Caparo Industries Plc v Dickman [1990] UKHL 2 is a landmark English tort law case that established a structured approach to determining the existence of a duty of care in negligence claims. The House of Lords formulated a three-stage test, which has since become a foundational principle in English negligence law. The case significantly refined the scope of liability, particularly in cases concerning economic loss and professional negligence.
The decision in Caparo Industries Plc v Dickman shifted away from the broader approach taken in Anns v Merton London Borough Council [1978] AC 728 and introduced a more restrictive method of assessing duty of care. The case arose from a claim involving an allegedly negligent misstatement in an audit report, leading to financial loss for the claimant. The House of Lords ultimately held that no duty of care was owed to individual shareholders or potential investors, limiting the scope of liability in such contexts.
Facts of Caparo Industries Plc v Dickman
The dispute in Caparo Industries Plc v Dickman centred on the acquisition of shares in Fidelity plc by Caparo Industries plc. Fidelity was a publicly listed company engaged in the manufacture of electrical equipment. In early 1984, Fidelity issued a profit warning, resulting in a substantial drop in its share price. A few months later, in May 1984, the company’s directors released preliminary profit statements confirming that the company’s financial position was deteriorating.
Caparo Industries plc, seeing an opportunity for acquisition, began purchasing shares in Fidelity. In June 1984, Fidelity’s annual accounts were published. These accounts, audited by Dickman, initially reassured Caparo about the financial health of the company. By the time Caparo acquired 29.9% of the shares—triggering a general takeover offer—it became evident that Fidelity’s financial condition was far worse than disclosed. Caparo subsequently suffered significant losses and brought a negligence claim against the auditors, alleging that they had prepared the accounts negligently, leading to reliance on misleading financial information.
The central legal question in Caparo Industries Plc vs Dickman was whether the auditors owed a duty of care to shareholders such as Caparo, who relied on the accounts when making investment decisions.
Procedural History
- High Court Decision: The claim was initially dismissed at first instance. The court found that no duty of care was owed to shareholders making investment decisions.
- Court of Appeal Decision: The Court of Appeal, led by Lord Justice Bingham, reversed the decision. It held that auditors did owe a duty of care to existing shareholders when preparing accounts, as their primary purpose was to inform shareholders about the company’s financial health.
- House of Lords Decision: The House of Lords unanimously reversed the Court of Appeal’s ruling and held that no duty of care was owed to individual shareholders or prospective investors.
Caparo Industries Plc v Dickman Judgement of the House of Lords
The leading judgement in Caparo Industries Plc versus Dickman was delivered by Lord Bridge of Harwich. The House of Lords clarified that in determining the existence of a duty of care, courts must apply a structured three-stage test:
- Foreseeability of harm – The damage must be a reasonably foreseeable consequence of the defendant’s actions.
- Proximity of relationship – There must be a sufficiently close relationship between the claimant and the defendant.
- Fair, just, and reasonable – It must be appropriate to impose a duty of care in the circumstances.
Lord Bridge explained that while foreseeability is an essential condition, it is not sufficient on its own to establish duty. The proximity between the parties and the fairness of imposing liability must also be carefully assessed.
The House of Lords held that auditors do not owe a duty of care to individual shareholders or potential investors. The statutory purpose of an audit, as required under the Companies Act 1985, was to inform the shareholders collectively about the governance of the company, not to guide investment decisions. The auditors’ duty was to the company as a whole, rather than individual investors relying on the report for personal financial gain.
Furthermore, the House of Lords cited policy concerns regarding the potential for indeterminate liability. If auditors were held liable to any investor who relied on their reports, this could open the floodgates for claims, imposing excessive and indefinite liability.
Conclusion
Caparo Industries Plc v Dickman [1990] UKHL 2 is one of the most significant cases in English tort law, establishing a structured three-stage test for duty of care in negligence. The decision limited the liability of auditors and professionals in cases of economic loss and ensured that duty of care is not automatically imposed in all situations of reliance on professional advice.
The ruling has been both influential and contentious, shaping the legal approach to negligence claims while prompting ongoing debate about the fairness and rigidity of the Caparo test.
