CASE ANALYSIS :CAPARO INDUSTRIES PLC v.

DICKMAN

[1990] 2 AC 605

AUTHOR : KANIKA SATYAN

INTRODUCTION : FACTS OF THE CASE

1. In this case, Caparo brought an action against the auditors of an electronics company,
Fidelity, after an accomplished takeover of Fidelity. In March 1984 Fidelity had issued a
profit warning, which had halved its share price. In May 1984 Fidelity's directors made a
preliminary announcement in its annual profits for the year up to March confirming the
negative outlook. The share price fell again .Caparo began to buy shares shortly before
Fidelity published its annual audited accounts to shareholders. Caparo then purchased
more shares in reliance on those accounts so as to take over Fidelity. In its claim against
the auditors of Fidelity, Caparo asserted that the audited accounts were incorrect and that
it would not have purchased the shares had it known of Fidelity‟s true state of affairs. It
sued Dickman for negligence in preparing the accounts and sought to recover its losses.

ISSUED RAISED IN THE CASE

The following issues were raised in the case at hand:

1) Did the auditors owe a duty of care towards the investors, especially Caparo?

2) Is it reasonably foreseeable that the claimant may be harmed by the

defendant's failure to take reasonable care?

3) Is the relationship between the claimant and defendant sufficiently proximate

(i.e, relationship of proximity)?

4) Is it fair, just and reasonable to impose on the defendant a duty of care

towards the claimant?

5) What test should be employed in determining negligence?

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JUDGMENT

2. The House of Lords finally laid down that the duties of an auditor are founded in contract
and the extent of the duties undertaken by contract must be interpreted in the light of the
relevant statutory provisions and the relevant auditing standards. The duties are duties of
reasonable care in carrying out the audit of the company‟s accounts. They are owed to the
company in the interests of its shareholders. No duty is owed directly to the individual
shareholders. The shareholders‟ interests are protected by the duty owed to the company.

3. Liability for economic loss for negligent mis-statement should be limited to situations
where the statement was made to a known recipient for a specific purpose of which the
maker was aware, and upon which the recipient had relied and acted upon to his
detriment. The law has moved towards attaching greater significance to the more
traditional categorisation of distinct and recognizable situations as guides to the
existence, the scope and the limits of the varied duties of care which the law imposes.
The House laid down a threefold test of foreseeability, proximity and fairness, and
emphasised the desirability of incremental development of the law. The test was if “the
court considers it fair, just and reasonable that the law should impose a duty of a given
scope upon the one party for the benefit of the other”.

EVALUATION OF THE CASE

1) TRIAL PROCESS

4. As already discussed in brief above, a case was filed by Caparo Industries against the
auditors for negligence stating that they had a duty of care towards them, in
particular and also the other investors .They relied upon the following arguments:
(1) The auditors knew or ought to have known
 that a press release had been issued stating that profits for the financial year would
fall significantly

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  that Fidelity's share price fell from 143p per share on 1 March 1984 to 75p per
share on 2 April 1984
 that Fidelity required financial assistance.
(2) The auditors therefore ought to have foreseen that Fidelity was vulnerable to a take-over
bid and that persons such as Caparo might well rely on the accounts for the purpose of
deciding whether to take over Fidelity and might well suffer loss if the accounts were
inaccurate.

5. In the preliminary trial, the Queen's Bench Division1 held

(i) that the appellants owed no duty at common law to Caparo as investors and
(ii) that, whilst auditors might owe statutory duties to shareholders as a class, there was
no common law duty to individual shareholders such as would enable an individual
shareholder to recover damages for loss sustained by him in acting in reliance upon the
audited accounts.
6. Caparo Industries then appealed to the Court of Appeal 2 where the majority held that
whilst there was no relationship between an auditor and a potential investor
sufficiently proximate to give rise to a duty of care at common law, there was such a
relationship with individual shareholders, so that an individual shareholder who
suffered loss by acting in reliance on negligently prepared accounts, whether by
selling or retaining his shares or by purchasing additional shares, was entitled to
recover in tort.
7. Then an appeal was further filed to the House of Lords with the leave of the Court of
Appeal. The respondents cross-appealed against the rejection by the Court of Appeal of
their claim that the appellants owed them a duty of care as potential investors.

2) RELATIONSHIP BETWEEN NEGLIGENCE AND DUTY OF CARE

8. Negligence is essentially concerned with compensating people who have suffered

damage as a result of the carelessness of others, but the law does not provide a remedy

1
[1988] B.C.L.C. 387
2
[1989] Q.B. 653
 for everyone who suffers in this way. One of the main ways in which access to
compensation is restricted is through the doctrine of the duty of care. Essentially, this is a
legal concept which dictates the circumstances in which one party will be liable to
another in negligence: if the law says you do not have a duty of care towards the person
(or organisation) you have caused damage to, you will not be liable to that party in
negligence, no matter how serious the damage.

