:-

“The Goods and the Work must be supplied and rendered strictly in accordance with the requirements of the Contract. In the absence of a specific reference to specification the Goods and the Work must be new and of first class quality.”

For the purposes of the Conditions the expression “the Goods” was defined as meaning “the goods and materials to be supplied by the Seller under the Contract”, while the expression “the Work” was defined as meaning “the services to be provided by the Seller under the Contract”.

In the Amended Particulars of Claim in this action it was pleaded on behalf of the Claimants that:-

“2.

The claims in this action are brought by the First Claimant as principal to the contracts described below and as the party that has suffered the substantial loss and damage; and in the alternative, by the Second Claimant in its capacity as agent for the First Claimant and party contracting on behalf of the First Claimant.

3.

For the purposes of these Particulars of Claim, no distinction is drawn between the two companies and they are referred to jointly as “Rolls-Royce”.”

It is unclear whether the unhelpful decision not to distinguish in the Amended Particulars of Claim between the two Claimants was made deliberately so as to attempt to conceal the important issues as to what duties, if any, Ricardo owed to RRPE, and whether, if no duties were owed by Ricardo to RRPE, Allen could recover damages in respect of losses in fact suffered by RRPE, or whether it was simply a misguided effort at finding a short-hand way of referring to the Claimants. If the former, it certainly did not succeed. The inelegance of seeking to have the two Claimants treated as one and indistinguishable only in the event served to call attention to the importance of the issues to which the reality of the separate identities of the two Claimants was relevant.

In the Amended Defence and Part 20 Claim of Ricardo the significance attached to the separate identities of RRPE on the one hand and Allen on the other was clearly explained:-

“15.1

At all material times, in carrying out the design, development, testing, manufacture and sale of the AX500 engine, and in instructing Ricardo, Allen held itself out to Ricardo as acting for itself as principal, and not as agent for Rolls Royce or anyone else. All negotiations were between Allen and Ricardo, and all relevant contracts were entered into between Allen and Ricardo. At no time did Allen indicate to Ricardo that it was purporting to contract on behalf of Rolls-Royce. Rather, at all material times Allen acted and described itself as the sole contracting party.

15.2

Further and in any event, Ricardo’s engagement … was for it to act in collaboration with Allen. Ricardo’s personnel were to be (and were) based at Allen’s premises and were to (and did) work closely with the Allen designers and analysts. Allen had approached Ricardo personally. It was understood that it was a team of designers from Allen with whom Ricardo had agreed to work and collaborate.

15.3

Accordingly and in any event Ricardo puts the Claimants to strict proof of the fact, nature and extent of the alleged relationship of agency between Rolls Royce and Allen, and of its applicability to the contracts which are the subject of these proceedings.

15.4

In the premises, it is not admitted that Rolls-Royce is entitled, as between itself and Allen, to the benefit of the said contracts as principal and it is denied that Rolls-Royce is entitled to enforce the terms of the same against Ricardo as principal or otherwise. …

17.

…. Ricardo’s case as to the legal relationship between itself and the Claimants is as follows:

17.1

Allen Ricardo accepts that it owed contractual and concurrent common law duties to Allen, as detailed in paragraphs 47 and 48 below;

17.3

Rolls Royce As indicated in paragraph 15 above, Ricardo does not admit and puts Rolls Royce to strict proof of the alleged contractual relationship between Ricardo and Rolls Royce. Ricardo denies that it owed any common law duties to Rolls-Royce (paragraph 48 below). ….

121.

Ricardo will contend that Allen can only recover such loss as it has suffered and that, in assessing the existence and extent of such loss, Allen cannot recover in respect of Rolls-Royce’s losses, except to the extent that they are liable in respect of such losses and that it was reasonably foreseeable by Ricardo that they would suffer such loss. Ricardo will rely in this context on the terms of the agency agreement (if any) that Allen proves that it had with Rolls-Royce, including the terms of any indemnity.

122.

Ricardo will contend that Rolls-Royce cannot recover any loss suffered by it from Ricardo, and/or that if Rolls-Royce is entitled to recover such loss, it cannot recover it to the extent that the real cause of the loss was any breach by Allen of the duties owed by Allen to Rolls-Royce.”

The plea at paragraph 122 of the Amended Defence and Part 20 Claim was a reflection of the case as to alleged contributory negligence set out in paragraphs 117 to 119 of that statement of case. That case was:-

“117.

Further or alternatively, Ricardo will contend that any loss which the Claimants may have suffered was caused alternatively contributed to by negligence on the part of the Claimants themselves. On the basis of the Claimants’ Particulars of Claim and Further Information provided to date, and the limited information in relation to the testing of the AX500 engines presently available to Ricardo, the best particulars of the foregoing which Ricardo is presently able to provide are as follows. Ricardo reserves the right to revise this section of the Defence in the light of further information and clarification of Allen’s conduct of the NEDD [New Engine Design and Development] process and its application of the principles set out in section 4 above.

118 On the part of Allen:

118.1

Allen failed to carry out adequate testing, Post-test inspection and/or trial release of the AX500 engine. If and to the extent that there were defects in the design as alleged in the Particulars of Claim, these ought to have been detected in the course of the Claimants’ testing, Post-test Inspection and/or trial release.

118.2

Allen attached undue and inappropriate significance to the results of the FEA carried out to the con[necting] rod and cylinder head designs, and to the advice of Ricardo, by (as Allen asserts on its own case) treating the FEA carried out during the Definitive Design phase as having “validated” the design of the engine at the time of deciding to enter into production and/or release for sale.

118.3

Allen failed to heed Ricardo’s advice at the Design Review Meeting No. 4 on 6^th July 1995 that there was a prediction of separation and risk of fretting to the con rod palm face and that this was a matter which required careful monitoring during testing. Without prejudice to the generality of the foregoing, Allen ought to have devised and effected a detailed testing regime directed specifically at the monitoring and assessment of the risk of fretting and any consequences of the same (including in particular crack initiation and propagation), to include extended component testing with periodic examinations and crack detection tests at the palm face.

118.4

Allen failed to heed or act upon the fretting to the con rod which was detected on the palm face at an early stage of testing. Having discovered such fretting during testing, Allen ought to have:

118.4.1

recognised and fully investigated the possible consequences of such fretting, namely crack initiation and propagation, potentially resulting in catastrophic failure of the connecting rod and the risk of fatal or serious injury.

118.4.2

In particular, Allen ought to have carried out rigorous testing to ascertain the severity of the problem and risk which it presented, as referred to in the last sub-paragraph.

118.5

Between the Definitive Design phase and production of the AX500 engines Allen effected significant changes to both the connecting rod and cylinder head design, but failed

118.5.1

To consider the possibility that the changes may adversely affect the Factors of Safety as calculated by Ricardo and used by them in assessing the fitness of the components for subsequent testing;

118.5.2

To refer the changes to Ricardo, or to perform (themselves or otherwise) any or any appropriate FEA of the revised design;

118.5.3

To validate the revised designs, by means of increased engine and/or rig testing.

118.6

Without prejudice to the generality of the preceding sub-paragraph, during the Definitive Design phase Allen failed to make sufficient resources and staff available for training by Ricardo and/or to take over Ricardo’s models during the final stages of the Definitive Design phase, and failed to purchase the necessary software to make full use of Ricardo’s analysis (both during the Definitive Design phase and thereafter as necessary and appropriate), in breach of the express and implied terms referred to in paragraph 49 above.

118.7

Allen failed to subject the AX500 engine to a trial release prior to general release of the engine into the marketplace. Allen ought to have identified and approached an appropriate customer and entered into an appropriate pre-production agreement with it on terms which enabled an actual production engine to be subjected to extended and intensive use without risk to safety or significant financial losses in the event of a failure of the engine during such trial release. …

119 On the part of Rolls Royce (strictly without prejudice to Ricardo’s non admission that it owed contractual duties and denial that it owes common law duties to Rolls Royce):

119.1

Ricardo is presently unaware of the precise relationship between Rolls Royce and Allen or of the involvement of Rolls Royce in relation to this project. However so far as Ricardo is aware, on the Claimants’ own case:

119.1.1

Rolls Royce had a duty to monitor and/or oversee Allen’s conduct of the design, development and testing of the AX500 engine.

119.1.2

In any event, in view of Rolls Royce’s interest in the outcome of the NEDD process, Rolls Royce ought to have done so, and to have taken care in doing so.

119.2

Further, prior to entering into production, entering into contracts for the sale of the new AX500 engines and/or releasing the engines onto the market, Rolls Royce ought to have considered carefully the nature and extent of testing of the engines carried out by Allen, and the extent to which Allen had properly applied the principles set out in section 4 above. Insofar as necessary Ricardo will rely on admissions by Mr. Ruffles, a senior director of Rolls Royce, at the review meeting of 15^th May 2001 to the effect that it was dismayed and concerned at, amongst other things, the lack of design/change control processes and component release processes in relation to the AX500 engine.

119.3

Rolls Royce also ought to have taken care to set up an appropriate regime for release of the AX500 engine on a trial basis at the outset, in the manner referred to in paragraph 118.7 above. Without prejudice to the generality of the foregoing, Ricardo will insofar as necessary refer to the Claimants’ admission at the foregoing review meeting of 15^th May 2001 that they would have wished a trial release of the AX500 engine comprising 8000 hours of service prior to general release and sale, but that only 2,000 hours had been possible.

119.4

Before embarking on a programme of developing, manufacturing and/or marketing the AX500 engine through the agency of Allen and/or using designs produced and/or developed by Allen, Rolls Royce should have taken steps to satisfy themselves that Allen had sufficient resources and/or experience to carry out the tasks delegated to them and/or should have taken proper steps to monitor the performance of Allen and/or to satisfy itself that the AX500 had been properly developed and tested so as to be in a fit state to be manufactured and sold commercially.

119.5

So far as Ricardo is aware Rolls Royce failed to take any of the abovementioned steps or measures and/or failed to exercise appropriate care in doing so. Had Rolls Royce done so, it would have discovered the inadequacies in Allen’s testing and withheld the engines from the market until an appropriate level of testing had been successfully carried out.

119.6

Further and in any event, Rolls-Royce on its own case relied solely and exclusively on Mr. Youdan. Ricardo will say that it was unreasonable of it to do so.

119.7

Further, on the Claimants’ own case as to the involvement and interest of Rolls Royce in the project, Rolls-Royce ought to have applied (but so far as Ricardo is aware failed to apply) its own FEA skills and expertise to assess the design and analysis of the AX500 in the light of its development history.”

The Part 20 Claim included a claim for contribution from Allen in respect of any liability which Ricardo might be found to be under to RRPE. The relevant allegations were:-

“133.3

However so far as Ricardo is aware Allen owed common law duties and express or implied contractual duties to Rolls Royce obliging it to exercise the level of skill and care reasonably to be expected of engineers in the position of Allen in and about:

133.3.1

conducting and supervising the NEDD process and applying the principles referred to in section 4 herein above;

133.3.2

supervising the subsequent manufacture of engines;

133.3.3

responding promptly, diligently and with due care to faults and problems encountered with the engines post-sale.

134.

Further Allen was in breach of the aforementioned duties owed to Rolls Royce, in the respects set out in paragraph 118 above. Ricardo will rely in particular on the Claimants’ own admission in answer to Request 6 of the Further Information served on 31^st January 2003, in which Rolls Royce accepted that “Because of his position as Programme Manager of the AX500, the senior management of the First and Second Claimant relied on Mr. Youdan to alert them if the design integrity was not confirmed”, and that Rolls Royce relied upon the absence of any warning from Mr. Youdan that the design integrity of the AX500 engine was not confirmed.”

In the light of the matters to which I have referred so far in this judgment it seemed convenient and useful to order the trial of a number of preliminary issues. On 21 July 2003 I ordered that six issues be tried. At the commencement of the intended trial of the issues which had been identified in my order of 21 July 2003 I was invited by Mr. John Marrin Q.C., who appeared on behalf of the Claimants, together with Mr. Marc Rowlands and Mr. Jonathan Selby, to direct that the terms of two of the issues originally ordered to be tried should be modified and that a further issue should be added. I acceded to that request. The issues with which this judgment is concerned are therefore:-

“1.

Did the Second Claimant enter into the Definitive Design Contract as:

a.

Principal to the Contract; or

b.

As agent for the First Claimant (and if so, was the First Claimant a disclosed or undisclosed principal)?

2.

Did the Defendant owe the First Claimant a duty of care in respect of any or all of the losses pleaded?

3.

Were the Rolls-Royce General Conditions of Purchase (“the Conditions”) incorporated into (and if so, to what extent, having regard to paragraph 44 of the Defence) the Definitive Design Contract, as pleaded at paragraph 14 of the Particulars of Claim?

4.

If the answer to question 3 is that clause 4 of the Conditions was incorporated into the Definitive Design Contract, (a) is the obligation on Ricardo to supply Work of first class quality pursuant to clause 4.1 of those Conditions different to, and more onerous than, the (admitted) duty to exercise reasonable skill and care? (b) Is the obligation on Ricardo to supply services strictly in accordance with the requirements of the Contract pursuant to Clause 4.1 of the Conditions different to and more onerous than the (admitted) duty to exercise reasonable skill and care?

5.

If the answer to question 4(a) or question 4 (b) is yes, is the defence of contributory negligence available to the Defendant (a) as against the First Claimant, and (b) as against the Second Claimant?

6.

Did the Second Claimant owe the First Claimant a duty of care and if so is it open to the Defendant to claim a contribution from the Second Claimant pursuant to the Civil Liability (Contribution) Act 1978 in respect of any breaches by the Second Claimant of that duty of care, as alleged in the Part 20 Claim?

7.

In the event that (a) the Second Claimant entered into the Definitive Design Contract as Principal and (b) the Defendant did not owe the First Claimant a duty of care in respect of any or all of the losses pleaded, is the Second Claimant entitled to recover losses suffered by the First Claimant on any of the following bases (as set out at paragraphs 64 and 64A of the Amended Reply and Defence to Part 20 Claim);

(a)

As agent for the First Claimant, the undisclosed principal;

(b)

As trustee;

(c)

In accordance with the rule in Dunlop v. Lambert;

(d)

Pursuant to the “broad ground” of recovery in McAlpine Construction v. Panatown?”

Before turning to consider those issues it is necessary to reach some conclusion as to how the Definitive Design Contract was actually made.

The case originally pleaded on behalf of the Claimants at paragraph 13 of the Particulars of Claim was that the CDC Order and the DDC Order were each an acceptance of a proposal emanating from Ricardo. It was said that the CDC Order was an acceptance of a “Proposal to W H Allen Limited for support during the concept design of a new engine” dated 17 December 1993 (“the Second CDC Proposal”) which had the reference number DP93/2684, while the DDC Order was an acceptance of a “Proposal to NEI-Allen Limited for support during definitive design of a new engine” dated 3 December 1993 (“the DDC Proposal”) which had the reference number DP93/2568. Both the Second CDC Proposal and the DDC Proposal in fact were successors to earlier proposals dealing with the same subject matter. There were three predecessor versions of the Second CDC Proposal, the only one of which that needs to be noted specifically is that dated 3 December 1993 and bearing the reference DP93/2544 (“the First CDC Proposal”). In paragraph 13A of the Amended Particulars of Claim a new case was advanced that the CDC Order and the DDC Order were each counter-offers to offers contained in the Second CDC Proposal and the DDC Proposal, essentially because of the introduction by the CDC Order and the DDC Order of the Conditions. At paragraph 13B of the Amended Particulars of Claim it was alleged that each of the counter-offers alleged was accepted by Ricardo by commencing the work the subject of the relevant order.

At paragraph 41 of the original Defence and Part 20 Claim it was admitted that the Concept Design Contract was made by acceptance by Ricardo of the CDC Order and that the Definitive Design Contract was made by acceptance by Ricardo of the DDC Order. That position altered in the Amended Defence and Part 20 Claim. At paragraphs 41A and 41B of the latter statement of case the contentions advanced were:-

“41A Save that it is denied that the Purchase Orders [that is the CDC Order and the DDC Order] represented counter-offers, paragraph 13A is admitted. The Purchase Orders represented confirmation by Allen of its acceptance of the offers contained in Ricardo’s Proposal documents, as was originally pleaded by the Claimant in paragraph 13 of the Particulars of Claim, and was admitted and averred by Ricardo in Reply 45 of the Further Information served 13^th June 2003. In support of the foregoing (and by reference to the Definitive Design Contract in particular) Ricardo will rely upon the following:

41A.1 during the course of a meeting between Mr. G H Youdan and Mr. Niven and Mr. P McNamara of Ricardo at Allen’s premises on or about 10^th August 1994, Mr. G H Youdan told Mr. Niven and Mr. McNamara that, as regards the Definitive Design stage of the project, Allen now “had the budget approval from Rolls-Royce and would be issuing the order shortly. The scheduled start date is 12.09.94.” The reference to “order” was a reference to the issue by Allen of a purchase order, which was to represent formal confirmation of Ricardo’s appointment for the Definitive Design phase pursuant to the Definitive Design Proposal.

