Caparo Industries v Dickman

Facts

Caparo held shares in Fidelity plc and, after the audited accounts were published showing profits, bought more shares and later made a successful takeover bid. The accounts, prepared by Fidelity and audited by Touche Ross, overstated Fidelity's earnings, which were in fact much lower than shown. Caparo sued the auditors, claiming that it had relied on the accounts in buying shares and bidding, and that the auditors were negligent.

History

The claim failed at first instance. The Court of Appeal held that auditors owed a duty to Caparo as an existing shareholder but not as a prospective bidder, and the auditors appealed to the House of Lords.

Issue

Whether auditors owed a duty of care to a shareholder or prospective investor in respect of losses arising from reliance on audited accounts when deciding to buy shares or make a takeover bid.

Held

The auditors' appeal was allowed. They owed no duty to Caparo either as an existing shareholder deciding whether to buy more shares or as a bidder.

Ratio

• The statutory duty to prepare an audit report exists so that shareholders as a body can exercise control over the company, and it does not extend to protecting individual shareholders or others who rely on the accounts in making investment decisions.
• For a duty of care in negligence for economic loss from reliance on a statement, there must be sufficient proximity between the parties and the imposition of a duty must be fair, just and reasonable, in addition to foreseeability, and the law develops incrementally by analogy with established categories.

The judgments

Key reasoning

• The duty must be defined by the purpose of the statute under which the accounts are prepared, which is to enable shareholders to exercise supervision over management, not to provide advice for investment decisions.
• Conceptually the courts should avoid one general principle of foreseeability and instead treat duty as built up by reference to categories of case, using proximity and fairness to limit liability.
• Extending liability to anyone who might foreseeably rely on the accounts would expose auditors to indeterminate liability to an indeterminate class, which is a reason for not imposing the duty.

Where it fits in the module

For FHS Tort, Caparo is the starred case on duty of care in general and on negligent statements. It frames the debate about whether duty is decided by a general test or by incremental development, and it sets out the limiting role of proximity and policy in claims for pure economic loss. Students should connect it to the later treatment of the tripartite approach in Robinson v Chief Constable of West Yorkshire Police [2018] UKSC 4 and to the assumption of responsibility analysis in Hedley Byrne.

Criticisms

• The fair, just and reasonable criterion is open-textured and invites courts to decide duty by policy intuition, which makes the law unpredictable.
• Proximity is not given a clear content, so it can operate as a label for conclusions rather than as an explanatory principle.
• The restrictive treatment of auditors' duty disregards that the market relies on audited accounts, and leaves investors without a remedy even when the audit was negligently performed.
• Later courts criticised the three-stage test as a universal formula, and the case is now understood as a statement of how to develop the law in novel situations rather than as a test of general application.