Tort Law

Caparo Industries plc v. Dickman

[1990] 2 AC 605; [1990] UKHL 2

Facts

• Fidelity plc was a public company whose financial position appeared in audited statutory accounts.
• Dickman and his accounting firm audited the accounts.
• The accounts showed a profit, although Fidelity’s actual commercial position was considerably less favourable.
• Caparo Industries purchased shares in Fidelity and gradually increased its holding.
• After obtaining control through a takeover, Caparo claimed that it had relied upon the audited accounts when purchasing shares.
• Caparo alleged that the auditors had negligently prepared the accounts and that the shares were worth less than it had paid.
• It sought compensation for the investment loss.
• The auditors argued that statutory accounts were prepared for shareholders collectively, principally to assist them in supervising the company and exercising membership rights.
• They denied owing a duty to individual investors or takeover bidders making personal investment decisions.

• Whether the auditors owed Caparo a duty of care regarding its share purchases and takeover.
• Whether foreseeability that investors might read the accounts was sufficient.
• How proximity, purpose and policy determine the existence and scope of a negligence duty for economic loss.

• The existence of a duty in a novel situation generally requires consideration of:
o reasonable foreseeability of damage;
o sufficient proximity between claimant and defendant; and
o whether imposing the duty is fair, just and reasonable.
• The scope of the duty depends upon the purpose for which the information was prepared and communicated.
• A professional who prepares information for one purpose does not automatically assume responsibility for every different use that another person may foreseeably make of it.
• Liability for negligent statements causing pure economic loss ordinarily requires a sufficiently close relationship or assumption of responsibility.
• Robinson later clarified that Caparo did not create a mechanical universal test for all negligence cases; established duties should ordinarily be applied through precedent.

• It was foreseeable that shareholders and investors might read Fidelity’s accounts.
• Foreseeability alone was insufficient because published accounts could be seen and relied upon by an extremely wide class of persons.
• The auditors prepared the accounts to fulfil a statutory duty owed to the company and its shareholders as a collective body.
• Their purpose was to assist shareholders in matters such as:
o evaluating management;
o voting at company meetings; and
o exercising rights connected with existing membership.
• The accounts were not specifically prepared to advise Caparo whether to buy additional shares or launch a takeover.
• Caparo did not receive individual advice from the auditors, and the auditors did not know of or accept responsibility for its particular transactions.
• Imposing liability would potentially expose auditors to claims from an indeterminate class of investors for an indeterminate amount.
• The connection between the statutory auditing purpose and Caparo’s takeover losses was therefore insufficiently close.

• The House of Lords held that the auditors did not owe Caparo the alleged duty of care.
• The statutory accounts were prepared for shareholders as a body, not to guide individual investment or takeover decisions.
• Although reliance by investors was foreseeable, the necessary proximity and purpose-based relationship were absent.
• Caparo’s claim therefore failed.
• The case is important both for its three considerations and for the principle that a duty’s scope is controlled by the purpose for which a statement or service is supplied.