41A.2 Further, by letter dated 18^th August 1994 Mr. Youdan wrote to Mr. Niven confirming the then present position as follows:

“With regard to the Definitive Phase AX500 project I would like to advise you of the status of our administrative process in preparation for continuing this design work beginning on Monday September 12. The formalities of internal presentation/phase gate sign off has had to be rearranged to fit changed vacation and business schedules. This however does not change the plans we agreed to begin the reassembly of your team etc at the beginning of week 37. The purchase order requisition has been signed by two of the three needed and is only waiting for the General Manager’s return to the office on Friday for the final signature. For the record requisition number is 31030. I hope this information is sufficient for now and look forward to meeting you again after your well earned vacation.”

41A.3 In the premises, even prior to Allen’s issue of the Purchase Order dated 31^st August 1994, Allen had agreed in principle to appoint Ricardo pursuant to the Definitive Design Proposal, subject to formal confirmation which was to be provided by way of issue of a Purchase Order. Further, such confirmation would be provided “shortly”, on completion of Allen’s internal administrative processes and formalities.

41A.4 Accordingly when Allen issued the Purchase Order on 31^st August 1994 and sent a copy of the same to Ricardo by fax on the same day, this represented not a “counter-offer” as alleged by the Claimants but Allen’s formal and final confirmation of Ricardo’s appointment for the Definitive Design phase, in accordance with the Definitive Design Proposal.

41B Paragraph 13B is denied. Even if, contrary to the foregoing, the Purchase Orders did represent only counter-offers, those counter-offers were accepted by Ricardo’s letters of acknowledgement of the Purchase Orders, written and sent to Allen on 22^nd December 1993 and 31^st August 1994.”

The First CDC Proposal, and indeed the Second CDC Proposal and the DDC Proposal, was essentially a technical document describing the work which it was suggested that Ricardo should undertake and how it proposed to go about it. The structure of each of these documents was the same. Section 1 was an introduction. Section 2 set out objectives. Section 3 laid out the technical approach. Section 4 was concerned with the programme structure. Section 5 dealt with the scope of work. Section 6 indicated the software to be supplied. Section 7 included the prices to be charged and the timings of particular tasks. Section 8 addressed the question of terms and conditions. In each case seven terms were proposed, of which five dealt with prices and charges, and the timing of payments. The third term set out an indication of when it was desired to raise invoices and a requirement that invoices should be paid “on the basis of net 30 day terms”. The sixth term was concerned with variations to the work programme. The eighth term in each case was:-

“The results of work performed during the project would be the property of NEI-Allen. If any innovative design or manufacturing techniques are developed by the joint engineering team during the project, NEI-Allen would have the right to patent such an item in its name and at its expense.”

Having said that the First CDC Proposal, the Second CDC Proposal and the DDC Proposal were essentially technical documents, it is nonetheless necessary to quote some of the provisions of the DDC Proposal. The DDC Proposal began with a Summary which included:-

“This proposal describes a scope of work for Ricardo to assist NEI-Allen in the definitive design and analysis of a new family of engines. …

The proposed work makes extensive use of CAE methods to optimise the design and provide a “right first time” solution. …

The method of working is collaborative and it is proposed that Ricardo engineers work at the W H Allen site at Bedford. The Ricardo engineers would bring with them Ricardo computing and software facilities.

The method of working will facilitate technology transfer and will allow W H Allen engineers to use Ricardo software prior to purchase.”

The Introduction section of the DDC Proposal also included passages in which it was stated that what Ricardo was suggesting was providing help to Allen:-

“A proposal (DP 93/1218) was submitted in response to a request from NEI-Allen Limited (W H Allen) made during a meeting at Ricardo on 13^th May 1993. The meeting discussed how Ricardo could be of assistance to W H Allen in the concept and definitive design of a new family of engines. The document presented the assistance Ricardo would provide with the definitive design. ….

During the course of the design process, W H Allen wish to expand their in-house analysis capability, particularly in the area of analytical software and experience of using it for their new engine design….”

The Objectives set out in the DDC Proposal were:-

“2.1

To provide design analysis support to the definitive design of a new W H Allen family of engines in the following areas:

-

Provision of design assistance to the W H Allen team and assistance in co-ordination of the analysis activities.

-

Thermodynamic simulation of the engine to assist in the design optimisation.

-

Design analysis to support the engine design.

2.2

To support the design with finite element structural analysis of the major components.

2.3

To provide technology transfer to the W H Allen design and analysis team.”

Section 3 of the DDC Proposal set out the Technical Approach proposed for the undertaking of the services indicated by Ricardo:-

“Ricardo would provide assistance to the W H Allen team performing the design and analysis. In order to achieve a closely integrated team, work would be performed both at W H Allen and Ricardo by the Ricardo engineers. During the definitive design stage, Ricardo would provide analysts together with computers and software at the W H Allen site at Bedford. In this way, the best use is made of the available sources and technology transfer is facilitated from Ricardo to W H Allen personnel.

In the first half of the engine design programme, Ricardo would provide significant computer aided engineering (CAE) assistance to ensure that all the models are in place in good time to feed back into the design. The models would be progressively handed over to the W H Allen staff so that in the final stages of the programme they are performing the updating and iteration necessary on these models. This method of working would make the best use of the available resources and facilitate technology transfer from Ricardo to W H Allen.”

The Programme Structure set out in section 4 of the DDC Proposal envisaged that the involvement of Ricardo personnel would tail off as Allen personnel mastered new techniques as a result of transfer of technology:-

“Ricardo understand that W H Allen would be using a team of four designers/analysts and one specialist analyst during the definitive design phase. The Ricardo support to the staff could be considered in two separate areas. The first is the design assistance and miscellaneous support tasks which would go on throughout the programme and the second area is the computer aided engineering work which would see a significant Ricardo input at the start of the programme. The Ricardo input to CAE work would gradually tail off as W H Allen take over the CAE models for iteration work, later in the design.

Throughout the programme there would be, on average, a one man support to W H Allen in the area of design and technical co-ordination. In addition a miscellaneous support task allows for a further half man during the programme. The specific task which this resource would be allocated to would be decided during the programme….

For approximately half the programme, the Ricardo support would be a four man team for CAE. This would reduce to one man during the second half of the programme.

Approximately one half of the Ricardo CAE work would be performed at the W H Allen site at Bedford. Throughout the programme, there would be two Ricardo silicon graphics workstations plus a remote terminal to it placed at the Bedford site. The workstations would be complete with Ricardo software to allow operation as stand alone analysis facilities. The workstations would be connected via a modem link to the Ricardo site at Shoreham to allow data transfer for large analysis tasks.

The aim of the Ricardo team would be to achieve a completed definitive design for the 6-cylinder in-line version. All other members of the engine family would not have been completed but the definitive designs would be well underway for the other family members.”

Section 5 of the DDC Proposal, in dealing with the scope of the work proposed to be done by Ricardo, again contained a number of indications of the close working relationship envisaged between Ricardo personnel and Allen personnel:-

“5.1

…

At the start of the definitive design phase, a senior engineer would be appointed to act as technical co-ordinator for the Ricardo work and be the main contact between W H Allen and Ricardo during the work.

The technical co-ordinator would spend 20% of his time throughout the project involved in design and analysis decisions, both at W H Allen and Ricardo. …

5.2

Task 2 – Thermodynamic Simulation

…

It is assumed that this task would be performed primarily by the W H Allen engineers with Ricardo support. It is also assumed that W H Allen would have already purchased the WAVE software by the start of the definitive design phase. ….

5.4

Task 4 – Finite Element Analysis

…

The finite element analysis would be performed by a team made up of W H Allen FE specialists and Ricardo engineers. The exact scope of work allocated to each of the engineers would be decided at the start of the project. …

5.6

Task 6 – Miscellaneous Design and Analysis Support

An allowance has been made in the price for general analysis and design support by Ricardo for W H Allen. This would be used to perform any tasks which cannot be identified at the start of the project. …”

The transfer of technology envisaged as part of the DDC Proposal contemplated that Ricardo computer software would be supplied to Allen. Section 6 of the DDC Proposal dealt with that so far as is presently material as follows:-

“The programme of work for the definitive design has been constructed so that the software necessary to ensure a good design would be made available at the W H Allen site at Bedford on Ricardo hardware.

During the definitive design, W H Allen engineers would be able to work with the software in collaboration with Ricardo engineers, through the use of the additional terminal on the Ricardo silicon graphics work station. This would provide W H Allen with a clear understanding of the capabilities of the software, training in the use of the software and where the software can be used during a design programme. Having obtained this experience in the use of the software, it would allow W H Allen a clear judgement on which software to proceed with to purchase. This proposal for definitive design assistance assumes that W H Allen have purchased the WAVE software at some point during the concept phase.”

Although the CDC Order was raised after the date of the Second CDC Proposal, it referred in fact to the First CDC Proposal. The main text of the CDC Order as entered in the Standard Form, and omitting details of stage payments, was:-

“Provision of new engine concept design as discussed between your Messrs. H. Niven and J.M. Hales and our Mr. G.H. Youdan. Your ref J50369; DP93/2544 refers.”

After the details of stage payments the CDC Order went on:-

“Payments due 60 days from invoice”

That was not a provision which had featured in the First CDC Proposal. The print on the Standard Form included:-

“Please supply the above Goods and/or Work to the Conditions overleaf [that is to say, the Conditions].”

Ricardo responded to the CDC Order by a letter dated 22 December 1993. The material part of that letter was in these terms:-

“We acknowledge and thank you for your Purchase Order No: 529/655, dated 20 December 1993. However we would point out that our payment terms are strictly 30 days, in accordance with Clause 8.3 of our proposal which you have referenced on the order, and our quoted [sic] being given on that basis.”

A conventional analysis of the exchanges represented by the delivery of the First CDC Proposal, the Second CDC Proposal, the CDC Order and the letter dated 22 December 1993 would be that the offer contained in the First CDC Proposal was withdrawn and replaced by that in the Second CDC Proposal before the date of the CDC Order, which itself was in any event a counter-offer to what was offered in both the First CDC Proposal and the Second CDC Proposal because it sought to introduce new terms, specifically as to timing of payments and the applicability of the Conditions. That counter-offer was itself rejected by the letter dated 22 December 1993 by which Ricardo sought to insist on payment of invoices within 30 days. However, the work the subject of the Second CDC Proposal was in fact done and no issue in this action arises in respect of it, so it is unnecessary to consider further the rights and liabilities of Allen, RRPE and Ricardo in relation to that work.

The position in relation to the DDC Proposal was more straightforward than that in respect of the CDC Proposals in that at least the DDC Order referred to the DDC Proposal and not to a predecessor of it. What was said was simply:-

“Please supply New Engine Definitive Design Support Re Your Ref J50369, DP93/2568 Refers”

Unlike in the case of the CDC Order there was no reference to any discussions between representatives of Allen and Ricardo.

The DDC Order did, by its inclusion of the wording of the Standard Form to which I have already referred, seek to incorporate the Conditions. It was completed so as to incorporate a requirement that the work the subject of it be completed by 31 August 1995, which requirement did not appear in the DDC Proposal. Although the DDC Order did set out a programme for the raising of invoices it did not in terms indicate that such invoices would be paid within 30 days. Rather it stated, enigmatically, “Payments in accordance with above schedule”. On a conventional analysis, therefore, the DDC Order was not an acceptance of an offer contained in the DDC Proposal. Rather it was a counter-offer.

Ricardo responded to the DDC Order in a letter also dated 31 August 1994. That letter was in these terms:-

“We acknowledge and thank you for your Purchase Order No: 529/688, dated 31 August 1994. However we would point out that our payment terms are strictly 30 days, in accordance with our proposal which you have referenced on the order and our quote being given on that basis. (J50369 DP93/2568).

We accept your order subject to the above, and confirm that it is receiving our attention.”

Clause 8.1 of the Conditions provided that:-

“Unless otherwise agreed in writing, the terms of payment are nett 60 days from completion of the Contract in all respects.”

In opening the Claimants’ case orally Mr. Marrin submitted, for reasons which were not altogether clear to me, that the counter-offer contained within the DDC Order was accepted by Ricardo by the letter of acknowledgement dated 31 August 1994 because in that letter Ricardo sought to make alternative provision as to the timing of payments of invoices, which provision was expressed in writing and was accepted by Allen by conduct. A less contrived analysis would be that the letter dated 31 August 1994 written by Ricardo was a further counter-offer to the counter-offer contained in the DDC Order in that it sought to reinstate provision for payment of invoices within 30 days, whilst accepting the other terms proposed in the DDC Order. That further counter-offer was itself capable of being accepted by conduct. In his closing submissions Mr. Marrin accepted that the latter was the preferable analysis.

The case pleaded at paragraph 41A of the Amended Defence and Part 20 Claim on behalf of Ricardo really amounted to a contention that the offer contained in the DDC Proposal was accepted orally by Dr. Glyn Youdan on behalf of Allen by what he said at a meeting with Mr. Niven and Mr. McNamara of Ricardo on 10 August 1994 or was accepted in writing by Dr. Youdan’s letter dated 18 August 1994.

The terms of Dr. Youdan’s letter dated 18 August 1994 were quoted accurately and in full in paragraph 41A.2 of the Amended Defence and Part 20 Claim. It does not seem to me that it can seriously be contended that by the letter Allen accepted the offer contained in the DDC Proposal. The letter did not purport to be an acceptance. On its face it merely indicated that it was expected that an order in relation to the Definitive Design work in respect of the Engines would be forthcoming shortly, as proved to be the case. In the light of the terms of the CDC Order those at Ricardo who were taking an interest in the contractual side of things must have realised that it was possible, if not likely, that the order, when it came, would seek to introduce new terms which might not be acceptable to Ricardo. However that may be, it is plain, in my judgment, that the letter itself was not an acceptance of the DDC Proposal.

Equally, on the evidence, nothing said by Dr. Youdan at the meeting which it was common ground he in fact had with Mr. Niven and Mr. McNamara on 10 August 1994 amounted, or was thought to amount, to an acceptance of the offer contained in the DDC Proposal. Mr. McNamara and Dr. Youdan both gave evidence before me, but Mr. Niven was not called as a witness. Mr. Niven did prepare a memorandum dated 10 August 1994 following the meeting with Dr. Youdan. That memorandum was brief. All it said was:-

“PMM and I visited Glyn Youdan, the AX500 project leader, to discuss the next phase, namely the definitive design. He said that they had the budget approval from Rolls Royce and would be issuing the order shortly. The scheduled start date is 12.09.94!”

Mr. McNamara said a little more in his witness statement dated also 29 September 2003, but what he said did not take matters further:-

“On 10 August 1994, Humphrey Niven issued an internal memorandum concerning the AX500 project which referred to a meeting which he and I had with Glyn Youdan. The memo reported that WHA had received approval from Rolls-Royce and that WHA would be issuing the purchase order shortly. I took this to mean that WHA wished to appoint Ricardo in respect of the definitive design phase of the project on the terms set out in the definitive design proposal, the latter to be confirmed by WHA’s purchase order. Consequently, we commenced forward planning, even before receipt of the purchase order. When the purchase order was received, although I doubt that I would have seen it, I would not have considered it, or any standard terms and conditions attached to it, to represent a counter-offer to the proposal, but merely confirmation of the acceptance of the definitive design proposal. ”

Whatever Mr. McNamara’s private opinions as to the significance of the despatch of the DDC Order by Allen, he certainly anticipated that one would be sent and he did not contend that at the meeting on 10 August 1994 Dr. Youdan accepted the DDC Proposal orally.

In the result I find that the Definitive Design Contract was made by the acceptance by conduct by Allen in letting Ricardo get on with the work the subject of the DDC Proposal of the offer on the part of Ricardo contained in Ricardo’s letter dated 31 August 1994. That letter in effect restated all of the terms of the DDC Order other than that in relation to the time allowed for payment of invoices. The DDC Order incorporated by reference the DDC Proposal, as without reference to the DDC Proposal it was impossible to understand to what the DDC Order related. Whether it also incorporated the Conditions is the question raised by Issue 3 and I shall therefore return to it in the context of that issue.

Principal to the Contract; or

As agent for the First Claimant (and if so, was the First Claimant a disclosed or undisclosed principal)?