9. We can analyse the development of the law on duties of care in three main stages: the
original neighbour principle as established in Donoghue v. Stevenson (1932); a two-stage
test set down in Anns v. Merton London Borough (1978), which greatly widened the
potential for liability in negligence; and a retreat from this widening following the case of
Murphy v. Brentwood District Council (1990).

3) THE TRADITIONAL APPROACH – TRILOGY OF CASES

10. Till then, there were two different approaches which were adopted by the Judges in cases
where duty of care was questioned. The field of law uses a very tradition approach with
regard to this and every circumstance of negligence depends upon the specific duty that
exists in that situation. This approach was also looked upon by Lord Atkin in the case of
Donoghue v. Stevenson where he emphasized on the importance of adopting a modern
approach of seeking a single general principle which may be applied in all circumstances
to determine the existence of a duty of care.

11. Another case that lay emphasis on this modern approach is Hedley Byrne v. Heller3. This
case laid down that when a person makes a statement, he voluntary assumes
responsibility to the person he makes it to (or those who were in his contemplation). If
the statement was made negligently, then he will be liable for any loss which results.The

3
[1964] A.C. 465
 case which completed this trilogy was Dorset Yacht Co. Ltd. v. Home Office4. These
three cases paved the way for the approach which is now used.

4) THE LAW TODAY

12. Over the years, case law has established that there are a number of factual situations in
which a duty of care is known to be owed. For example, drivers owe a duty to take care
not to injure pedestrians, and employers owe a duty of care to take reasonable steps to
protect their employees from injury. However, there are still situations in which it is not
clear whether there is a duty of care, and, following the moves towards a tighter test after
Anns was overruled, the House of Lords

13. Since the Anns case a series of decisions of the Privy Council and of your Lordships'
House, have emphasised the inability of any single general principle to provide a
practical test which can be applied to every situation to determine whether a duty of
care is owed and, if so, what is its scope5.The position that has now been reached is that
in order to establish that a duty of care , which arises in a particular situation, it is not
necessary to bring the facts of that situation within those of previous situations in which a
duty of care has been held to exist. Rather the question has to be approached in two
stages.
 First one has to ask whether, as between the alleged wrongdoer and the person who has
suffered damage there is a sufficient relationship of proximity or neighbourhood such
that, in the reasonable contemplation of the former, carelessness on his part may be
likely to cause damage to the latter - in which case a prima facie duty of care arises.
 Secondly, if the first question is answered affirmatively, it is necessary to consider
whether there are any considerations which ought to negative, or to reduce or limit the

4
[1970] A.C. 1004, 1026-1027
5
Governors of Peabody Donation Fund v. Sir Lindsay Parkinson &Co. Ltd. [1985] A.C. 210, 239f-241c; Yuen Kun
Yeu v. Attorney-General of Hong Kong[1988] A.C. 175, 190e-194f; Rowling v. Takaro Properties Ltd. [1988] A.C.
473, 501d-g; Hill v. Chief Constable of West Yorkshire[1989] A.C. 53, 60b-d
 scope of the duty or the class of person to whom it is owed or the damages to which a
breach of it may give rise.

14. The Caparo test is now accepted as the basic test to be applied when a court is presented
with a new factual situation in which it needs to decide whether a duty of care exists.
However, the courts have developed more detailed, and more restrictive, rules which
apply in certain types of case:
1) where the damage caused is psychiatric, rather than physical, injury.
2) where the damage caused is purely economic loss;
3) where the damage was caused by a failure to act (known as liability for omissions);
4) where the damage was caused by a third party, rather than the defendant;
5) whether the defendant falls within a range of groups who have become subject to special
rules on policy grounds.

15. Thus what emerged out of this was that ,in addition to the foreseeability of damage,
necessary ingredients in any situation giving rise to a duty of care are that there should
exist between the party owing the duty and the party to whom it is owed a relationship
characterised by the law as one of "proximity" or "neighbourhood" and that the situation
should be one in which the court considers it fair, just and reasonable that the law should
impose a duty of a given scope upon the one party for the benefit of the other.

