Caparo Industries Plc. v Dickman

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The House of Lords in 'Caparo Industries v Dickman' (1990, House of Lords) adopted at least some of the concerns expressed in different common law courts at the two-stage test set out in Anns v. Merton London Borough Council. The three-stage 'Caparo' test required:

foreseeability of damage
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 would be fair just and reasonable that the law should impose a duty of given scope on one party for the benefit of the other.

It should be stated that once a case falls within Hedley Byrne v Heller there is no further requirement for a consideration of whether it is ‘fair just and reasonable’ to impose liability.

Caparo remains the relevant decision for the United Kingdom. It may be said that it differs from Anns in that the approach to each case is not from a general proposition of Lord Atkin’s principle but from a consideration of the particular relationships which have previously given rise to a duty of care.

Facts & Background

The facts of Caparo where that the defendant were the auditors of a company, Fidelity Plc, the plaintiff acquired shares in Fidelity Plc on the basis of the accounts of Fidelity as audited by the defendants in fact the reality of the financial position of the company was announced to be (to the stock exchange) significantly worse than the audited accounts revealed shortly after the acquisition of the shares by the plaintiffs.

On a preliminary issue as to whether a duty of care existed in the circumstances as alleged by the Plaintiff, the Plaintiff was unsuccessful at first instance but was successful in the Court of Appeal in establishing a duty of care might exist in the circumstances.The House of Lords unanimously held there was no duty of care on the facts as alleged by the Plaintiff.

Legal Reasoning

Lord Bridge of Harwich who delivered the leading judgment stated the now famous Caparo test. That is:

Foreseeability;
Proximity or neighbourhood in the relevant relationship;
The situation should be one in which it is fair just and reasonable that the law should impose a duty of a given scope on one part for the benefit of the other.

Lord Bridge says that the principles have developed since Anns' case. Indeed, even Lord Wilberforce had subsequently recognised that foreseeability alone was not a sufficient test of proximity. It is necessary to consider the particular circumstances and relationships which exist.

Lord Bridge Then proceeds to analyse the particular facts of the case based upon principles of proximity and relationship. He refers approvingly to the dissenting judgment of Denning LJ (as he then was) in Candler v Crane Christmas (1951, Court of Appeal) where Denning LJ held that the relationship must be one where the accountant or auditor preparing the accounts was aware of the particular person and purpose for which the accounts being prepared would be used.

There could not be a duty owed in respect of ‘liability in an indeterminate amount for an indeterminate time to an indeterminate class (Ultramares Corp v Touche (1931, New York Court of Appeal)). Applying those principles, the defendants owed no duty of care to potential investors in the company who might acquire shares in the company on the basis of the audited accounts.

Although it was not necessary to decide the matter, it would seem unlikely that shareholders independently would have any right of action against the auditors for negligently prepared accounts even if they chose to dispose of their shares on the basis of those accounts. The company itself would have a right of action for any loss it suffered as a result of those accounts being negligently prepared.

The judgment is lengthy as also is the judgment of Lord Oliver and Lord Jauncey.

Legal Significance

The judgment does overturn the decision of a judge at first instance in JEB Fasteners Ltd v Marks Bloom (1981) and is in disagreement with a decision of the New Zealand Court of Appeal in Scott Group Limited v McFarlane in both of which cases a duty of care was found in substantially similar circumstances.

Caparo leaves open the question of the law in Australia and whether the decision in Caparo would be followed.

The decision is also noteworthy for the fulsome comments made as to the analysis of Brennan J of the Australian High Court in Sutherland Shire Council v Heyman espousing the proposition that the law should develop novel categories of negligence ‘incrementally and by analogy with established categories’.

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