On the face of the DDC Order Allen was acting as principal in placing it and in entering into the Definitive Design Contract. At paragraph 19 of his written skeleton argument Mr. Marrin explained that it was the Claimants’ case that RRPE was the undisclosed principal in relation to the Concept Design Contract and the Definitive Design Contract and entitled to sue on them. In support of that case Mr. Marrin relied in particular, as I understood it, on the terms of clause 8 of the Second Management Agreement. However, in relation to Issue 2 Mr. Marrin seemed to be submitting that actually RRPE was a disclosed principal. For the purposes of the duty of care in tort which it was contended that Ricardo owed to RRPE Mr. Marrin contended at paragraph 32 of his skeleton argument that Ricardo had assumed responsibility to RRPE for the reasons set out at paragraph 17 of the Amended Particulars of Claim. That paragraph was in these terms:-

“Further or alternatively, Ricardo was under a duty at common law to exercise reasonable skill and care in the performance of the services. In relation to the duty owed to the First Claimant, the following facts and matters are relied upon in support of the Claimants’ contention that Ricardo assumed responsibility to the First Claimant to avoid causing economic loss:

(1)

The Second Claimant entered into (or purported to enter into) the Concept Design Contract and the Definitive Design Contract on behalf of the First Claimant.

(2)

Ricardo assumed responsibility to provide services of first class quality (see paragraph 14 above), alternatively with reasonable skill and care.

(3)

Ricardo knew, or ought reasonably to have known, that (a) the First Claimant would rely upon Ricardo’s services and advice and (b) that the First Claimant would be likely to suffer loss in the event of breach of duty by Ricardo (in other words), that damage was reasonably foreseeable. In particular:

(a)

During the 1980s and 1990s, Ricardo had worked with Rolls-Royce plc on different projects which included extensive involvement in, for example, the Rolls-Royce Trent aero-engine programme.

(b)

Ricardo had worked with Allen on various projects since the 1930s.

(c)

Ricardo knew that, in 1989 Rolls-Royce plc acquired the NEI group of companies (which included Allen) and thereby created the Rolls-Royce Industrial Power Group.

(d)

On or around February 1993, Ricardo had in its possession a chart which shows the breakdown of the Rolls-Royce Industrial Power Group. Further this chart described the First Claimant as a management company and the Second Claimant as a trading company under the First Claimant’s control.

(e)

Ricardo therefore actually knew that the Second Claimant was a wholly owned subsidiary of the First Claimant.

(f)

Ricardo undertook research into, and provided a report to the Second Claimant dated 2 November 1993 concerning competing products in the medium speed diesel market. This research would have revealed (had Ricardo not already known, which is denied) the fact that the Second Claimant was a trading company under the First Claimant’s control.

(g)

Most, if not all, correspondence from the Second Claimant to Ricardo from as early as 26 April 1993 (including the Concept Design and Definitive Purchase Orders) was either written on Rolls-Royce letter-head or had the Rolls-Royce logo on the face of it.

(h)

In its “Leads Review Form” no. 02473 dated 18 May 1993 Ricardo described the Second Claimant as “part of NEI – Rolls-Royce Power”.

(i)

The fact that, on 10 June 1994, Ricardo attended a meeting with Stewart Miller whom they knew to be Director – Engineering & Technology of Rolls-Royce plc. At that meeting Ricardo gave Mr. Miller a detailed presentation as to their services in relation to the AX500 project and discussed, inter alia, project timescales and project objectives and that Ricardo was to supply design expertise, design analysis, cycle simulation, FEA, software and technology transfer.

(j)

On or before 14 June 1994, Ricardo became aware of a “Directive from Rolls-Royce” whereby the Rolls-Royce management committee had to sign off deliverables and phase gates before a project moved from one phase to the next.

(k)

Ricardo knew that the Second Claimant needed approval from the First Claimant before it could issue the Definitive Design Purchase Order.

(l)

On 14 September 1994, i.e. after the issue of the Definitive Design Purchase Order, Ricardo made a further detailed presentation to Stewart Miller of Rolls-Royce plc.

(m)

At a meeting held on 16 September 1994 attended by Ricardo, the Second Claimant indicated that the First Claimant required that a risk assessment be carried out for the AX500 project.

(n)

As Ricardo recorded in their Project Review Report, signed on 9 November 1994, Ricardo held a meeting with “W H Allen and Rolls-Royce” to discuss overall strategy and design.

(o)

The fact that the Second Claimant operated as agent of the First Claimant was stated in the relevant accounts which Ricardo obtained or ought to have obtained prior to entering into the Contracts.

(4)

The First Claimant belonged to a limited class of people to whom Ricardo’s advice may have been foreseeably communicated.

(5)

At no stage did Ricardo seek to control who might rely, receive or benefit from its advice and services (in particular, see paragraph 8.7 of the Definitive Design Proposal and clauses 6.4 and 9 of the Conditions).

(6)

Further, none of Ricardo’s reports contained terms which stated that they had been prepared solely for the benefit of Allen (as opposed to any other individual or company).

(7)

As is set out in paragraphs 29 and following, below, the First Claimant relied upon Ricardo’s advice and services.

(8)

The First Claimant relied upon Ricardo’s advice and services for the purpose which they were provided (see paragraph 6 above).

(9)

As is set out in paragraphs 54 and following, below, the First Claimant relied upon Ricardo’s advice and services to its detriment.”

Most of the matters alleged in paragraph 17 of the Amended Particulars of Claim were not substantially in dispute on the evidence led before me. However, virtually all of them amounted on analysis to no more than the assertion, which was not in dispute, that Ricardo knew at the date of the Definitive Design Contract that Allen was a member of the Rolls-Royce Group of Companies, specifically a wholly-owned subsidiary of RRPE and a member of the Rolls-Royce Industrial Power Group. Generally speaking a party does not owe a duty of care to a shareholder in a limited liability company not to cause the value of his shareholding to diminish by causing loss to the company – see Prudential Assurance Co. Ltd. v. Newman Industries Ltd. (No.2) [1982] Ch. 204. That well-known principle obviously presented a bit of a conundrum for the Claimants. It was not enough to establish that Ricardo owed the duty of care to RRPE contended for merely to demonstrate the uncontested fact that Ricardo knew at the date of the Definitive Design Contract that Allen was a wholly-owned subsidiary of RRPE, for any relevant duty of care would be owed to Allen, as was not disputed by Ricardo, and Allen could sue in respect of any loss which it had suffered as a result of a breach of that duty of care. To establish the duty of care contended for it was necessary to go further and to show that Ricardo knew that carelessness in performance of its obligations under the Definitive Design Contract would cause loss not to Allen, but to RRPE, either because under the Second Management Agreement the activities of Allen were carried on for the sole benefit, and at the sole risk, of RRPE, or because, as turned out to be the case, the commercial exploitation of the Engines was undertaken not by Allen but by RRPE. But then if RRPE could establish that Ricardo knew either of these things at the date of the making of the Definitive Design Contract, it would actually be proving that Ricardo understood the true interest of RRPE in the design and development of the Engines, and thus showing that Ricardo understood that Allen was acting on behalf of RRPE, and not on its own behalf, in entering into the Definitive Design Contract. Mr. Marrin did not really grapple with this contradiction, but sought simultaneously to accept that RRPE was actually an undisclosed principal in relation to the Definitive Design Contract and to contend that its real interest in that contract was, or should have been, sufficiently well-known to Ricardo to give rise to the duty of care contended for.

The pleaded case of Ricardo put very much in issue the question whether Allen had been acting as agent for RRPE in entering into the Definitive Design Contract. I have already set out the terms of paragraph 15 of the Amended Defence and Part 20 Claim.

There was in fact no evidence that anyone at Ricardo actually knew of the existence of the Second Management Agreement or that Allen simply acted generally as agent for RRPE. It was simply untrue that Allen indicated to Ricardo at the time the Definitive Design Contract was made that it was acting on behalf of RRPE, if that was what was sought to be alleged at paragraph 17(1) of the Amended Particulars of Claim. There was no evidence that anyone at Ricardo at any relevant time in fact considered any accounts of Allen or RRPE, and I can think of no reason why Ricardo should be treated as knowing what it did not actually know but would have known had it looked at some accounts. That is particularly so given that the organisation charts for RRPE and the Rolls-Royce Group which it seems Mr. David Beighton of Allen provided to Ricardo in February 1993 described RRPE as a “management”, that is non-trading, company and Allen as a “trading” company. In a conventionally organised group of companies the trading companies operate on their own account and for their own benefit, transferring profits by way of dividend or management charges to the relevant parent company. In his cross-examination Mr. Brown accepted that in fact until about 18 February 1999 Allen did operate as if it were a company trading on its own account in that it entered into contracts, whether of sale or purchase, in its own name, it carried on a business as a manufacturer and supplier of various goods, including diesel engines, and it prepared management accounts. The Second Management Agreement was in reality only of fiscal significance. The charts produced to Ricardo in February 1993 were accurate as to the practical reality but actively misleading as to the supposed underlying fiscal basis of operation. However, there was nothing in the charts to put on enquiry someone who saw them but did not know the fiscal arrangements between Allen and RRPE.

Both of the witnesses called on behalf of Ricardo, Mr. McNamara and Mr. Michael Monaghan, accepted that they knew by the date of the Definitive Design Contract that Allen was a member of the Rolls-Royce Group. Mr. Monaghan accepted that he knew after seeing the organisation chart for RRPE that Allen was a subsidiary of that company. It was certainly the case that letters written to Ricardo by Allen after 1990 were typed on stationery which included the Rolls-Royce double R logo and an indication, in words which in detail varied over time, that Allen was a member of the Rolls-Royce Group. From certainly no later than the date of the CDC Order the Standard Form also included an indication of the Rolls-Royce affiliation of Allen.

It was not in dispute that representatives of Ricardo met Mr. Stewart Miller, who was at the time Director – Engineering & Technology of Rolls-Royce Plc, that is a director of the ultimate parent company of the Rolls-Royce Group, on two occasions, namely 10 June 1994 and 25 October 1994. Mr. Monaghan and Mr. Niven attended both meetings, while Mr. McNamara only attended the second. The first meeting involved a visit by Mr. Miller on his own to Ricardo’s premises in Shoreham. The second meeting took place in the offices of Rolls-Royce Plc in London and was also attended by Mr. Beighton, at the time Engineering Manager of Allen, Mr. Richard Buckland, at the time the managing director of Allen, Mr. Tony Burton, at the time a member of the board of directors of Allen, and Dr. Youdan, project manager of the Engines project (“the Project”) from Allen. Mr. Miller is now dead and so the only accounts of the meeting on 10 June 1994 given in evidence were, first, that which Mr. Miller himself gave in a memorandum concerning the visit dated 15 June 1994 which he wrote, and, second, that of Mr. Monaghan. Mr. Beighton, Mr. Buckland and Dr. Youdan gave accounts in their witness statements of the meeting on 25 October 1994. With slight differences of emphasis the accounts given of the meeting of 25 October 1994 by each of the witnesses who gave evidence about it were similar. Perhaps the fullest account was that of Mr. Monaghan, who was at the time Director of Technology at Ricardo and was the senior representative of Ricardo present. I accept that account as accurate, as I accept Mr. Monaghan’s account of the meeting on 10 June 1994 as accurate.

Mr. Monaghan said at paragraph 19 of his witness statement dated 29 September 2003 that he knew Mr. Miller to be Director – Engineering and Technology of Rolls-Royce Plc and understood his visit to Ricardo to be made in that capacity. He went on at paragraphs 20 and 21:-

“20.

My recollection of the nature and purpose of the meeting is quite clear: Mr. Miller was coming to look around Ricardo to see what it was doing, what its capacities were and the like. The fact that Ricardo was acting for WHA in relation to the AX500 engine gave the meeting some added purpose but was almost incidental. I am quite clear in my own mind that the meeting was intended to be high level and not specifically aimed at the AX500 project.

21.

During the visit itself there was relatively little debate about the AX500 project. There was no sense that Mr. Miller was investigating the design programme as such. My impression was that he had been to WHA, had seen Ricardo’s office up there and was merely keen to keep himself abreast and informed of the project. So far as I was (and am) aware, the visit was not linked (expressly or otherwise) to any question of RRPE’s approval of the entry into the definitive design stage. Certainly, there was no suggestion that anything that Ricardo could contribute was intended to be relied upon for approval purposes, albeit that we, Ricardo, plainly knew that if we performed badly during the course of the visit, that could jeopardise our ongoing role. That is always the case, however. There was no suggestion at the meeting that this was anything other than WHA’s project, or that the company contracting with Ricardo was anyone other than WHA. On the contrary, it was referred to as WHA’s project, both by Ricardo and I believe also Stewart Miller.”

The account of the meeting on 10 June 1994 given by Mr. Monaghan was, as it seemed to me, confirmed by what Mr. Miller wrote about it in his memorandum dated 15 June 1994:-

“I had a useful first visit on 10 June, which met its objective of assessing their capabilities and interest in Allen’s large engine programme.

They have good design tools and I met some good people. Obviously they have a very wide experience to apply to any particular project, although they are very careful to maintain commercial security between clients’ programmes.

They understand our question about the competitiveness of our project, in an industry which has a number of stronger players. Their preliminary answer is that careful selection of market applications should lead to a satisfactory level of business. They also offered their opinion that, if Allen’s do not launch a project like this, their diesel business will disappear.

The decisions we require to make about which new projects to support are also understood. In their view, one year’s delay in launch, for instance, would not damage the business opportunity irreparably. They did make a plea, however, for preserving the joint team and not disbanding it, if it is our intention to continue in one way or another. With an eye to business, they emphasised what their contribution could be to joint development.

During a brief presentation on the Allen project, I queried whether the fuel consumption target was aggressive enough.

All these points need further examination. We agreed to have a fuller joint technical review after the present concept design phase was completely [sic], possibly in August.”

What Mr. Monaghan said about the meeting on 25 October 1994 in his witness statement was:-

“24.

The only other involvement so far as I am aware with any of the Rolls-Royce companies was with Mr. Miller in October 1994. We were asked to attend a meeting. This had been foreshadowed in a thank you letter (dated 13 June 1994) which Stewart Miller sent me shortly after the June visit. In it he had said that he had been in touch with WHA and that a “more thorough review of their project” would be arranged after the concept design was completed.

25.

I believe Stewart Miller’s secretary called me and said he wanted a meeting at Rolls-Royce’s head office in London to discuss the further design stages of the AX500 project. It was my understanding (based on, I believe, a conversation that either Martyn Raynor or I had with Glyn Youdan) that the purpose of the meeting was to confirm the viability of the AX500 as a marketable engine. I did not understand the continuation of the engine design to be contingent on the meeting. Glyn Youdan was aware that a meeting was to be requested and he sent us a copy of a presentation that he had made to Rolls-Royce in September. Glyn Youdan did not give any idea as to what he wanted Ricardo specifically to say at the meeting, but I do remember him saying that he wanted Ricardo to put on a good show. I would have expected nothing less in any event.

26.

Both Glyn Youdan and David Beighton attended the meeting. They gave an introduction to Ricardo’s role in the concept design and Ricardo then described our proposed involvement in the definitive design. During the meeting, Mr. Miller said (and I think it was in his summing up) that Rolls-Royce were providing funding for the engine programme. This was no particular surprise to us, given what I have already said as to our understanding of the roles of the companies.

27.

I do not believe that anything was said at the meeting which was inconsistent with our understanding of the roles of the companies. In particular there was no suggestion that this was Rolls-Royce Power Engineering’s project and not WHA’s own project, or that the company with which Ricardo was contracting at the Definitive Design stage was anyone other than WHA.

28.

I specifically recall that Mr. Miller’s main enquiry was about the place of the proposed new engine in the large engines market generally. In other words, the comfort he was looking for from Ricardo was whether if the engine was built according to the concept and early stage of the definitive design, would it be a marketable product? At that stage, whilst we may have had concerns over WHA’s resources, and whilst the engine itself was not particularly innovative, there was no reason why it ought not to be marketable. There is no doubt that Mr. Miller was taking a lot more interest in the project at this stage, and whilst he indicated that he was relying upon Ricardo in terms of comfort that the engine was one which was likely to be marketable and therefore in principle worth pursuing, he did not look for, and we did not give, any advice as to the processes by which the engine could be developed.

29.

The discussions in the meeting did not affect my previously held views as to with whom we were contracting, namely WHA. Nor did they change my understanding as to what the purpose of the meeting had been. The simple point was that Mr. Miller was looking for reassurance that a relatively conservative design would be competitive, not that Ricardo would ensure (beyond its normal obligations) that WHA would build the engine properly or that Ricardo would give Rolls-Royce its assurance in this respect.

30.

At the end of the meeting, Mr. Miller thanked us. He said he looked forward to seeing a good product.”