16. Further , approving a dictum of Brennan J in the High Court of Australia in Sutherland
Shire Council v Heyman (1985), in the present case it was held that that the law should
preferably develop novel categories of negligence incrementally and by analogy with
established categories, rather than by a massive extension of a prima facie duty of care
restrained only by indefinable "considerations which ought to negative or limit the scope
of the duty or the class of person to whom it is owed". Thus, it can be rightly stated that
the current case provided a restrictive approach to liability.
5) ANALYSIS OF JUDGMENT

17. This decision of the House of Lords, in which Lords Bridge, Oliver and Jauncey set out at
length the reasons behind their decision, has come to be considered as an important
landmark in the context of the law on negligent misstatements by professionals which
results in economic loss. The essential features of the judgment are as follows:
 Their Lordships, in the instant case, were reluctant to extend the situations where a
duty of care for negligent statements may arise beyond those recognised by the
authorities and thus rejected the more modern approach of applying recognised
principles to a situation regardless of whether or not it is covered by authority.
 They agreed that foreseeability alone was not sufficient to impose such a duty and that
the requisite relationship of proximity should also be present to limit what would
otherwise be an unlimited duty of care owed by auditors for the accuracy of their
accounts to all, who may foreseeably rely on them.
 Lord Bridge found that the limit imposed upon the liability for causing economic loss,
rested in the necessity to prove, „as an essential ingredient of the “proximity” between
the plaintiff and the defendant, that the defendant knew that his statement would be
communicated to the plaintiff… specifically in connection with a particular
transaction…. (e.g. in a prospectus inviting investment) and that the plaintiff would be
very likely to rely on it for the purpose of deciding whether or not to enter upon that
transaction….‟
 Lord Oliver agreed there was no support for the proposition that the relationship of
proximity is to be extended beyond circumstances in which advice is tendered for
the purpose of the particular transaction and the adviser knows or ought to know that
it will be relied on by a particular person in connection with that transaction.
 Lord Jauncey considered that the possibility of reliance on a statement for an
unspecified purpose will not impose a duty of care on the maker of the addressee.
Even if the reliance was probable, regard must be had to the transaction of the purpose of
which the statement was made.
 Their Lordships referred to Cann v. Willson, Ultramares Corporation v. Touche, the
dissenting judgment of Lord Denning in Candler v. Crane, Christmas & Co., approved
 by the House of Lords in Hedley Byrne and Co. v. Heller & Partners and the two appeals
of Smith v. Eric S Bush and Harris v. Wyre Forest District Council, both of which had
been heard together by the House of Lords, as their authority for these propositions.
 Their Lordships felt that the ratio of the above mentioned cases led to the conclusion that
auditors owe no duty of care to members of the public at large who rely on the
accounts to buy shares, as, if it did, the duty would then extend to all who rely on the
accounts such as investors deciding to buy shares, lenders or merchants extending
credit.
 Even the fact that a company is vulnerable to a take-over at the time when the accounts
are being prepared cannot per se create the relationship of proximity. In fact, in Al Saudi
Banque v. Clark Pixley, Justice Miller had rejected a claim that auditors owed a duty of
care to a bank and their Lordships agreed with the decision.
 Their Lordships questioned the purpose behind the statutory requirement for an annual
audit, and concluded that it is to enable shareholders to review the past management of
the company and to exercise their rights to influence future management. They saw
nothing in the statutory duties of an auditor to suggest that they were intended to protect
the interests of the public at large or investors in the market in particular. The statutory
duty was, therefore, owed to shareholders as a body and not as individuals. Since an
auditor owed no duty to an individual shareholder, it followed that he could owe no duty
to a potential investor.
 Their Lordships were not prepared to widen the scope of duty to include loss caused to an
individual by reliance upon the accounts for a purpose for which they were not supplied
and were not intended, as to do so would be to extend it beyond the limit deducible from
the previous decisions of the House of Lords.

6) DETAILED ANALYSIS OF THE THREE FOLD TEST

19. Since, the judgment in the present case laid down the three fold test to check if a person
owed a certain duty of care towards the other , it is not only necessary to review the judgment
but also the components that comprise the test. Numerous other judgments are also referred
to, to lay clarity on this point. These are:

1) Reasonable Forseeability

20. This element of the test has its foundations in the original „neighbour principle‟
developed in Donoghue v Stevenson (see p. 18). Essentially, the courts have to ask
whether a reasonable person in the defendant‟s position would have foreseen the risk of
damage. A case which shows how this part of the test works is Langley v Dray (1998),
where the claimant was a policeman who was injured in a car crash when he was chasing
the defendant, who was driving a stolen car. The Court of Appeal held that the defendant
knew, or ought to have known, that he was being pursued by the claimant, and therefore
in increasing his speed he knew or should have known that the claimant would also drive
faster and so risk injury. The defendant had a duty not to create such risks and he was in
breach of that duty.

