Authored By: Ayesha Minhas
University of Greenwich
Case Name: Caparo Industries plc v Dickman
Date: 26 February 1990
Court: House of Lords
Citation: [1990] 2 AC 605, [1990] 1 All ER 568, [1990] 2 WLR 358
Introduction
In the case of Caparo Industries plc v Dickman[1], the plaintiff, Caparo Industries, was a company that had purchased shares in Fidelity plc. Caparo relied on an audit report prepared by the defendant, Dickman, an accountant, when purchasing the shares. Caparo later discovered that the company’s financial health was misrepresented and sought to recover losses by claiming that Dickman owed a duty of care when preparing the accounts.
This was a civil case concerning negligence and duty of care in the context of economic loss caused by misstatements. The central legal issue surrounding this case was whether auditors owe a duty of care to the individual investors who rely on their reports when making investment decisions.
The case progressed through the High Court, which ruled in favor of Caparo, finding that a duty of care did exist. The Court of Appeal upheld this decision.
However, the House of Lords (now the UK Supreme Court) later overturned the ruling, establishing the Caparo three-stage test for duty of care[2]: (1) the damage must be foreseeable, (2) there must be sufficient proximity between the parties, and (3) it must be fair, just, and reasonable to impose a duty. The court concluded that auditors owe a duty of care to the company as a whole but not to the individual shareholders or potential investors.
Facts
Caparo Industries, a corporate investor, purchased shares in Fidelity plc, a company whose financial health had been reported in an audit prepared by Dickman, the defendant. Caparo relied on this audit report, which indicated that Fidelity was profitable, and then proceeded to increase its shareholding with the intention of taking over the company. However, after completing the takeover, Caparo discovered that Fidelity was in a far worse financial position than the audit had suggested. Believing that the misleading audit had caused their financial losses, Caparo sued Dickman for negligence, arguing that the auditors owed a duty of care to potential investors relying on their financial statements.
The case arose in the broader context of expanding liability in negligence for economic loss, particularly following Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964][3], which had established liability for negligent misstatements where there was an assumption of responsibility. The legal question in Caparo was whether auditors owed a duty of care not just to the company they audited, but also to investors and shareholders who relied on their reports for financial decisions. This issue was critical because imposing a broad duty of care could significantly increase the liability of auditors and other professionals issuing financial reports.
Legal Issues
The primary legal issue in this case was whether an auditor owes a duty of care to individual shareholders or potential investors who rely on the auditor’s report when making investment decisions. The court had to determine whether the relationship between Caparo and Dickman was sufficiently proximate to justify imposing a duty of care for negligent misstatements.
Several sub-issues were also addressed by the court:
- The Scope of Duty in Negligent Misstatements: The court considered whether the principle from Hedley Byrne v Heller[4] (which established liability for negligent misstatements in cases of assumed responsibility) applied to statutory audits.
- The Concept of Proximity in Negligence: The case clarified what constitutes a sufficiently close relationship between a defendant and a claimant for a duty of care to arise.
- The “Fair, Just, and Reasonable” Test: The ruling refined the three-stage test for establishing duty of care – foreseeability of harm, proximity, and whether it is fair, just, and reasonable to impose a duty – which has since become a cornerstone of negligence law.
- Distinction Between Duty to the Company and Individual Investors: The court examined whether auditors owe duties only to the company as a whole (for whom the audit is prepared) or to specific investors relying on the information.
Arguments
Plaintiff’s Arguments (Caparo Industries plc):
Caparo argued that Dickman and his firm owed a duty of care to individual investors, including Caparo, who relied on the audited financial statements when making investment decisions. The plaintiff claimed that it was foreseeable that potential investors would rely on the audit when assessing the financial health of Fidelity plc. Caparo also contended that there was a sufficiently proximate relationship between the auditors and investors, given that auditors knew their reports would be used to make financial decisions. Finally, Caparo argued that holding auditors liable was fair, just, and reasonable, as it would encourage greater accuracy and diligence in financial reporting.
Defendant’s Arguments (Dickman – the Auditor):
Dickman, representing the auditing firm, countered that their duty of care was owed only to the company (Fidelity plc) and not to individual shareholders or potential investors. They argued that the primary purpose of a statutory audit is to assist the company’s shareholders in overseeing management, rather than to guide investment decisions. The defendant maintained that if auditors were liable to all potential investors, it would create an unlimited scope of liability, placing an unreasonable burden on auditors. Additionally, they argued that Caparo, as a takeover bidder, had different interests from ordinary shareholders, and imposing a duty in such cases would extend negligence liability too far.
Court’s Analysis
The House of Lords, in its deliberation, delineated the boundaries of duty of care in instances of negligent misstatement. While the court acknowledged that it was foreseeable that investors such as Caparo might rely on audited financial statements, it emphasised that foreseeability alone was insufficient to impose liability. Instead, it established a three-stage test to determine the existence of a duty of care: (1) foreseeability of harm, (2) a sufficiently proximate relationship between the parties, and (3) whether it was fair, just, and reasonable to impose such a duty. The House of Lords ultimately held that auditors owe a duty only to the company as a corporate entity, rather than to individual investors or potential shareholders, as the primary function of an audit is to facilitate corporate governance rather than to inform individual investment decisions.