The involvement of Mr. Miller to which I have referred, far from assisting any case that Ricardo knew that the real beneficiary of its services was, or was to be, RRPE, seems to me to undermine it. Mr. Miller’s involvement throughout both of the meetings which he had with representatives of Ricardo was as a main board director of Rolls-Royce Plc. Whether he had any particular formal role within RRPE did not emerge clearly in evidence, but it seemed that he had not. What his involvement showed was Rolls-Royce Plc at the highest level taking an interest in the project and seeking to use its ultimate control of expenditure within the Group to ensure that its agreement was sought and obtained to the project going forward. No one has suggested that there was any prospect of Rolls-Royce Plc itself undertaking the production of Engines and thereby being exposed directly to the risk of loss if production Engines were somehow defective. The submissions on behalf of the Claimants treated Mr. Miller implicitly as if he were the manifestation so far as Ricardo was concerned of RRPE. Not only was he not, but that he was not and what his role actually was are important, as it seems to me, in considering how matters were presented to Ricardo.

While it is correct that Allen had entered into the Second Management Agreement with RRPE and had thereby undertaken to act as agent of RRPE in relation to the activities described in the agreement as “the Activities”, which included carrying on the business carried on under the name “W. H. Allen” as a manufacturer and supplier of diesel engines, there was no provision of the Second Management Agreement, or any other agreement to which Allen was party, which in terms prevented from carrying on some business of its own. That point is important because of the case advanced on behalf of Ricardo by Mr. Justin Fenwick Q.C. and Mr. Paul Sutherland. Having posed the question, “In entering into the Definitive Design Contract, did Allen intend to act on RRPE’s behalf?”, to the relevance of which as a matter of law I shall return, Mr. Fenwick and Mr. Sutherland went on in their written skeleton argument:-

“9.

D indicated in its Note for the PTR (at para 6.1) that the first issue that arises in relation to agency is (and the facts relevant to the issue are):

“whether Allen in fact entered into the contract of appointment with Ricardo intending to act as agent for RRPE. None of the 7 Allen witnesses support this; they do not even refer to the 1992 “Management Agreement” relied upon in the Claimants’ pleadings; indeed the witnesses do not even suggest that as at 1994 they were aware of the alleged relationship of agency”.

10.

The burden is clearly on the Claimant to show that Allen did have the necessary intention to act as agent. Accordingly, and since the D expressly raised the point at the PTR, it is surprising that the Claimants (a) have not sought to adduce supplementary evidence of such an intention, and (b) have not even addressed this issue in their Opening Note.

11.

D submits that, absent any evidence that Allen did have such an intention (which is the case here even before any cross-examination of the witnesses), the Claimants’ case on agency must fail.

12.

The Claimants’ contemporary documents also suggest that Allen did not intend to contract (and indeed did not contract) as RRPE’s agent. The Claimants have disclosed over 650 files of documents in this case. In October 2003 they proposed that 9 lever arch files of those documents be included in the preliminary issue trial bundles (Bundle E). Aside from the Management Agreement itself, not a single one of those documents even refers to the alleged relationship of agency between Allen and RRPE.

13.

In fact the documents paint a very different picture. They suggest that Allen conducted its business, and pursued the AX500 project, in its own right, and not on behalf of RRPE. See for example:

(a)

The fact that the phase gates were signed off by Allen internally, i.e. by directors of Allen not RRPE. So far as approval was required from RRPE or “Rolls Royce”, the Claimants rely heavily on the involvement of Mr. Stewart Miller, and the need to obtain his approval for entry into the Definitive Design phase. They appear to have lost sight of the fact that Mr. Miller was a director of Rolls Royce Plc, not RRPE, the alleged principal.

(b)

The contemporaneous documents, which Ricardo will refer to during the course of the trial next week.

14.

The strong impression is that the “Management Agreement” document came into being principally if not solely in order to justify the adoption of a convenient and cost effective single accounting system within the companies in the RRPE group. In particular, it avoided the need for separate accounts to be prepared in respect of each of the companies in the group, and (by stipulating that RRPE’s role as principal was to be undisclosed) had the added advantage of ensuring that the exposure of RRPE itself to potential liability under Allen’s contracts, was kept secret.

15.

There is no evidence to suggest that the Management Agreement was intended to apply, or did apply, beyond such accounting matters. Indeed, for the reasons already referred to above, the evidence suggests the contrary.”

It was common ground between Mr. Marrin and Mr. Fenwick that the principles of law to be applied in answering Issue 1 in the light of my findings of fact relevant to that issue were those summarised by Lord Lloyd of Berwick in giving the advice of the Privy Council in Siu v. Eastern Insurance Co. Ltd. [1994] 2 AC 199 at page 207:-

“For present purposes the law can be summarised shortly. (1) An undisclosed principal may sue and be sued on a contract made by an agent on his behalf, acting within the scope of his actual authority. (2) In entering into the contract, the agent must intend to act on the principal’s behalf. (3) The agent of an undisclosed principal may also sue and be sued on the contract. (4) Any defence which the third party may have against the agent is available against his principal. (5) The terms of the contract may, expressly or by implication, exclude the principal’s right to sue, and his liability to be sued. The contract itself, or the circumstances surrounding the contract, may show that the agent is the true and only principal.”

It was in the light of the principles summarised by Lord Lloyd in the passage quoted in the previous paragraph that Mr. Fenwick and Mr. Sutherland identified as relevant to Issue 1 the question “In entering into the Definitive Design Contract, did Allen intend to act on RRPE’s behalf?”. I accept as accurate the submissions of Mr. Fenwick and Mr. Sutherland as to the state of the evidence in relation to that question, even following cross-examination. The fact is that there was no evidence that at the time of the making of the Definitive Design Contract anyone at the Allen end gave any thought whatever to the issue on whose behalf Allen was acting in entering into the contract. Mr. Brown in his cross-examination indicated that he considered Allen in the period up to February 1999 to be a trading company which entered into its own contracts. Mr. Buckland told me in his cross-examination that there was tight financial control exercised by Rolls-Royce Plc, the ultimate parent company, through the medium of the management board of the Industrial Power Group, and in particular that approval was needed from that board for the making of contracts like the Definitive Design Contract. However, even he did not say that that contract, or each and every contract entered into by Allen, was made as agent for RRPE as undisclosed principal. Thus if it were necessary, in order for a party claiming to be an undisclosed principal to be able to sue on a contract made by his alleged agent, for the agent subjectively at the moment of contracting to have considered that it was acting on behalf of the supposed undisclosed principal, no one within Allen, on the evidence led before me, had that subjective intention in respect of the making of the Definitive Design Contract. That said, at the time the Definitive Design Contract was made the Second Management Agreement was in place. It was a perfectly lawful agreement and there is no obvious reason why effect should not be given to it according to its terms. Thus, if the question were whether, objectively, at the moment at which the Definitive Design Contract was made, arrangements were in place which had the effect that, as between Allen and RRPE, the Definitive Design Contract was to be taken as having been made by Allen on behalf of RRPE, the answer would be affirmative.

My attention was drawn by Mr. Marrin, in the context of the question whether the intention of an agent said to have been acting for an undisclosed principal to enter into the relevant contract as agent was to be ascertained objectively or subjectively, to a decision of Colman J, National Oilwell (UK) Ltd. v. Davy Offshore Ltd. [1993] 2 Lloyd’s Rep 582. A major issue in the case, relevant to the alleged counterclaim of the defendant, was whether the plaintiff and the defendant were co-assured. In the context of that issue it was necessary for Colman J to consider and to analyse various previous decisions relating to co-assurance. In the course of that analysis one question upon which the learned judge had to form a view was as to how intention to enter into a policy of insurance on behalf of other parties might be demonstrated. On that point Colman J said, at page 597:-

“(3)

Evidence as to whether in any particular case the principal assured or other contracting party did have the requisite intention may be provided by the terms of the policy itself, by the terms of any contract between the principal assured or other contracting party and the alleged co-assured or by any other admissible material showing what was subjectively intended by the principal assured.”

Mr. Marrin accepted that the relevant intention was subjective, as Colman J suggested, but submitted that the Second Management Agreement was, in Colman J’s terms “any contract between the [agent, in this case] …and the alleged [principal]” which demonstrated the requisite intention subjectively.

I agree with Colman J that the relevant intention needs to be proved subjectively. Unless that were so, the second of Lord Lloyd’s principles adds nothing to the first, in effect that the contract must have been made by the supposed agent acting within the scope of his actual authority. However, I reject the submission of Mr. Marrin that in the present case the terms of the Second Management Agreement provide the requisite proof of the subjective intention of Allen to enter into the Definitive Design Contract on behalf of RRPE. In the passage which I have quoted from his judgment it seems to me that the focus of Colman J’s attention was on the need for proof of subjective intention, and he was contemplating that an agreement in appropriate terms made at an appropriate date between the policy holder and the supposed co-assured could provide proof of such subjective intention. That is, in my judgment, a considerable distance from his view having been that, having regard to arrangements previously made which were not present to anyone’s mind when the relevant contract were made, the necessary subjective intention was demonstrated. As I have already indicated, in my judgment in the present case Allen has not proved that it consciously intended at the time the Definitive Design Contract was made to enter into it on behalf of RRPE.

There is an even more fundamental objection to a finding that Allen entered into the Definitive Design Contract as agent for RRPE and that depends upon the fifth of Lord Lloyd’s principles. He himself went on later on page 207 of his speech to say:-

“The present case is concerned with the fifth of the features noted above. The law in that connection was stated by Diplock LJ in Teheran-Europe Co. Ltd. v. S.T. Belton (Tractors) Ltd. [1968] 2 QB 545, 555:

“Where an agent has … actual authority and enters into a contract with another party intending to do so on behalf of his principal, it matters not whether he discloses to the other party the identity of his principal, or even that he is contracting on behalf of a principal at all, if the other party is willing or leads the agent to believe that he is willing to treat as a party to the contract anyone on whose behalf the agent may have been authorised to contract. In the case of an ordinary commercial contract such willingness of the other party may be assumed unless either the other party manifests his unwillingness or there are other circumstances which should lead the agent to realise that the other party was not so willing.”

It was common ground that there could be circumstances from which the conclusion should be drawn that the other contracting party in what otherwise seemed to be an ordinary commercial contract was not willing to treat as a party to the contract anyone on whose behalf the agent may have been authorised to contract. At the first paragraph numbered 25 of his skeleton argument Mr. Marrin gave examples from previous cases:-

“(1)

Said v. Butt [1920] 3 KB 497 where the undisclosed principal purported to use an agent to buy him a theatre ticket when he knew that the theatre would not have sold the ticket to him had he attempted to buy it himself;

(2)

Collins v. Associated Greyhound Racecourses Ltd. [1930] 1 Ch 1 where the Court of Appeal held that an undisclosed principal was not entitled to rely on an agent’s application for shares on the terms of a prospectus and memorandum and articles of association as, under the terms of the transaction, the company was entitled to consider the personality of the applicant before deciding to accept the application;

(3)

Greer v. Downs Supply [1927] 2 KB 28 (CA) where the third party only entered into the contract with the “agent” because the “agent” was its debtor.”

Mr. Marrin in his skeleton argument advanced the Claimants’ case that there was no reason in the circumstances of the present case to find any unwillingness on the part of Ricardo to contract with Allen’s undisclosed principal in this way:-

“23.

It is submitted that the correct approach is to consider whether or not it was a term of the Definitive Design Contract that no other individual (i.e. Rolls-Royce) had any interest in Allen’s contract with Ricardo. …

25.

[second paragraph so numbered] On Ricardo’s case the following provisions of the Definitive Design Proposal appear relevant:

(1)

That Allen’s engineers would be entitled to use Ricardo software and that ultimately “technology transfer” would take place (see, inter alia, clause 2.3);

(2)

Section 6 states that during the concept design “W H Allen engineers would be able to work with the software in collaboration with the Ricardo engineers”;

(3)

Section 4 states that Ricardo understands that Allen will be using a team of four designers/analysts and one specialist analyst. It does not stipulate who those designers/analysts will be nor does it stipulate:

(a)

Whom they will be employed by; and

(b)

Their levels of qualification or position within Allen.

As a matter of fact, the team that Ricardo thought they would be working with was the team that it got.

(4)

Clause 8.7 provides that the results of work performed during the project would be the property of Allen. If any innovative design or manufacturing techniques are developed by the joint engineering team during the project, Allen would have the right to patent such an item in its name and at its expense. In other words, Ricardo was not seeking to control who would benefit from the fruits of the project; Allen had control of them and, in theory, they could transfer the patent rights to anybody they wished – including Rolls-Royce.

26.

At paragraph 32 of his witness statement Mr. Monaghan, Ricardo’s Technical Director … suggests that it was of significance that the collaboration was to be with Allen (rather than any other organisation) because Allen were well known to Ricardo. But Ricardo’s interest in limiting collaboration to working with Allen would not preclude Rolls-Royce having an interest in the contract.

27.

The Claimants submit that none of these matters is such as to suggest that it was a Term of the Definitive Design Contract that no-one other than Allen would have an interest.”

Mr. Fenwick and Mr. Sutherland submitted, correctly in my judgment, first that the formulation of Diplock LJ approved by the Privy Council in Siu v. Eastern Insurance Co. Ltd. did not postulate that unwillingness to treat as a party to the contract anyone on whose behalf the agent may have been authorised to act had to be manifested by means of a term of the contract, and second that the issue was not whether Ricardo would have had an objection to contracting with the party alleged to be the actual undisclosed principal, RRPE, but whether Ricardo was unwilling to take the risk of contracting with anyone whomsoever on whose behalf Allen may have been authorised to act. Their position was, essentially, that the fact that the nature of the services to be provided by Ricardo under the Definitive Design Contract involved employees of Ricardo working in collaboration with employees of Allen in pursuit of a common objective of developing a new engine design for Allen and providing for a transfer of technology made plain that this was not an ordinary commercial contract, but one in respect of which it was inconceivable that the particular identities of the respective contracting parties was not of the greatest significance to the other. A number of witnesses called on behalf of the Claimants spoke of the high reputation of Ricardo and the high regard in which it was held as a result of experience of dealing with it over a number of years. On the Ricardo side Mr. Monaghan indicated that it was important to Ricardo to be committing itself to collaborate not with any party which might appear and claim the benefit of the Definitive Design Contract, but with Allen. At paragraph 32 of his witness statement, a passage as to which he was not cross-examined, he said:-

“I have been asked whether it was of any significance to Ricardo that it was contracting with WHA rather than anyone else The answer is that this was of significance. Both the Concept and the Definitive Design contracts were for a collaborative project, in which Ricardo were to work closely with (and to train) the client throughout these design development stages. We agreed to do this (and prepared our budget) on the basis that it was WHA’s personnel, at WHA’s premises, who were the client. WHA were well known to us and we thought that the intended collaboration was workable on the terms set out in the proposal documents, and was likely to be worthwhile (in the sense that the project was likely to be profitable to Ricardo both financially and in terms of adding to Ricardo’s profile and portfolio). Obviously the same would not necessarily be the case with any and every other engineering firm or company.”

I accept that evidence.

Moreover, the conclusion of the Definitive Design Contract obviously has to be viewed in the context that it was the successor to and the logical continuation of the work done, apparently successfully, under the Concept Design Contract. It thus was intended to build upon work already done in collaboration between identified individuals who had no doubt developed satisfactory personal relationships in the course of the earlier work. The background of the earlier successful work and the satisfactory working relationships established during the course of it was, as it seems to me, essential to the decision of Ricardo to agree to a continuation. Had the earlier work been fraught with difficulties at a practical level it is impossible sensibly to contemplate that the Definitive Design Contract would have been made. Consequently in my judgment the Definitive Design Contract was manifestly one which was not an ordinary commercial contract and, moreover, was one which was made in circumstances such that, had anyone at Allen given the matter any attention, they would have realised that Ricardo was not willing to contract with anyone other than Allen.

In the result I find that the answer to Issue 1 as formulated is that Allen did not enter into the Definitive Design Contract as agent for RRPE as undisclosed principal so as to enable RRPE to sue Ricardo on the Definitive Design Contract or Allen to recover damages quantified by reference to the loss allegedly sustained by RRPE. Those conclusions also dispose of Issue 7(a), which Mr. Marrin accepted ought logically to be considered with Issue 1.

All of the losses which it is alleged that RRPE has suffered as a result of the alleged failure of Ricardo to do what it was said it should have done in performance of its obligations under the Definitive Design Contract were economic. In summary the alleged heads of loss were costs incurred in investigating the condition of the Engines which had been sold or part manufactured, costs of redesigning the defective components, costs incurred in manufacturing replacement components, various commercial costs incurred in seeking to satisfy disgruntled customers, such as provision of extended warranties, or provision of temporary alternative power, or payment of liquidated damages for delay in completion of installation, costs associated with programme extensions, tax liabilities and loss of business.