21. In order for a duty to exist, it must be reasonably foreseeable that damage or injury
would be caused to the particular defendant in the case, or to a class of people to
which he or she belongs, rather than just to people in general. In other words, the
duty is owed to a person or category of persons, and not to the human race in
general. A good example of this principle can be seen in Palsgraf v Long Island
Railroad (1928). The case arose from an incident when a man was boarding a train, and
a member of the railway staff negligently pushed him, which caused him to drop a
package he was carrying. The box contained fireworks, which exploded, and the blast
knocked over some scales, several feet away. They fell on the claimant and she was
injured. She sued, but the court held that it could not reasonably be foreseen that pushing
the passenger would injure someone standing several feet away. It was reasonably
foreseeable that the passenger himself might be injured, but that did not in itself create a
duty to other people.

22. That does not, however, mean that the defendant has to be able to identify a particular
individual who might foreseeably be affected by their actions; it is enough that the
 claimant is part of a category of people who might foreseeably be affected. This was the
case in Haley v. London Electricity Board (1965). The defendants dug a trench in the
street in order to do repairs. Their workmen laid a shovel across the hole to draw
pedestrians‟ attention to it, but the claimant was blind, and fell into the hole, seriously
injuring himself. It was agreed in court that the precautions taken would have been
sufficient to protect a sighted person from injury, so the question was whether it was
reasonably foreseeable that a blind person might walk by and be at risk of falling in. The
Court of Appeal said that it was: the number of blind people who lived in London meant
that the defendants owed a duty to this category of people.

23. The duty must also relate to a particular kind of harm which the defendant could
reasonably foresee arising from their actions, rather than to the possibility of
causing any kind of harm what- soever. As Lord Oliver explained in the present case
i.e Caparo v Dickman, ‘It is not a duty to take care in the abstract, but a duty to
avoid causing to the particular plaintiff [the old word for claimant] damage of the
particular kind which he has in fact sustained.‟

2) Proximity

24. In normal language, proximity means closeness, in terms of physical position, but in law
it has a wider meaning which essentially concerns the relationship, if any, between the
defendant and the claimant. In Muirhead v Industrial Tank Specialities (1985), Goff LJ
pointed out that this does not mean that the defendant and claimant have to know
each other, but that the situations they were both in meant that the defendant could
reasonably be expected to foresee that his or her actions could cause damage to the
claimant.
25. In this sense, proximity can be seen as simply another way of expressing the
foreseeability test, as the case of Caparo v Dickman itself shows.. An audit was not
intended to be a source of information or guidance for prospective new investors, and
therefore could not be intended to help existing shareholders, like Caparo, to decide
whether to buy more shares. The audit was effectively a statement that was „put into more
 or less general circulation and may foreseeably be relied on by strangers to the maker of
the state- ment, for any one of a variety of purposes which the maker of the statement has
no reason to contemplate‟. As a result, the House of Lords held that there was no
relationship of proximity between Caparo and Dickman, and no duty of care.

26. Proximity may also be expressed in terms of a relationship between the defendant,
and the activity which caused harm to the claimant, defined by Lord Brennan
in Sutradhar v. Natural Environment Research Council (2004) as „proximity in the
sense of a measure of control over and responsibility for the potentially dangerous
situation‟. An example of this kind of proximity can be seen in Watson v. British
Boxing Board of Control (2000), where the claimant was the famous professional boxer
Michael Watson, who suffered severe brain damage after being injured during a match.
He sued the Board, on the basis that they were in charge of safety arrangements at
professional boxing matches, and evidence showed that if they had made immediate
medical attention available at the ringside, his injuries would have been less severe. The
Court of Appeal held that there was sufficient proximity between Mr Watson and the
Board to give rise to a duty of care, because they were the only body in the UK which
could license professional boxing matches, and therefore had complete control of and
responsibility for a situation which could clearly result in harm to Mr Watson if the
Board did not exercise reasonable care.

3)Reasonableness

27. In practice, the requirement that it must be just and reasonable to impose a duty often
overlaps with the previous two – in Watson and Sutradhar, for example, the arguments
made under the heading of proximity could equally well be seen as arguments relating to
justice and reasonable- ness. It was obviously more just and reasonable to expect the
Boxing Board to supervise a match properly, since that was their job, than it was to
expect the researchers in Sutradhar to take responsibility for a task that was not their
job, and which they had never claimed to have done.
 28. Where justice and reasonableness are specifically referred to, it is usually because a
case meets the requirements of foreseeability and proximity, but the courts believe
there is a sound public policy reason for denying the claim. An example
is McFarlane v Tayside Health Board(1999). The claimant had become pregnant after
her partner‟s vasectomy failed, and claimed for the costs of bringing up the child. The
courts denied her claim, on the basis that it was not just and reason- able to award
compensation for the birth of a healthy child – something most people, they said, would
consider a blessing.

