Caparo Industries plc v Dickman

Reasonable foreseeability alone does not create a duty of care. The law also requires sufficient proximity and circumstances in which imposing a duty of the claimed scope is fair, just and reasonable. Novel duties should develop incrementally and by analogy with established categories.

For negligent statements causing pure economic loss, proximity ordinarily requires the maker to know that the statement will reach a particular person or ascertainable class for a known transaction or purpose, and will probably be relied upon for that purpose.

Statutory company accounts enable shareholders collectively to supervise management. Auditors therefore owe no duty to potential investors, or to individual shareholders purchasing further shares, merely because reliance on the accounts is foreseeable.

Caparo Industries plc v Dickman concerned allegedly negligent accounts prepared by the auditors of a public company. Caparo began purchasing shares before publication of the accounts, bought further shares afterwards and ultimately acquired the company. It alleged that it relied on materially overstated profits when purchasing shares and making its takeover bid.

On a preliminary issue, the Queen's Bench Division held that the auditors owed no relevant duty to Caparo either as an investor or as an individual shareholder: [1988] B.C.L.C. 387. The Court of Appeal, by a majority, held that no duty was owed to potential investors but that a duty was owed to individual shareholders relying on the accounts when selling, retaining or purchasing shares: [1989] Q.B. 653.

The auditors appealed and Caparo cross-appealed. The central question was whether the purpose and circumstances of the statutory audit created sufficient proximity for either asserted duty.

Appeal allowed unanimously; cross-appeal dismissed unanimously.

1. Per Lord Bridge of Harwich, foreseeability of damage was necessary but insufficient for a duty of care. There must also be a relationship characterised by law as one of proximity or neighbourhood, and it must be fair, just and reasonable to impose a duty of the claimed scope. These concepts do not provide a universal mechanical formula. Novel categories should develop incrementally and by analogy with established categories. Lord Oliver of Aylmerton and Lord Roskill adopted the same general approach.

2. For a negligent statement causing pure economic loss, the necessary proximity ordinarily requires knowledge that the statement will be communicated to a particular person or ascertainable class in connection with a particular transaction or kind of transaction, and that the recipient will probably rely upon it for that purpose. The two-stage approach stated in Anns v Merton London Borough Council [1978] AC 728 could not be used to equate foreseeability with proximity. The established negligent-statement authorities, particularly Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465, required closer attention to the known recipient and purpose.

3. Per Lord Oliver, the typical conditions included a known purpose, contemplated communication to the recipient or an ascertainable class, likely reliance for that purpose without independent inquiry, and detrimental reliance. Those conditions were guidelines rather than an exhaustive formula. The surveyors in Smith v Eric S Bush [1990] 1 AC 831 knew of the identified house purchases and the purchasers' probable reliance. That confined context differed materially from statutory accounts placed in general circulation.

4. Per Lord Oliver and Lord Jauncey of Tullichettle, Part VII of the Companies Act 1985 required audited accounts so that shareholders collectively could scrutinise management, exercise voting and other class rights, and influence company policy. It did not require accounts to guide individual dealings in shares. A shareholder buying additional shares was acting in an independent market transaction and stood in the same position as any other investor.

5. The duty and its scope had to be defined by reference to the claimant, the kind of damage and the purpose for which the information was supplied. A relationship relating to collective shareholder control could not be enlarged into protection against losses from individual investment decisions. The House left open whether a materially different claim concerning loss in the value of an existing holding could arise.

6. Lord Roskill agreed and emphasised that foreseeability could not support an unrestricted liability to anyone using audited accounts for any purpose. Lord Ackner agreed with the reasons of the other Law Lords. The auditors' appeal was allowed with costs, and Caparo's cross-appeal was dismissed with costs.

1. House of Lords: Allowed the auditors' appeal unanimously and dismissed Caparo's cross-appeal unanimously. The majority decision of the Court of Appeal was reversed.
2. Court of Appeal: By a majority, allowed Caparo's appeal and held that auditors owed a duty to individual shareholders relying on accounts when selling, retaining or purchasing shares. It unanimously rejected a duty to potential investors: [1989] Q.B. 653.
3. Queen's Bench Division: Sir Neil Lawson determined the preliminary issue against Caparo, holding that no relevant common-law duty was owed either to investors or to individual shareholders: [1988] B.C.L.C. 387.