I was reminded by Mr. Marrin of the various tests which have been formulated in the House of Lords over the last fifteen years or so by reference to which it has been suggested that the question whether a duty of care was owed by A to B should be answered. He referred in particular to the assumption of responsibility test of Lord Goff of Chieveley expounded in Henderson v. Merrett Syndicates Ltd. [1995] 2 AC 145 at pages 180-181, the “threefold” test suggested by Lord Griffiths in Smith v. Bush [1990] 1 AC 831 at pages 864-865, the incremental approach commended by Lord Bridge of Harwich in Caparo Industries plc v. Dickman [1990] 2 AC 605 at page 618 and the observations of Lord Hoffmann in South Australia Asset Management Corporation v. York Montague [1997] AC 191 at pages 211-214. Mr. Marrin submitted that whichever of the tests was applied the result should be the same. On that point I agree with him on the facts of the present case. I have already quoted paragraph 17 of the Amended Particulars of Claim in which were set out the matters upon which Mr. Marrin relied as giving rise to the duty of care for which he contended owed by Ricardo to RRPE. However, Mr. Marrin accepted in closing the Claimants’ case that in the light of the way in which the evidence had come out it was not realistic to contend that Ricardo had actual or constructive knowledge of the Second Management Agreement or of the provision made in it for Allen to act as agent for RRPE as undisclosed principal. He urged upon me the test formulated by Lord Griffiths in Smith v. Bush, loc. cit., namely:-

“I therefore return to the question in what circumstances should the law deem those who give advice to have assumed responsibility to the person who acts upon the advice or, in other words, in what circumstances should a duty of care be owed by the adviser to those who act upon his advice? I would answer – only if it is foreseeable that if the advice is negligent the recipient is likely to suffer damage, that there is a sufficiently proximate relationship between the parties and that it is just and reasonable to impose liability.”

Mr. Marrin concentrated his submissions on the issue of foreseeability and submitted that in view of the involvement of Mr. Miller it was foreseeable to Ricardo that, if it failed to perform with reasonable skill and care the duties which by the Definitive Design Contract it had assumed in relation to Allen, RRPE would or might suffer loss.

The pleaded answer to the Claimants’ case as to a duty of care was set out very thoroughly, and at some length, in paragraphs 48 to 48D inclusive of the Amended Defence and Part 20 Claim. For present purposes the main points made may be summarised quite shortly. The first main point was that Ricardo had no dealings with RRPE at all, which was correct. The second main point was that Ricardo had no reason to suppose that Allen was acting in relation to the design and development of the Engines other than on its own behalf and for its own benefit. On my findings set out in the context of my consideration of Issue 1 that also is correct. The third main point was that on the pleaded case of the Claimants RRPE did not rely at all on advice given or statements made by Ricardo, but rather on the failure of Dr. Youdan, who it was said did rely on that advice and those statements, to give it appropriate warnings. That does indeed seem to be the effect of the pleaded case, so far as is presently material. The fourth main point, which again is correct on my findings, was that RRPE chose deliberately to conceal from Ricardo the true nature of its interest and involvement in the project.

Mr. Fenwick and Mr. Sutherland in their written submissions contended that I should pay particular regard to the observations of Lord Hoffmann in South Australia Asset Management Corporation v. York Montague Ltd., loc. cit., in addressing Issue 2. The material passage is a long one, but it is worth setting out substantially in full:-

“Because the valuer will appreciate that his valuation, though not the only consideration which would influence the lender, is likely to be a very important one, the law implies into the contract a term that the valuer will exercise reasonable care and skill. The relationship between the parties also gives rise to a concurrent duty in tort: see Henderson v. Merrett Syndicates Ltd. [1995] 2 AC 145. But the scope of the duty in tort is the same as in contract.

A duty of care such as the valuer owes does not however exist in the abstract. A plaintiff who sues for breach of a duty imposed by the law (whether in contract or tort or under statute) must do more than prove that the defendant has failed to comply. He must show that the duty was owed to him and that it was a duty in respect of the kind of loss which he has suffered. Both of these requirements are illustrated by Caparo Industries Plc v. Dickman [1990] 2 AC 605. The auditors’ failure to use reasonable care in auditing the company’s statutory accounts was a breach of their duty of care. But they were not liable to an outside take-over bidder because the duty was not owed to him. Nor were they liable to shareholders who had bought more shares in reliance on the accounts because, although they were owed a duty of care, it was in their capacity as members of the company and not in the capacity (which they shared with everyone else) of potential buyers of its shares. Accordingly, the duty which they were owed was not in respect of loss which they might suffer by buying its shares. As Lord Bridge of Harwich said, at p. 627:

“It is never sufficient to ask simply whether A owes B a duty of care. It is always necessary to determine the scope of the duty by reference to the kind of damage from which A must take care to save B harmless.”

In the present case, there is no dispute that the duty was owed to the lenders. The real question in this case is the kind of loss in respect of which the duty was owed.

How is the scope of the duty determined? In the case of a statutory duty, the question is answered by deducing the purpose of the duty from the language and context of the statute: Gorris v. Scott (1874) LR 9 Ex 125. In the case of tort, it will similarly depend upon the purpose of the rule imposing the duty. Most of the judgments in the Caparo case are occupied in examining the Companies Act 1985 to ascertain the purpose of the auditor’s duty to take care that the statutory accounts comply with the Act. In the case of an implied contractual duty, the nature and extent of the liability is defined by the term which the law implies. As in the case of any implied term, the process is one of construction of the agreement as a whole in its commercial setting. The contractual duty to provide a valuation and the known purpose of that valuation compel the conclusion that the contract includes a duty of care. The scope of the duty, in the sense of the consequences for which the valuer is responsible, is that which the law regards as best giving effect to the express obligations assumed by the valuer: neither cutting them down so that the lender obtains less than he was reasonably entitled to expect, nor extending them so as to impose on the valuer a liability greater than he could reasonably have thought he was undertaking.

What therefore should be the extent of the valuer’s liability? The Court of Appeal said that he should be liable for the loss which would not have occurred if he had given the correct advice. The lender having, in reliance on the valuation, embarked upon a transaction which he would not otherwise have undertaken, the valuer should bear all the risks of that transaction, subject only to the limitation that the damage should have been within the reasonable contemplation of the parties.

There is no reason in principle why the law should not penalise wrongful conduct by shifting on to the wrongdoer the whole risk of consequences which would not have happened but for the wrongful act. …. But that is not the normal rule. ….

Rules which make the wrongdoer liable for all the consequences of his wrongful conduct are exceptional and need to be justified by some special policy. Normally the law limits liability to those consequences which are attributable to that which made the act wrongful. In the case of liability in negligence for providing inaccurate information, this would mean liability for the consequences of the information being inaccurate.

I can illustrate the difference between the ordinary principle and that adopted by the Court of Appeal by an example. A mountaineer about to undertake a difficult climb is concerned about the fitness of his knee. He goes to a doctor who negligently makes a superficial examination and pronounces the knee fit. The climber goes on the expedition, which he would not have undertaken if the doctor had told him the true state of his knee. He suffers an injury which is an entirely foreseeable consequence of mountaineering but has nothing to do with his knee.

On the Court of Appeal’s principle, the doctor is responsible for the injury suffered by the mountaineer because it is damage which would not have occurred if he had been given correct information about his knee. He would not have gone on the expedition and would have suffered no injury. On what I have suggested is the more usual principle, the doctor is not liable. The injury has not been caused by the doctor’s bad advice because it would have occurred even if the advice had been correct. …

Your Lordships might, I would suggest, think that there was something wrong with a principle which, in the example which I have given, produced the result that the doctor was liable. What is the reason for this feeling? I think that the Court of Appeal’s principle offends common sense because it makes the doctor responsible for consequences which, though in general terms foreseeable, do not appear to have sufficient causal connection with the subject matter of the duty. The doctor was asked for information on only one of the considerations which might affect the safety of the mountaineer on the expedition. There seems no reason of policy which requires that the negligence of the doctor should require the transfer to him of all the foreseeable risks of the expedition.

I think that one can to some extent generalise the principle upon which this response depends. It is that a person under a duty to take reasonable care to provide information on which someone else will decide upon a course of action is, if negligent, not generally regarded as responsible for all the consequences of that course of action. He is responsible only for the consequences of the information being wrong. A duty of care which imposes upon the informant responsibility for losses which would have occurred even if the information which he gave had been correct is not in my view fair and reasonable as between the parties. It is therefore inappropriate either as an implied term of a contract or as a tortious duty arising from the relationship between them.”

In my judgment a consideration of the first importance in addressing the question whether Ricardo owed a duty of care to RRPE not to cause it the economic losses which it is alleged that it has sustained as a result of the problems encountered with the Engines, and, indeed, in determining whether, in relation to Issue 7, there would be what Mr. Marrin characterised as a “black hole”, unless liability was found to exist on one of the bases there contended for, is the mechanism by which RRPE came to suffer the losses alleged. That actually had nothing whatever to do with RRPE being a party to the Second Management Agreement, or its position as the immediate parent company of Allen, or any role it may have had in approving the undertaking of the Project, supervising its course or providing funding. It is entirely referable to the fact that at the beginning of 1999 the Allen Diesels Business was transferred to, and thereafter carried on by, RRPE. RRPE was, therefore, in exactly the same position as would have been an independent third party to whom the assets of the Allen Diesels Business had been sold. In effect what was sought to be achieved by the contention that a duty of care in favour of RRPE should be imposed upon Ricardo, or that liability should be imposed upon it in one of the ways suggested in Issue 7, was the imposition upon Ricardo in favour of whomsoever should in the future seek to undertake the manufacture and sale of Engines of a transmissible warranty as to the quality of the work which Ricardo undertook under the Definitive Design Contract. It just is not the case that, by some peculiar operation of company law, or the idiosyncrasies of group organisation, or the doctrine of privity of contract, breach of an obligation owed to one company in a group caused loss not to it but to another company. But for the transfer of the Allen Diesels Business out of Allen into RRPE the party which would immediately have sustained any loss as a result of a breach on the part of Ricardo of a provision of the Definitive Design Contract or of a duty of care arising by reason of the making of the Definitive Design Contract, would have been Allen and Allen could have recovered such loss notwithstanding that as between it and RRPE RRPE was bound under clause 4 of the Second Management Agreement to indemnify it against loss.

It was not in dispute that Ricardo owed a duty of care to Allen to perform with reasonable skill and care the obligations which Ricardo assumed under the Definitive Design Contract. The real question to which Issue 2 gave rise was whether that duty of care should be extended to encompass any party to which Allen transferred the Allen Diesels Business. It seems to me that, whichever of the tests of which Mr. Marrin reminded me one applied, although I found that of Lord Hoffmann of most assistance, particularly in its consideration of the significance of foreseeability, the conclusion must be the duty of care should not be so extended.

The answer to Issue 2 is therefore negative in relation to all classes of loss claimed.

As I have already pointed out, the Conditions were referred to on the face of the DDC Order and were printed on the reverse of it. In those circumstances one would ordinarily reach the conclusion that the Conditions were incorporated into the Definitive Design Contract.

In the Amended Defence and Part 20 Claim at paragraphs 42 and 43 it was not accepted that the Conditions were incorporated into the Concept Design Contract or the Definitive Design Contract for two reasons. The first was that, having regard to the background and factual matrix to those contracts,

“It was never intended by the parties that those or any such Conditions were or would be relevant or applicable to Ricardo’s contract of engagement, in the light of its nature and the content of the proposal documents.”

The second reason put forward was:-

“neither of the parties had any regard to any of the contents of those Conditions during the course of or at any time since Ricardo’s engagement with Allen.”

The points made at paragraph 44 of the Amended Defence and Part 20 Claim, so far as presently material, were:-

“In any event, if and insofar as, contrary to the foregoing, those Conditions were somehow incorporated into the contracts of engagement:

44.1

this was only to the extent that they were not inconsistent with what had otherwise been agreed between the parties, including in particular the contents of the Concept and Definitive Design proposal documents. On this basis Ricardo does not accept that any of the particular provisions of the standard terms and conditions to which the Claimants refer in the Particulars of Claim were applicable to the Contracts between the parties. …

44.2

Further and in any event, to the extent that the standard terms and conditions purported to limit the liability of Allen and/or to render a performance of their obligations under the Contracts substantially below that stipulated, they were only incorporated to the extent that they were reasonable, and it is denied that it is reasonable of the Claimants to rely on the terms upon which they seek to rely in the Particulars of Claim to enable them to escape or diminish their responsibilities under the Contracts and/or to impose a liability on Ricardo which does not take into account the Claimants’ own breaches. ..”

In their written skeleton argument Mr. Fenwick and Mr. Sutherland submitted that the answer to Issue 3 was that, having regard to how the Definitive Design Contract was made, according to their contentions, the Conditions simply were not included in the contract. I have already indicated my findings as to how the Definitive Design Contract was made and in the light of those findings I reject this submission. The second point made in respect of the Conditions was expressed in this way at paragraph 61 of the skeleton argument:-

“… the standard terms on the back were nonetheless not incorporated because it was clearly not the intention of the parties that they should be:

(a)

see particularly the number of iterations of the DDP proposal document prior to its finalisation: … which is quite inconsistent with a sudden unilateral imposition of the proposed new terms;

(b)

the contents of the small print terms are also inappropriate for a professional appointment such as that of Ricardo for the Definitive Design period [sic]. See e.g. clause 3.3: “The Seller will mark and despatch the Goods in accordance with the Buyer’s instructions and ensure that each separate consignment is suitably packaged and each item is clearly identified.”

(c)

D also relies on C’s own admission that the standard terms are inappropriate to Ricardo’s appointment, as contained in a letter from John Brown of Allen to Allen’s loss adjusters on 17 January 1996, regarding an insurance claim in respect of a burglary [which] included the theft of some of Ricardo’s computers …

“Please note that the Ricardo proposal does not specifically address the question of insurance and the purchase order conditions [are] not really appropriate to a contract of this nature, whereby the sub-contractor is actually employing people on our site and using his own equipment.”

(d)

There is also evidence that C did not in fact believe that it could impose its own standard terms on Ricardo. See in particular Allen’s manuscript notes on Ricardo’s letter of 22 December 1993 acknowledging receipt of the Purchase Order … : “…it will be too late to change the agreement now … hopefully KK will agree to 30 days in this case”; And “Are 30 days agreed?”

(e)

See also the inconsistencies between the 2 documents:e.g. the payment terms under the standard terms (clause 8.1: 60 days for payment of invoices) differ from those contained in the payment provisions in the DDP (at clause 8.3: 30 days for payment).”

I reject the submissions of Mr. Fenwick and Mr. Sutherland that the Conditions were not incorporated into the Definitive Design Contract because it was the intention of the parties that they should not be. On analysis that point seems to amount to no more than the contention that, notwithstanding that the Conditions were referred to on the face of the DDC Order to which Ricardo responded indicating that it was content with the terms of the order other than in relation to time for payment of invoices, some of the provisions of the Conditions related solely to goods, while under the Definitive Design Contract Ricardo was agreeing to perform services. It is correct that some of the provisions of the Conditions were only sensibly applicable in a case in which a party was supplying goods to Allen. However, the Conditions were plainly drafted as a set of conditions for general use in procurement by Allen and covered both the supply of goods and the supply of services. Provisions inapplicable to the circumstances of a particular contract could simply be disregarded as irrelevant. The contradiction between the provision for the time allowed for payment of invoices in clause 8.1 of the Conditions and the provision made in clause 8.3 of the DDP and repeated in Ricardo’s letter of 31 August 1994 in my judgment gives rise to a simple question of construction. The answer is that the time for payment agreed was 30 days from invoice. The private opinions of individuals within Allen as to whether the Conditions were appropriate or Allen was in a position to insist upon that relating to time for payment of invoices strike me as just irrelevant to the issue whether in fact the Conditions were incorporated into the Definitive Design Contract.

The remaining point in relation to Issue 3 made by Mr. Fenwick and Mr. Sutherland in their skeleton argument was:-

“As a final point, insofar as necessary D will contend that the proposed standard terms, and in particular clause 4.1, are in any event unreasonable. D’s case in this regard is set out in Reply 50 to the Further Information … The point is a straightforward one. C contends that the effect of clause 4.1 is to bar any defence of contributory negligence. If that is right, then clause 4.1 represents an attempt by C to impose on D a liability irrespective of C’s own breaches, and/or an attempt to escape or diminish their own responsibilities under the contract. It would be unreasonable for any such attempt to succeed.”

The proper construction of clause 4.1 of the Conditions is Issue 4. I find for the reasons given later in this judgment that the obligation on the part of Ricardo under clause 4.1 to supply services strictly in accordance with the requirements of the Definitive Design Contract does not on its own inform one as to the standard of quality which the services had to achieve, but rather invite attention to the other provisions of the Definitive Design Contract which deal with that question. An obligation which on proper construction is to provide services with reasonable skill and care is strictly complied with if the relevant services are provided with reasonable skill and care. However, an obligation to provide services of first class quality does conceptually, and may in practice, involve an obligation going beyond a requirement merely to use reasonable skill and care in providing the services. The consequences of that conclusion are dealt with in the section of this judgment which is concerned with Issue 5. For the reasons there explained I find that the defence of contributory negligence is not available to Ricardo either against Allen or against RRPE. I address the submission that the terms of clause 4.1 of the Conditions were unreasonable in the light of those conclusions.