In reaching this determination, the court narrowed the scope of the principle established in Hedley Byrne & Co Ltd v Heller[5], which imposed liability for negligent misstatements where there was an assumption of responsibility. However, in Caparo, the Lords rejected the notion that auditors assume responsibility to the general investing public. The decision also underscored the necessity of balancing economic policy considerations, as an expansive duty of care could lead to indeterminate liability, therefore discouraging professionals from providing critical services.
In doing so, the House of Lords refined the broad duty of care framework initially set out in Donoghue v Stevenson [1932][6] which established the neighbour principle. Lord Atkins who is credited for the neighbour principle[7] explained that it is the idea that individuals owe a duty of care to those who are closely and directly affected by their actions, as determined by what a reasonable person would foresee as likely consequences. Unlike Donoghue, where a general duty of care arose from foreseeable harm, Caparo introduced a structured approach to limit the scope of liability, particularly in cases concerning economic loss. As noted by Murphy in Street on Torts[8], this ruling provided greater judicial discretion in determining the boundaries of negligence liability, ensuring that the duty of care is extended gradually and only in circumstances where it is justifiable in law and policy.
Decision
The House of Lords unanimously ruled in favor of Dickman, overturning the Court of Appeal’s decision. The court held that auditors do not owe a duty of care to individual investors or potential shareholders who rely on their reports for investment decisions. Instead, the duty of care is limited to the company itself and its shareholders as a collective entity, in accordance with the statutory role of auditors.
As a result of this ruling, Caparo’s claim for negligence was dismissed, and the auditors were not held liable for any financial losses suffered by the plaintiff. The judgement clarified that professionals like auditors cannot be held liable for all parties who may rely on their work, unless there is a clear proximity of relationship and an assumption of responsibility. Since this was a unanimous decision, there were no concurring or dissenting opinions, though the judgement provided clarifications on the scope of negligence liability, which continue to guide courts in professional negligence cases today.
Significance
The Caparo test has become a cornerstone of modern negligence jurisprudence, providing a structured framework for ascertaining the existence of a duty of care in novel circumstances. This landmark ruling substantially curtailed liability for economic loss arising from negligent misstatements, safeguarding professionals from indeterminate and excessive legal exposure. Furthermore, the decision reaffirmed that policy considerations are integral to the development of negligence law, ensuring that courts do not impose duties of care indiscriminately in a manner that could generate adverse economic and social repercussions.
Subsequent case law has consistently applied and refined the Caparo three-stage test, particularly in Robinson v Chief Constable of West Yorkshire Police [2018][9], where the Supreme Court emphasised that the determination of a duty of care must be grounded in established legal principles rather than being dictated solely by policy concerns. As Lunney and Oliphant[10] have noted, the Caparo framework has been pivotal in limiting professional liability, shielding accountants, financial advisors, and legal practitioners from claims where there is no clear assumption of responsibility or proximate relationship with the claimant. By adopting a measured approach, the law of negligence has evolved gradually and coherently, avoiding arbitrary judicial expansion. Caparo v Dickman[11] stands as a highly influential case in UK tort law, continuously guiding the courts in matters of professional negligence and economic loss.
Conclusion
The House of Lords in Caparo v Dickman[12] established a three-part test for determining the existence of a duty of care in negligence cases, particularly in situations of pure economic loss. This test requires foreseeability of harm, proximity of relationship, and that it be fair, just, and reasonable to impose a duty. The court ultimately held that auditors do not owe a duty of care to individual investors or potential investors, but only to the company as a whole.
The Caparo test has become a cornerstone of negligence law in common law jurisdictions. While providing a structured framework for determining duty of care, it also introduces a degree of flexibility through the “fair, just, and reasonable” limb, allowing courts to consider policy implications. The case significantly narrowed the scope of auditors’ liability, reflecting a policy decision to protect auditors from potentially limitless liability to a wide range of individuals. This decision has had lasting implications on UK tort law for the understanding of duty of care in general, highlighting the balance between protecting individuals from negligence and preventing the imposition of excessive burdens on professionals.
Reference(S):
Primary Sources
- Caparo Industries plc v Dickman [1990] 2 AC 605 (HL)
- Donoghue v Stevenson [1932] AC 562 (HL) 580
- Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465 (HL)
- Robinson v Chief Constable of West Yorkshire Police [2018] UKSC 4, [2018] AC 736
Secondary Sources
– Mark Lunney and Ken Oliphant, Tort Law (6th edn, OUP 2017) 123
– John Murphy, Street on Torts (15th edn, OUP 2018) 56
[1]Caparo Industries plc v Dickman [1990] 2 AC 605 (HL)
[2] Caparo Industries plc v Dickman [1990] 2 AC 605 (HL)
[3] Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465
[4] Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465
[5] Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465
[6] Donoghue v Stevenson [1932] AC 562
[7] Donoghue v Stevenson [1932] AC 562, 580
[8] John Murphy, Street on Torts (15th edn, OUP 2018) 56
[9] Robinson v Chief Constable of West Yorkshire Police [2018] UKSC 4, [2018] AC 736
[10] Mark Lunney and Ken Oliphant, Tort Law (6th edn, OUP 2017) 123
[11]Caparo Industries plc v Dickman [1990] 2 AC 605 (HL)
[12]Caparo Industries plc v Dickman [1990] 2 AC 605 (HL)