7)The economic perspective

29. Many losses resulting from tort could be described as economic; if the claimant‟s house
is burnt down because of the defendant‟s negligence, the loss is economic in the sense
that the claimant no longer has an asset they used to have. Similarly, a claimant who
suffers serious injury which makes them unable to work suffers a financial loss. The law
has always been willing to compensate for these losses with damages.

30. Therefore , even in the current case where this question of economic loss arose , the
Judges after referring to various judgments laid down in the cases of Cann v. Willson 6
the dissenting judgment of Denning L.J. in Candler v. Crane, Christmas & Co. 7 and
Hedley Byrne & Co. Ltd v. Heller &Partners Ltd. 8and Smith v. Eric S. Bush9 , held that
it was now a well established proposition that a negligent statement may, in certain
circumstances, render the maker thereof liable for economic loss occasioned thereby to
another.

6
(1888) 39 Ch.D. 39
7
[1951] 2 K.B. 164
8
[1964] A.C. 465
9
[1990] 1 A.C. 831
8 ) REFERENCE TO THE SAME IN INDIA

31. Though we have analysed how the development of duty of care developed over the years,
it is also imperative to see how the same have been applied in India as even in India,
there is no laid down law regarding the duty of care which professionals especially
auditors should owe in respect of the duty of care owed by them towards the other.
Certain cases that refer to the ratio laid down in Caparo Industries are:

1) Municipal Corporation of Delhi, Delhi v. Association of Victims of Uphaar Tragedy and

Ors. AIR2012SC100

Referring to the three fold test laid down in the case of Caparo Industries it was held that
there must be close or direct proximity to acts of Licensing Authority and fire accident and
death/injuries of victims to pay compensation to its claimant must be granted according to
facts and circumstances of case.T

2) Rajkot Municipal Corporation v. Manjulben Jayantilal Nakum and Ors. (1997)9SCC552

Commenting upon the relationship between negligence and corresponding duty of care ,
the Supreme Court in this case held that issue related to liability for negligence in
causing death of husband of first respondent and father of second to fourth respondents
due to sudden fall of tree while passing on road .Thus there was no duty to maintain
regular supervision thereof though local authority under duty to plant and maintain
trees .Causation for accident to remote and there was no common law right to file suit
for tort of negligence not just and proper to fast duty of care and liability of omission
thereof, occurrence cannot be foreseen . Thus, appellant not negligent in maintenance of
trees planted by it on roadsides.
CONCLUSION

Every person who, uses his professional and personal skills and the other person who depends on
that skill or alters his position in pursuance of that skill , the former person is morally and
socially supposed to owe a duty of care towards the other . However, it was not what was held in
the case. Legally, that person that does not owe a duty of care.Thus in the present case , the
House of Lords determined that, in general, auditors only owe a duty of care to shareholders as a
body and not to individual shareholders. They reasoned that the purpose of audited accounts is to
enable the company‟s management and shareholders to make informed decisions in respect of
the company and not to assist potential investors in deciding whether or not to invest in the
company. To impose a duty on the auditors to all such investors would be to expose them to (in
the words of Lord Oliver of Aylmerton) “a liability wholly indefinite in the area, duration and
amount and would open up a limitless vista of uninsurable risk for the professional man.”
As regards existing shareholders, the House of Lords held that, while existing shareholders are
entitled to rely on the audited accounts to protect their collective interest in the proper
management of the company, they are not entitled to rely on the auditor‟s statutory report as a
basis for making their own investment decisions. The House of Lords then adopted a threefold
test for the purpose of determining whether the auditors nevertheless owed a duty of care to
Caparo in the particular circumstances of the case. First, the damage must be reasonably
foreseeable as a consequence of the auditor‟s conduct. Second, there must be a close relationship
of proximity between the parties such as to justify the imposition of a duty of care. Proximity for
a duty of care would arise where (i) advice is required for a purpose and the auditor was fully
aware of the nature of the transaction that the advisee had in contemplation; (ii) the auditor knew
that the advice would be communicated to the advisee; (iii) the auditor knew that it was very
likely that the advisee would rely on that advice in deciding whether to engage in the transaction;
and (iv) the advice was so acted upon by the advisee to his detriment. Third, the situation must
be such that it is fair, just and reasonable that the law should impose. a duty upon the auditor.
After examining the circumstances of the case, the House of Lords determined that no duty of
care was owed to Caparo by the auditors of Fidelity.