In the ordinary way it is open to parties to a contract to agree whatever terms they wish as terms of their contract. However, in some circumstances statute has intervened to regulate the parties’ freedom. One situation in which statute has, or may have, an impact, by virtue of the provisions of Unfair Contract Terms Act 1977 s. 3(1), is where the parties contract on the written standard terms of business of one of them.

In a case falling within Unfair Contract Terms Act 1977 s. 3(1), s. 3(2) provides:-

“As against that party, the other cannot by reference to any contract term –

(a)

when himself in breach of contract, exclude or restrict any liability of his in respect of the breach; or

(b)

claim to be entitled –

(i)

to render a contractual performance substantially different from that which was reasonably to be expected of him, or

(ii)

in respect of the whole or any part of his contractual obligation, to render no performance at all,

except in so far as (in any of the cases mentioned above in this subsection) the contract term satisfies the requirement of reasonableness.”

The “requirement of reasonableness” is set out in Unfair Contract Terms Act 1977 s. 11(1) and is “that the term shall have been a fair and reasonable one to be included having regard to the circumstances which were, or ought reasonably to have been, known to or in the contemplation of the parties when the contract was made”.

As I understood the argument advanced by Mr. Fenwick, his submission was that by excluding the possibility of a defence of contributory negligence clause 4.1 of the Conditions had the effect that Allen, which if it were in fact contributorily negligent would be in breach of contract, was excluding its liability for that breach or claiming to be entitled to render a contractual performance substantially different from that which was reasonably expected of it. Those submissions strike me as misconceived. The provisions of Unfair Contract Act 1977 s.3(2) are concerned with a situation in which a claim for damages for breach of contract against a contract breaker, otherwise good, is excluded or restricted by some contract term, or the contract breaker claims to be entitled to perform his obligations under the contract in a way substantially different from what was reasonably expected. They are not concerned with the exclusion as against a contract breaker of a defence which would otherwise have been available. I therefore reject Mr. Fenwick’s submissions in relation to Unfair Contract Terms Act 1977.

In any event it does not seem to me that there is anything inherently unreasonable about a party to a contract stipulating for a standard of performance which has the effect of eliminating as a possible defence in the event of a breach of contract contributory negligence. That was in fact the position in Barclays Bank Plc v. Fairclough Building Ltd. [1995] QB 214, a decision to which I shall return.

One of the considerations which is relevant to an assessment of whether a term was a fair one to include in a contract is the matter of inequality of bargaining power. It is correct that in the present case Allen was a member of a large and powerful group of companies. However, it does not seem to me that there was an inequality of bargaining power between Allen and Ricardo in any meaningful sense. Although a much smaller enterprise than the Rolls-Royce Group, Ricardo was one of a very small number of companies, on the evidence, able to provide the services which Allen wanted. The successful provision of those services depended upon a relationship of mutual trust and confidence between Allen and the organisation providing the services, and Ricardo was in a strong position on that score by reason of the previous relationship and dealings between it and Allen.

In the result I find that the answer to Issue 3 is that the Conditions including clause 4.1 were incorporated into the Definitive Design Contract.

Clause 4.1 of the Conditions was, so far as is presently material, in two parts. By the first part, in the circumstances of the present case, Ricardo was required to render the services the subject of the Definitive Design Contract “strictly in accordance with the requirements of the Contract”. The second part only became relevant in the event that the Definitive Design Contract was silent as to the standard of performance required, for it provided, “In the absence of a specific reference to specification, the Goods and Work must be new and of first class quality”. Although not particularly elegantly expressed, for it is difficult to see how services performed under the Definitive Design Contract, or under any contract for the provision of services, could be other than “new”, it is tolerably clear, in my judgment, that the effect of Clause 4.1, taken as a whole in relation to services, was that the standard of performance required was that specifically required expressly under the relevant contract, or in default of any expressly specified standard, first class quality.

An obligation to do something “strictly in accordance with the requirements of the Contract” does not tell one what those requirements are. If they are to do something using reasonable skill and care, the nature of that obligation is not altered by stating that the requirement to use reasonable skill and care is to be strictly complied with. In the present case Mr. Marrin did not identify any provision of the Definitive Design Contract with which it was alleged that Ricardo had not strictly complied. Rather his attention in his submissions was concentrated on what was involved in providing services “of first class quality”.

In his written Note in Reply to the written skeleton argument of Mr. Fenwick and Mr. Sutherland Mr. Marrin drew attention to definitions of the expression “first class” in Shorter Oxford English Dictionary, 1993 edition:-

“A The first (usu the highest) of a series of classes into which people or things are grouped; a set of people or things grouped together as better than others; …

B Belonging to, achieving, …the first class; of the best quality, very good; of the highest order”

The researches of Counsel revealed just two decisions in which the meaning of the expression “first class” had been considered. The first was Hood v. North Eastern Railway Co. (1870) LR 5 Ch App 525. In that case a railway company had covenanted that a piece of land which it had purchased should for ever after be used as a “first class station”. The covenantee sought to compel the successors in title to the railway company to replace the station in fact built with a larger one and to compel all trains running along the line to stop at the station. In the course of his judgment as to the meaning of the expression “first class” in the context of the relevant covenant Lord Hatherley LC said, at page 528:-

“Moreover, if we look at the words of these covenants, I think the true and sensible construction of them is, that this was to be a first-class station for taking up and setting down passengers; and that that was the primary object of this contract. This is a small place, and cannot possibly have any great traffic; and the intention of the parties was, that the company should afford the travellers at that station, few as they might be in number, all the advantages that were given to any other station on the line. First-class must mean something, and must mean that the station shall be in a position at least equal to any other station.”

The second decision in which consideration had been given to the force of a reference to “first class” to which my attention was drawn was a very recent decision of H.H. Judge Richard Havery Q.C., ConocoPhillips Petroleum Co. UK Ltd. v. Snamprogetti Ltd. [2003] All ER (D) 134. One of the clauses which fell to be construed in that case was clause 3.5:-

“In performing the Work the Contractor shall observe and exercise the standards of skill, care and diligence adhered to by recognised first class contractors performing work of a similar nature.”

At paragraph 11 of his judgment H.H. Judge Havery Q.C. said this about that provision:-

“I do not read clause 3.5 as implying that there necessarily exist second class contractors that perform work of a nature similar to that undertaken by Snamprogetti. Rather, it recognises what may be described as the high class nature of the work undertaken. Nevertheless, whilst not requiring the services of a paragon, combining the qualities of polymath and prophet, the contract did, in my judgment, require something more than ordinary competence on the part of Snamprogetti. It required the competence of the no doubt limited number of firms that undertake work of the relevant kind.”

In my judgment an obligation to provide services “of first class quality” imports a comparative standard. If services are provided “of first class quality” it seems to me that they are provided to a standard which would not be exceeded by anyone else who might actually have been engaged to provide them. The standard is not absolute, for the comparison to be made is with those who actually would have been in a position to provide the services at the time Ricardo, in this case, was engaged to provide them. The demonstration of the accuracy of the contention that Ricardo did not achieve the “first class” standard therefore involves the adducing of evidence of at least one other consulting engineer who might have been retained to provide the services required under the Definitive Design Contract that in respect of some alleged deficiency on the part of Ricardo he would have done something more than Ricardo or would have done something differently in such a way as to produce a higher standard of result.

Mr. Fenwick submitted that in fact the requirement to provide services under the Definitive Design Contract “of first class quality” amounted to nothing different from using reasonable skill and care in the provision of the services. With services of this type that may well be so in practical terms. Whether it is so is a matter to be considered, if at all, on another occasion. What is important for the present is that conceptually the obligation to provide services “of first class quality” is different from an obligation to use reasonable skill and care in the provision of those services, and sets by contract a standard which, in theory, if not necessarily in practice, is higher than merely undertaking the provision of the services with reasonable skill and care.

The answer to Issue 4(a) is therefore affirmative, while the answer to Issue 4(b) is negative.

While it may not be as clear from the issue as drafted as might have been desirable, it was common ground between the parties that the issue really was whether contributory negligence was available as a defence to a claim based upon an alleged breach of clause 4.1 of the Conditions, rather than, for example, a claim based solely on the alleged negligence of Ricardo. The significance of this point, and hence the reason why clarification is desirable, is that in respect of alleged defaults of Ricardo between the date of the making of the Definitive Design Contract and a date in 1996 a defence of limitation is or may be available in relation to claims based upon an alleged breach of contract, but might not be available in respect of claims based upon alleged negligence in tort.

It is unnecessary for me to deal separately with Issue 5(a) and Issue 5(b) because the answer is the same whichever party on the Claimants’ side is seeking to rely upon an alleged breach of clause 4.1 of the Conditions. In fact, for the reasons set out earlier in this judgment, I find that only Allen is able to rely upon any such alleged breaches.

Mr. Fenwick and Mr. Sutherland in their written skeleton argument contended at paragraph 69 that:-

“This Issue can be dealt with shortly, because C’s submissions proceed on the basis of the wrong legal test. The correct position is that if the liability of Ricardo includes liability for breach of the contractual duty of care, with its tortious parallel, then the defence of contributory negligence is available.”

The question to which Issue 5 gives rise is how, if at all, does the decision in Forsikringsaktieselskapet Vesta v. Butcher [1986] 2 All ER 488 (“the Vesta Case”) impact upon the defences which are potentially available to Ricardo in relation to claims based upon alleged breach of clause 4.1 of the Conditions? It was common ground between Mr. Marrin and Mr. Fenwick that in the Vesta Case Hobhouse J identified three categories of case involving a breach of contract. These were:-

I therefore find that the answer to Issue 5 is that contributory negligence is not available as a defence to a claim for damages for breach of clause 4.1 of the Conditions.

It may be that in the light of the development of the law of negligence, in particular in Henderson v. Merrett Syndicates Ltd. [1995] 2 AC 145, the precise characterisation adopted by Hobhouse J in the Vesta Case requires to be reconsidered. As it appears that the correct analysis in relation to the provision of services by a professional person may be that it is by virtue of entering into a contract to provide services that he or she assumes responsibility in tort to his or her client, and that the scope of the duty of care is circumscribed by the terms of the contract – see per Lord Hoffmann in South Australia Asset Management Corporation v. York Montague Ltd. at page 211G – it would seem happier to express the third of Hobhouse J’s categories as something along the lines of “where the defendant’s negligent breach of contract is mirrored by a liability in the tort of negligence”. However whether that is desirable or not, any worthwhile reformulation would not affect the substance of the question as to in what circumstances a defence of contributory negligence is available by way of answer to a claim framed in contract.

It was not in dispute that, if Allen owed a duty of care to RRPE, and if it were in breach of that duty of care in relation to the design and development of the Engines, it would be open to Ricardo to claim contribution from Allen under the provisions of Civil Liability (Contribution) Act 1978 towards any liability which it should be found to be under to RRPE whether for breach of the provisions of the Definitive Design Contract or in tort. The focus of the Issue was, therefore, whether Allen owed RRPE a duty of care.

In his submissions on this Issue Mr. Fenwick seemed to start from the position that it was obvious that Allen owed RRPE a duty of care unless that duty was excluded in some way. He went on to submit that, contrary to the submissions of Mr. Marrin, it was not the effect of the Second Management Agreement that no duty of care was owed.

Mr. Marrin addressed the question to which Issue 6 gave rise from a slightly different perspective. As I understood his submissions, he contended that, in addressing the issue whether a duty of care arose as between Allen and RRPE, one should not start with a preconception that there would be a duty of care unless it was excluded, but rather consider all of the relevant circumstances in order to determine whether a duty of care was owed. In particular he drew to my attention the observations of Purchas LJ in Pacific Associates Inc. v. Baxter [1990] 1 QB 993 at pages 1010 and 1011:-

“However, I believe that in order to determine whether a duty arises in tort it is necessary to consider the circumstances in which the parties came together in the initial stages at which time it should be considered what obligations, if any, were assumed by the one in favour of the other and what reliance was placed by the other on the first. …

The contractual structure against which the engineer and the contractor came into contract [sic – possibly contact was meant] was substantially provided by the terms of the contract which, of course, were part of the background against which the tender was made. …

It is now necessary to turn to consider some of the authorities relating to the specific position as between the contractor and the engineer. It is immediately apparent that there is no simple unqualified answer to the question; “Does the engineer owe a duty to the contractor in tort to exercise reasonable skill and care?” but that this question can only be answered in the context of the factual matrix including especially the contractual structure against which such duty is said to arise. ”

I prefer the approach of Mr. Marrin as being more consistent with established principle.

Among the circumstances which Mr. Marrin contended should be taken into account in considering whether a duty of care was owed by Allen to RRPE – in fact, in his submission, the critical circumstance – were the terms of the Second Management Agreement. He reminded me that in Henderson v. Merrett Syndicates Ltd. Lord Goff of Chieveley, with whose speech the other members of the House of Lords agreed, indicated at page 191 of the report that he agreed with the observation of Le Dain J, delivering the judgment of the Supreme Court of Canada in Central Trust Co. v. Rafuse (1986) DLR (4^th) 481, at page 522:-

“A concurrent or alternative liability in tort will not be admitted if its effect would be to permit the plaintiff to circumvent or escape a contractual exclusion or limitation of liability for the act or omission that would constitute the tort. Subject to this qualification, where concurrent liability in tort and contract exists the plaintiff has the right to assert the cause of action that appears to be the most advantageous to him in respect of any particular legal consequence.”

Allen was at all material times a wholly-owned subsidiary of RRPE. So far as what were called in the Second Management Agreement “the Activities” was concerned, it held no assets of its own. By clause 3.5 of the Second Management Agreement all and any assets which it held as a result of carrying out “the Activities” it held for RRPE beneficially. By clause 4 of the Second Management Agreement RRPE was to hold Allen fully indemnified against all liabilities and obligations of any description which Allen might incur in connection with “the Activities”. As between Allen and RRPE, therefore, it seems fairly clear that the agreement was that all risks associated with “the Activities”, including the risk of negligence on the part of Allen in conducting “the Activities”, were to be borne by RRPE. That was what they had agreed in the Second Management Agreement and in practical terms RRPE had chosen so to arrange things in its capacity as the parent company of Allen that Allen had no means to discharge any liabilities which it might incur towards RRPE other than out of assets which in fact belonged to RRPE. It would be bizarre in those circumstances to hold that Allen owed a duty of care to RRPE in relation to how it conducted “the Activities”, including the design and development of the Engines.

As Mr. Fenwick’s submissions developed it became pretty obvious that what he was in fact contending was that Allen owed Ricardo a duty of care to use reasonable skill and care in the design and development of the Engines not to cause RRPE to sustain economic loss which it could recover from Ricardo. In other words, the whole thing was an artificial construct to provide a route by which Ricardo, if liable to RRPE, and if unable overtly to advance a defence of contributory negligence, could achieve the same practical effect. In my judgment that route, although attractively signposted by Mr. Fenwick, does not exist.

I therefore find that the answer to Issue 6 is negative.

As agent for the First Claimant, the undisclosed principal;

As trustee;

In accordance with the rule in Dunlop v. Lambert;

Pursuant to the “broad ground” in McAlpine Construction v. Panatown?

The matters raised by Issue 7 were called collectively by Mr. Marrin “the black hole issues”. The underlying premise was that unless I were prepared to find in favour of the Claimants on one of the sub-issues set out at (a) to (d) there would be a legal “black hole” into which an otherwise good claim would fall. In fact sub-issue (a) did not really feature at this stage in the argument, as all relevant points had been advanced in the context of Issue 1. I, too, have considered them in that context, and so I need say no more about them.

Before turning to address the other sub-issues of Issue 7 it is convenient to pause to consider for a moment the notion of the legal “black hole”. It is notoriously not the case in English law that anyone who perceives himself to have been wronged is entitled to a remedy. In general terms whether a person who perceives himself to have been wronged is entitled to a remedy depends upon showing that the alleged wrongdoer owed him some duty enforceable at law, whether the source of that duty be contract, tort or something else. If no duty was owed, for whatever reason, then the aggrieved has no remedy, no matter how great the alleged loss or how blameworthy, in a moral sense, the conduct of the alleged wrongdoer may be considered to be. No doubt the lending institutions whose awards of damages were reduced as a result of the decision of the House of Lords in South Australia Asset Management Corporation v. York Montague Ltd. considered that the elements of what, to them, were no doubt their real losses which they in the event failed to recover had simply fallen into a legal “black hole”. However, that was a consequence of the identification by the House of Lords of the limitations of the scope of the duties owed by the respective valuers in that case. That said, the law does not readily contemplate a situation in which, as a result of a breach committed by A of a term of his contract with B, which term it was envisaged at the time the contract was made was intended, in whole or in part, to benefit C or an identified class of which C was a member, C has suffered a loss, C has no remedy. To avoid the injustice which depriving C of a remedy in that situation would cause the law strives to find a way of navigating round technical rules which would prevent C being compensated. The problem does not arise in tort because it can be avoided by the imposition of a duty of care owed by A to C in an appropriate case.

Although the law is always capable of development, it is, in my judgment, necessary to proceed with particular caution in the area of developing novel ways of providing remedies. The implications of the proposed new way of permitting a recovery to be made are unlikely to be readily apparent beyond the circumstances of the particular case. Moreover, unless the law is moving to a stage in which there is to be a remedy for every perceived wrong, there must be some justification in policy for developing the law in favour of a particular claimant beyond that he contends that he has suffered a loss which will otherwise go uncompensated unless the law is developed.

Mr. Marrin submitted that, properly regarded, the Second Management Agreement constituted Allen as trustee for RRPE. He went on to submit that, by reason of being a trustee for RRPE, Allen was able, as a party to the Definitive Design Contract, to recover from Ricardo damages not only in respect of its own, nominal, loss, but also in respect of the losses sustained by RRPE as the beneficiary under the trust contended for. Those submissions involve the need to consider a number of different matters.

Logically the first questions which arise are was Allen in truth a trustee for RRPE, and, if so, in respect of what? Mr. Fenwick, who had good personal reasons for being aware of it, referred me to an unreported decision of the Court of Appeal, R v. Chester and North Wales Legal Aid Area Office (No.12) ex parte Floods of Queensferry Ltd., in which judgment was handed down on 18 December 1997, on the question of what are the fundamentals of a fiduciary relationship. The case was actually about a challenge to a refusal of legal aid to a limited liability company which asserted that it wished to pursue, in a fiduciary capacity, a claim the benefit if which had been assigned by the company to its managing director and principal shareholder. The leading judgment was that of Millett LJ. In the course of his judgment Millett LJ said this:-

“The obligation on which reliance is placed is the core obligation of a fiduciary to act in the interests of his beneficiary and not his own. Such obligation arises whenever one person (the beneficiary) entrusts the management of a particular matter to another (the fiduciary) to undertake on his behalf. It is immaterial whether the obligation arises contractually or gratuitously. In the company’s skeleton it is admitted that:

“The essence of a fiduciary relationship is that one person acts for, or on behalf of, or in the interests of, or with the confidence of, another.”

This is no doubt sufficiently accurate for most purposes, but it is misleading if the concluding words are taken to be an alternative, for confidence is the very essence of the relationship. Unless a relationship is one of trust and confidence, it is not fiduciary. There are many commercial situations in which one man undertakes to act for the benefit of another without any trust or confidence being reposed in him. In such a case there is no fiduciary relationship. An example, not far removed from the present case, is that of a plaintiff who brings proceedings for the benefit of an insurance company which has subrogated rights to his claim. He is accountable to the insurance company for the proceeds of the action, but he is not a fiduciary: see Lord Napier and Ettrick v. Hunter [1993] AC 713 at p752.

The mere separation of legal and equitable ownership does not without more result in a fiduciary relationship. This has led Lord Browne-Wilkinson to say that it does not necessarily create a trust: see Westdeutsche Landesbank [1996] AC 669 at p 760. This, perhaps, raises a semantic question which need not detain us, but it is certainly the case that the mere separation of the legal and beneficial ownership does not ipso facto create a fiduciary relationship.

It is in any case fanciful to suppose that the relationship between Mr. Flood and the company brought about by the assignment is a relationship of trust and confidence. Mr. Flood does not trust the company; he controls it. He is not only Managing Director (in which capacity he owes fiduciary duties to the company), but its principal shareholder (in which capacity he is not subject to any fiduciary obligations to the company). Before the assignment, as after it, and irrespective of the validity or scope of the assignment, he has had the carriage of the action. He does not need the assistance of a court of equity to prevent the company from exploiting a position of trust or confidence. The company is not in a position of trust, nor is it in a position to exploit Mr. Flood’s vulnerability.”

It cannot, I think, be doubted that an agent is likely to owe fiduciary duties to his principal. However, that is not to say that all agents in all circumstances act, and only act, as trustees for their principals in such a way as potentially to attract the full weight of available equitable remedies in the event of any breach of the contract between the principal and the agent. The true position was explained nearly a hundred years ago by Fletcher Moulton LJ in In re Coomber [1911] 1 Ch 723, in a much-quoted passage at pages 728-729 of his judgment, which in turn is reflected in the passage from the judgment of Millett LJ quoted in the preceding paragraph of this judgment:-

“It is said that the son was the manager of the stores and therefore was in a fiduciary relationship to his mother. This illustrates in a most striking form the danger of trusting to verbal formulae. Fiduciary relations are of many different types; they extend from the relation of myself to an errand boy who is bound to bring me back my change up to the most intimate and confidential relations which can possibly exist between one party and another where the one is wholly in the hands of the other because of his infinite trust in him. All these are cases of fiduciary relations, and the courts have again and again, in cases where there has been a fiduciary relation, interfered and set aside acts which, between persons in a wholly independent position, would have been perfectly valid. Thereupon in some minds there arises the idea that if there is any fiduciary relation whatever any of these types of interference is warranted by it. They conclude that every kind of fiduciary relation justifies every kind of interference. Of course that is absurd. The nature of the fiduciary relation must be such that it justifies the interference. There is no class of case in which one ought more carefully to bear in mind the facts of the case, when one reads the judgment of the Court on those facts, than cases which relate to fiduciary and confidential relations and the action of the Court with regard to them. In my opinion there was absolutely nothing in the fiduciary relations of the mother and the son with regard to this house which in any way affected this transaction.”

It is appropriate, therefore, to turn to the question why it was said to matter whether Allen was an agent for RRPE. The answer is that Mr. Marrin contended that as Allen entered into the Definitive Design Contract as trustee for RRPE, Allen held the benefit of the Definitive Design Contract for RRPE, and thus, in the event of a breach on the part of Ricardo of the Definitive Design Contract, Allen could recover as damages in its role of trustee for RRPE whatever loss RRPE, rather than Allen, had suffered as a result of the breach. It will immediately be appreciated that no question arose, on this analysis, of the assistance of equity being invoked to control the alleged fiduciary, or to provide some remedy in respect of some default on his part. The trust analysis was sought to be invoked simply as a route to impose upon Ricardo a liability in effect to RRPE which, but for the trust analysis, and subject to the other “black hole” arguments, would not have existed. It was not contended that the damages which were sought to be recovered represented a loss actually suffered by Allen in its capacity as trustee for RRPE, so that in practical terms the loss was that of RRPE, although nominally that of Allen, as would be the case, for example, if a building held by Allen as trustee for RRPE were damaged. The cost of repair would be the same no matter who owned the building beneficially, but in fact the loss, if not compensated, would in reality fall upon the beneficial owner, not the legal owner. It is important, in my judgment, to recognise that what was asserted was that damages could be recovered by Allen in its capacity as trustee which could not be recovered at all were it not a trustee.

In support of the proposition that Allen could recover as trustee losses sustained by the alleged beneficiary of the trust, Mr. Marrin relied upon the decision in Lloyd’s v. Harper (1880) 16 Ch D 290, obiter dicta in Darlington Borough Council v. Wiltshier Northern Ltd. [1995] 1 WLR 68, and passages in the speeches in the House of Lords in Woodar Investment Development Ltd. v. Wimpey Construction UK Ltd. [1980] 1 WLR 277 and in Alfred McAlpine Construction Ltd. v. Panatown Ltd. [2001] 1 AC 518.

In Lloyd’s v. Harper the issue material for present purposes was whether the corporation of Lloyd’s could enforce for the benefit of all those who had dealings with a particular member a guarantee which had been given by his father of his performance of his engagements as such member. The most oft quoted passage from the judgments in the Court of Appeal is that of Lush LJ at page 321:-

“Then the next question which, no doubt is a very important and substantial one, is, that Lloyd’s, having sustained no damage themselves, could not recover for the losses sustained by third parties by reason of the default of Robert Henry Harper as an underwriter. That, to my mind, is a startling and an alarming doctrine, and a novelty, because I consider it to be an established rule of law that where a contract is made with A. for the benefit of B., A. can sue on the contract for the benefit of B., and recover all that B. could have recovered if the contract had been made with B. himself. The books afford innumerable instances of the application of this doctrine. Lloyd’s policies, from the time that Lloyd’s was established, have been always made in the name of the insurance broker on printed forms. The broker insures for the benefit of all whom it may concern, and the broker can bring an action, and is the person to sue and recover according to the interest of the parties. It is true that the person who employed him has a right, if he pleases, to take action himself and sue upon the contract made by the broker for him, for he is a principal party to the contract. If the subject-matter of the policy is sold with the benefit of the policy, the purchaser cannot sue, because he was not a party to the contract, but the assured, the assignor, may in this case sue upon the policy for the benefit of the person to whom he assigned it. That is the doctrine which runs through the whole of our law. I confess I heard the point pressed with something like surprise. I have not the slightest doubt that in this case Lloyd’s could recover. The very object of making them the parties to the contract was that they should recover for the benefit of all the persons who had sustained losses upon the default of Robert Henry Harper.”

James LJ, at page 315 of the report, dealt with the question on the basis that the guarantee was given to Lloyd’s as trustee for all persons beneficially interested in it:-

“The only other point was one of a rather technical character. The Defendants say, “You Lloyd’s have sustained no loss, and can only recover nominal damages, because you can only recover for your own loss and not for the losses sustained by other persons”. That might be true if Lloyd’s were not trustees, but I am of opinion that Mr. Justice Fry was well warranted in the conclusion at which he arrived, that the engagement was made with the committee as trustees for and on behalf of the persons beneficially interested. That brings the case within the authorities, of which there are more than one, viz. Gregory v. Williams …before Sir William Grant, Lamb v. Vice… , and many other cases which proceed on an obvious principle, that if A. is trustee for B., A. can sue on behalf of B. It is a very common case for a person to enter into a policy of insurance with a broker on behalf of the persons interested, it is one of the most common forms of policy of Lloyd’s itself, and nobody ever supposed that a broker could not sue on such a policy for the benefit of the persons interested. It appears to me therefore that that contention fails.”

Cotton LJ dealt with the matter even more succinctly at page 316 of the report:-

“Then it was said that this was a contract only with a committee managing the affairs of Lloyd’s, and was to be taken as only guaranteeing the son’s engagements with that committee. But – and this is material on another point – the committee were, in my opinion, obtaining this guarantee not only on their own behalf (for of course this guarantee would cover all engagements with them made by Mr. Harper, jun., as an underwriting member), but for the benefit of all those with whom Mr. Harper, jun., should enter into contracts of insurance, and that being so, the words cannot be limited so as to confine them to engagements with the managing committee of Lloyd’s.”

Thus it may be seen that all of the members of the Court of Appeal in Lloyd’s v. Harper approached the question of for whose benefit the guarantee might be enforced as depending upon the obvious purpose of the transaction. Cotton LJ in terms considered the issue as one of construction of the guarantee.

The passages in the speeches in Woodar Investment Development Ltd. v. Wimpey Construction UK Ltd. upon which Mr. Marrin relied were, first, a comment of Lord Wilberforce at page 284A-B that, “if Woodar made a contract for a sum of money to be paid to Transworld, Woodar can, without showing that it has itself suffered loss or that Woodar was agent or trustee for Transworld, sue for damages for nonpayment of that sum.”, and, second, an observation of Lord Russell of Killowen at page 293E-F to the effect that, in the absence of a suggestion that Woodar was acting as agent or trustee for Transworld, no damages in respect of the contemplated nonpayment would have been recoverable by Woodar, which Mr. Marrin submitted amounted to an expression of the view that, had Woodar been acting as agent or trustee for Transworld, substantial damages would have been recoverable in respect of the contemplated nonpayment.

In Darlington Borough Council v. Wiltshier Northern Ltd. a local authority had entered into an agreement with a finance company under which the finance company was to have a building constructed on a site owned by the local authority. Pursuant to the agreement the finance company engaged a contractor to construct the building. The contractor was aware that, although its contract to build the building was with the finance company, the building was actually being constructed for the local authority. The building was defective. The finance company assigned to the local authority all rights and causes of action which the finance company had against the contractor. The Court of Appeal found that the local authority was able, as assignee, to recover substantial damages from the contractor by reason of the operation of what was called before me, variously, “the rule in Dunlop v. Lambert” or “the Albazero exception”. Whether that principle is applicable in the present case is the second sub-issue of Issue 7 to which attention needs to be given later in this judgment. However, at page 75E Dillon LJ, with whom Waite LJ agreed, said:-

“I reach the same result, however, by a slightly different route which was put forward by an amendment to the council’s notice of appeal which we allowed in the course of the appeal. The amendment added an additional ground:

“(e)

that Morgan Grenfell were constructive trustees for [the council] of the benefit of any rights under or for breach of the building contracts against Wiltshier and as such would have been entitled, but for the assignment, to recover substantial damages for and on behalf of [the council]. Accordingly, by the assignment [the council] is seeking to recover a head of loss which would have been available to Morgan Grenfell and the burden on Wiltshier is not thereby increased because Morgan Grenfell would have been entitled, but for the assignment, to substantial damages as constructive trustees.”

In the light of clause 3(4) of the covenant agreement, if Morgan Grenfell had, before any assignment, sued in its own name for damages for the alleged breaches of the building contracts, it would have held any damages recovered as a constructive trustee for the council and would have been accountable accordingly in equity. Lloyd’s v. Harper, 16 Ch D 290 is thus analogous, and Morgan Grenfell could have recovered from Wiltshier the losses of the council to whom it stood, in that respect, in a fiduciary relationship.”

Mr. Marrin drew to my attention in Alfred McAlpine Construction Ltd. v. Panatown Ltd., in the context of his trust argument, first a passage in the speech of Lord Clyde at pages 522-523:-

“I find no reason to question the general principle that a plaintiff may only recover damages for a loss which he has himself suffered. But there are exceptions to that principle. One is where the one party expressly enters a contract as agent or trustee for another. The existence of this category of case was recognised in Woodar Investment Development Ltd. v. Wimpey Construction UK Ltd. [1980] 1 WLR 277. In such a case the contracting party may be entitled to recover damages for all the loss which his principal has suffered.”

Mr. Marrin also invited me to consider a passage in the speech of Lord Millett at page 581:-

“There are several apparent but well-established exceptions to the general rule of English law that in an action for breach of contract a plaintiff can only recover substantial damages for the loss which he has himself sustained. I say “apparent exceptions”, for I regard most of them as explicable in a manner consistent with the rule. The first is the right of a trustee to recover damages for breach of contract in respect of the loss sustained by the beneficiaries. But an action for damages for breach of contract is an action at common law, and in the eyes of the common law it is the trustee who sustains the loss. The fact that a court of equity will compel him to hold the benefit of the contract and any damages recovered for its breach in trust for the beneficiaries is neither here nor there.”

Mr. Fenwick sought to answer Mr. Marrin’s submissions in relation to an alleged trust of the benefit of the Definitive Design Contract first by submitting that the benefit of that contract was not held by Allen on trust for RRPE. However, he went on to submit that the authorities and observations upon which Mr. Marrin relied for his alleged exception to the common law rule that a contracting party may only recover substantial damages in respect of a loss which he has himself sustained that a trustee may recover damages to compensate loss suffered by the beneficiaries of the trust of which he is trustee demonstrate that that exception only applies if it is known to both parties to the contract at the time it is made that one is contracting as trustee. That submission is, in my judgment, well-founded and consistent with principle. If the general rule is as re-stated by Lord Clyde and by Lord Millett in Alfred McAlpine Construction Ltd. v. Panatown Ltd. in the passages which I have quoted, it must follow that it cannot be circumvented by circumstances of which one of the contracting parties is unaware. None of the authorities or observations upon which Mr. Marrin relied went so far as to suggest the contrary. Indeed all emphasised that the exception depended upon the actual knowledge of the parties at the time the relevant contract was made. In Lloyd’s v. Harper the Court of Appeal stressed that the whole point of the giving of the guarantee was that it should benefit all those with whom Mr. Harper junior entered into engagements. In Darlington Borough Council v. Wiltshier Northern Ltd. to the knowledge of all parties the relevant transactions were set up as they were simply for funding reasons and the real party for which the building was to be constructed was the local authority. Lord Clyde in formulating the exception in the case of trusts used the expression “expressly enters a contract as agent or trustee”. In the present case, on my findings of fact, Ricardo did not know, and had no reason to know, that RRPE had any direct interest in the Definitive Design Contract at the time that contract was made. Indeed, on my findings, at that time RRPE did not in fact have any direct interest in the contract. It only acquired such interest following the transfer of the Allen Diesels Business to RRPE in about February 1999.

For the reasons which I have given the answer to Issue 7(b) is negative.

Dunlop v. Lambert (1839) 6 Cl & F 600 was a decision of the House of Lords on an appeal from the Court of Session. The question which was decided in that case was that a consignor of goods property in which was expected to pass from the consignor to others during the performance of the contract of carriage could maintain in his own name a claim for substantial damages for breach of the contract for the benefit of whomsoever happened to be the owner of the goods at the date of the alleged breach. It seems that the rule was not of much practical utility for the best part of a century and a half after the decision, but in The Albazero [1977] AC 774 an attempt was made to rely upon it to develop the law. The particular attempt was unsuccessful, but was pursued as far as the House of Lords. There the only substantive speech was that of Lord Diplock. In the course of his speech at page 847 Lord Diplock, having explained the historical circumstances which seemed to have given rise to it, sought to rationalise the rule in Dunlop v. Lambert in this way:-

“The only way in which I find it possible to rationalise the rule in Dunlop v. Lambert so that it may fit into the pattern of English law is to treat it as an application of the principle, accepted also in relation to policies of insurance upon goods, that in a commercial contract concerning goods where it is in the contemplation of the parties that the proprietary interests in the goods may be transferred from one owner to another after the contract has been entered into and before the breach which causes loss or damage to the goods, an original party to the contract, if such be the intention of them both, is to be treated in law as having entered into the contract for the benefit of all persons who have or may acquire an interest in the goods before they are lost or damaged, and is entitled to recover by way of damages for breach of contract the actual loss sustained by those for whose benefit the contract is entered into.”

The decision in The Albazero was considered by the House of Lords in Linden Gardens Trust Ltd. v. Lenesta Sludge Disposals Ltd., St. Martins Property Corporation Ltd. v. Sir Robert McAlpine Ltd. (“the Linden Gardens Case”)[1994] 1 AC 85 in the context of the second of the appeals before the House. The leading speech was that of Lord Browne-Wilkinson. The only other substantive speech was that of Lord Griffiths, to which I shall need to return in the context of the third sub-issue of Issue 7 which needs to be addressed later in this judgment. In the Linden Gardens Case at pages 114-115 Lord Browne-Wilkinson said:-

“In my judgment the present case [in fact, St. Martins Property Corporation Ltd. v. Sir Robert McAlpine Ltd.] falls within the rationale of the exceptions to the general rule that a plaintiff can only recover damages for his own loss. The contract was for a large development of property which, to the knowledge of both Corporation and McAlpine, was going to be occupied, and possibly purchased, by third parties and not by Corporation itself. Therefore it could be foreseen that damage caused by a breach would cause loss to a later owner and not merely to the original contracting party, Corporation. As in contracts for the carriage of goods by land, there would be no automatic vesting in the occupier or owners of the property for the time being who sustained the loss of any right of suit against McAlpine. On the contrary, McAlpine had specifically contracted that the rights of action under the building contract could not without McAlpine’s consent be transferred to third parties who became owners or occupiers and might suffer loss. In such a case, it seems to me proper, as in the case of the carriage of goods by land, to treat the parties as having entered into the contract on the footing that Corporation would be entitled to enforce contractual rights for the benefit of those who suffered from defective performance but who, under the terms of the contract, could not acquire any right to hold McAlpine liable for breach. It is truly a case in which the rule provides “ a remedy where no other would be available to a person sustaining loss which under a rational legal system ought to be compensated by the person who has caused it”.”

The words in quotation marks at the end of that passage are a formulation of the circumstances in which it can be said that a claim falls into a legal “black hole”.

Mr. Marrin relied upon the extension of the rule in Dunlop v. Lambert in the Lenesta Sludge Case as indicating that the principle applied not simply to cases concerned with the carriage or insurance of goods, but also to a building contract in respect of which the employer was the owner of the site at the date of the contract, but it was in the contemplation of both parties that the site might be subsequently transferred. I accept that submission.

Mr. Marrin next relied upon the decision in Darlington Borough Council v. Wiltshier Northern Ltd. as further extending the rule by indicating that its application did not depend upon a transfer of a proprietary interest in the item or building allegedly damaged. It is correct that in Darlington Borough Council v. Wiltshier Northern Ltd. the Court of Appeal applied that part of the decision in the Lenesta Sludge Case to which I have referred in a case in which there was no transfer of a proprietary interest. However, I am inclined to think that that was not so much an extension of the principle as formulated and applied by Lord Browne-Wilkinson, as an identification of the fact that the principle as so formulated did not depend upon the transfer of a proprietary interest, but rather on a more simple notion, namely that it was in the contemplation of the parties to the relevant contract that an identified third party, or at least a third party falling within an identified class, would or might suffer damage in the event that there was a breach of the contract. What Dillon LJ, with whom Waite LJ agreed, said at page 74 was:-

“The present case is, in my judgment, a fortiori since, so far from there being a prohibition on the assignment of Morgan Grenfell’s rights against Wiltshier under the building contracts, the covenant agreement, of which Wiltshier was aware, gave the council the right to call for an assignment of such rights.”

Mr. Marrin submitted that the present extent of the development of the rule in Dunlop v. Lambert should be ascertained from a consideration of the decision of the House of Lords in Alfred McAlpine Construction Ltd. v. Panatown Ltd. What I understood him to mean was, in effect, that I should be encouraged by various comments in the speeches in that case to seek to develop the law in response to those comments, for the decision in the case was that, on the facts, the party suing on the relevant contract was only entitled to nominal damages. The first comment which Mr. Marrin urged upon me as indicating in which direction the law should develop was an observation of Lord Millett at page 584 that the Lenesta Sludge Case extended the rule in Dunlop v. Lambert, “from contracts for the carriage of goods to contracts for the supply of services, and in particular to building contracts”. It is, of course, important to Mr. Marrin’s argument that the rule in Dunlop v. Lambert should apply to contracts for the provision of services, like the Definitive Design Contract. By no stretch of the imagination was the Definitive Design Contract a building contract. However, the characterisation of a building contract as a contract for the supply of services is unusual. It has been customary to characterise such a contract as a contract for work and materials. With the greatest respect to Lord Millett I should need rather more encouragement than an observation in the midst of a passage the focus of which as a whole was that extensions of the rule in Dunlop v. Lambert in favour of others than successors in title of the originally contracting party was difficult to justify to reach the conclusion that the traditional view of the nature of a building contract needed to be revised. If I were to give effect to the doubts expressed by Lord Millett, the consequence would seem to be in any event that the rule would not apply in the circumstances of the present case, as RRPE was not the successor in title to Allen to any relevant property. There was no evidence that the benefit of the Definitive Design Contract had been assigned by Allen to RRPE.

The other passage in the speeches in Alfred McAlpine Construction Ltd. v. Panatown Ltd. upon which Mr. Marrin sought to rely in particular was what Lord Clyde said at pages 530-531, following his citation of the passage from Lord Diplock’s speech in The Albazero which I have already set out:-

“It is particularly this passage in Lord Diplock’s speech which has given rise to a question discussed in the present appeal whether The Albazero exception is a rule of law or is based upon the intention of the parties. The issue was identified by my noble and learned friend, Lord Goff of Chieveley, in his speech in White v. Jones [1995] 2 AC 207,267. The problem arises from two phrases in the speech of Lord Diplock the mutual relationship between which may not be immediately obvious. The two phrases, in the reverse order than that in which they appear, are “is to be treated in law as having entered into the contract” and “if such be the intention of the parties”. In my view it is preferable to regard it as a solution imposed by the law and not as arising from the supposed intention of the parties, who may in reality not have applied their minds to the point. On the other hand if they deliberately provided for a remedy for a third party it can readily be concluded that they have intended to exclude the operation of the solution which would otherwise have been imposed by law. The terms and provisions of the contract will then require to be studied to see if the parties have excluded the operation of the exception.

That appears to have been the conclusion adopted in [the Lenesta Sludge Case] where my noble and learned friend, Lord Browne-Wilkinson, observed, at p 115:

“In such a case, it seems to me proper, as in the case of the carriage of goods by land, to treat the parties as having entered into the contract on the footing that Corporation would be entitled to enforce contractual rights for the benefit of those who suffered from defective performance but who, under the terms of the contract, could not acquire any right to hold McAlpine liable for the breach.”

In that case the point was made that the contractor and the employer were both aware that the property was going to be occupied and possibly purchased by third parties so that it could be foreseen that a breach of the contract might cause loss to others than the employer. But such foresight may be an unnecessary factor in the applicability of the exception. So also an intention of the parties to benefit a third person may be unnecessary. Foreseeability may be relevant to the question of damages under the rule in Hadley v. Baxendale (1854) 9 Exch 341, but in the context of liability it is a concept which is more at home in the law of tort than in the law of contract. If the exception is founded primarily upon a principle of law, and not upon the particular knowledge of the parties to the contract, then it is not easy to see why the necessity for the contemplation of the parties that there will be potential losses by third parties is essential. It appears that in the St Martins case [1994] 1 AC 85 the damages claimed were in respect of the cost of remedial work which had been carried out. I see no reason why consequential losses should not also be recoverable under this exception where such loss occurs and the third party should have a right to recover for himself all the damages won by the original party on his behalf.”

It is difficult to know what to derive from this passage. Mr. Marrin seemed to suggest that it meant that in the view of Lord Clyde there were no conditions to be satisfied if a party to a contract sought to recover damages in fact sustained by a non-party as a result of a breach of the contract. I do not consider that that is what Lord Clyde meant. He had already said at page 522 of the report that he found no reason to question the general principle that a claimant could only recover damages for a loss which he himself had suffered. If that is the general principle, there must be something exceptional about any case in which that principle did not apply. In the passage to which Mr. Marrin drew my attention Lord Clyde seemed to be considering, without expressing any concluded view, how appropriate the particular circumstances identified by Lord Diplock were as conditions to be met if the exception were to apply.

In the existing state of the law it seems to me that a fundamental condition to be met if the rule in Dunlop v. Lambert is to be applied in any case is that it should at the time the relevant contract was made have been in the actual contemplation of the parties that an identified third party or a third party who was a member of an identified class would or might suffer damage in the event of a breach of the contract. In no case to which my attention was drawn was that condition not satisfied. Moreover, if the general rule, as everyone seems to accept, is that a party to a contract may not recover in respect of a breach of it substantial damages if he himself has not suffered such loss, any exception is an exception to that rule, not a wholesale replacement of it, and there must be special circumstances which take a particular case out of the ambit of the general rule. If the special circumstances which take a case out of the general are knowledge that an identified third party or a third party who is a member of an identified class will or might suffer damage if there is a breach of contract, that is something which ought to be capable of being readily demonstrated, it involves no obvious injustice, as the possibility of loss will have been known at the time the contract was made, and seems to do justice because it gives effect to the contemplation of the contracting parties and provides a means of compensating the third party for whose benefit, at least in part, the relevant contractual obligation was undertaken. If knowledge at the date of the contract of the interest of the third party as such or as a member of an identified class were unnecessary, the result would be that a claim for substantial damages could be advanced on behalf of anyone whomsoever who contended that they had suffered loss as a result of a breach of contract, however remote their apparent connection to the performance of the contract. Such a possibility would destroy the general rule.

In the present case, on my findings of fact, RRPE was not a party identified either by name or by membership of an identified class as one who would or might suffer loss as a result of a breach of the Definitive Design Contract on the part of Ricardo. The fact that it was known to be the parent company of Allen is, in my judgment, insufficient, for in that capacity it would sustain no loss in the event of a breach of the contract in respect of which Allen could recover substantial damages, and Allen would have been able to do that in the event of a claim for damages arising at any stage, had not the Allen Diesels Business been transferred to RRPE and RRPE thereafter undertaken manufacture and sale of the Engines itself.

In the result the answer to sub-issue 7 (c) is negative.

Although in the formulation of Issue 7 the “broad ground” of recovery contended for is said to have come from Alfred McAlpine Construction Ltd. v. Panatown. Ltd., in fact it first surfaced in the speech of Lord Griffiths in the Lenesta Sludge Case. At pages 96-97 of the report Lord Griffiths said:-

“In my view neither of these considerations provide McAlpine with a defence to Corporation’s claim. I cannot accept that in a contract of this nature, namely for work, labour and the supply of materials, the recovery of more than nominal damages for breach of contract is dependent upon the plaintiff having a proprietary interest in the subject matter of the contract at the date of breach. In everyday life contracts for work and labour are constantly being placed by those who have no proprietary interest in the subject matter of the contract. To take a common example, the matrimonial home is owned by the wife and the couple’s remaining assets are owned by the husband and he is the sole earner. The house requires a new roof and the husband places a contract with a builder to carry out the work. The husband is not acting as agent for his wife, he makes the contract as principal because only he can pay for it. The builder fails to replace the roof properly and the husband has to call in and pay another builder to complete the work. Is it to be said that the husband has suffered no damage because he does not own the property? Such a result would in my view be absurd and the answer is that the husband has suffered loss because he did not receive the bargain for which he had contracted with the first builder and the measure of damages is the cost of securing the performance of that bargain by completing the roof repairs properly by the second builder.”

Lord Griffiths’ approach has not so far been adopted as a matter of decision in any case in England and Wales which Counsel had been able to discover. It seems on its face to divorce the assessment of damages for breach of contract in a case in which it is adopted from proof of any particular loss sustained by the claimant, substituting some more or less notional quantification of damages for loss of bargain. As it is a notional loss of the actual claimant, if the person who has actually sustained the loss has some independent ground of claim, for example in tort, it would seem that the wrongdoer could find himself having to pay compensation for one wrong twice over. Settlement of the claim of the other contracting party would not obviously be a defence to the claim of the person who in fact sustained loss. Again, leaving aside that difficulty, it does not seem at all easy just as a practical matter to apply Lord Griffiths’ approach in any case other than one in which the alleged damage is damage to, or failure to repair, property and there is no suggestion of any consequential loss. It may be that the cost of repairing damage to a house or a car or some other type of corporeal property is likely to be similar no matter who sustains it. It may be that the diminution in the value of an item of corporeal property is likely to be similar no matter who owns it. However, the nature and extent of any consequential loss – for example, loss of income from inability for a period to turn property to account – may well depend critically upon the particular circumstances of the owner and what he or she does with the property. A simple example is that an owner of a flat may live in it as his main residence, or he may keep it empty for occasional use by himself, or he may let it and derive an income from it. Inability to use the flat because it has been damaged in some way may cause no loss beyond the cost of repair in the second case – the owner can live in his main residence – and the measure of the loss in the other two cases may well be different, either the cost of renting alternative accommodation or loss of rental income. In a case such as the present, in which there has been no damage to corporeal property as a result of the defendant’s alleged breach of contract, it is impossible to see how any assessment of damages could be made other than by reference to what actually happened to the other contracting party.

In the Lenesta Sludge Case itself, Lord Keith of Kinkel and Lord Bridge of Harwich expressly did not decide the appeals on the basis of the suggested principle of Lord Griffiths, whilst indicating some sympathy with his comments. Lord Ackner expressly agreed only with Lord Browne-Wilkinson and did not comment at all upon what Lord Griffiths said. In Darlington Borough Council v. Wiltshier Northern Ltd. Dillon LJ, with whom Waite LJ agreed, expressly did not consider the principle suggested by Lord Griffiths, but the third member of the Court of Appeal, Steyn LJ, expressly adopted it as a ground for his decision concurring with the majority in the result. In Alfred McAlpine Construction Ltd. v. Panatown Ltd. Lord Clyde, at pages 532-535, and Lord Jauncey of Tullichettle, at pages 568-574, considered Lord Griffiths’ suggested approach and identified difficulties with it. Lord Goff of Chieveley, at page 546, expressed his agreement with it. Lord Browne-Wilkinson at page 577 assumed that it was sound. Lord Millett at page 591 approved it, but limited its application to “building contracts and other contracts for the supply of work and materials where the claim is in respect of defective or incomplete work or delay in completing it”.

In the result there is a lack of unanimity of judicial utterance as to the appropriateness of the approach of Lord Griffiths to any class of case, and a respectable body of opinion that in some or all classes of case it is contrary to principle and/or difficult of practical application. In these treacherous waters I prefer to navigate by already published charts and to seek to apply the law as it has already clearly developed, rather than to speculate as to how it may develop in future. For those reasons I answer sub-issue (d) of Issue 7 also in the negative.

For the reasons set out in this judgment the answers to the preliminary issues are:-

The effect of the answers set out in the preceding paragraph is that neither Allen nor RRPE can recover substantial damages in this action. Theoretically it would remain open to Allen to pursue a claim for nominal damages for breach of the Definitive Design Contract. Manifestly that is not, commercially, what this action is about and it may be that the way forward is simply to dismiss the action. However, I shall hear Counsel as to the appropriate course in the circumstances.