Caparo Industries Plc v Dickman [1990] UKHL 2 (08 February 1990)

Caparo purchased shares in Fidelity relying on audited accounts prepared by Touche Ross. The accounts were allegedly negligent, overstating profits. Caparo sued the auditors claiming they owed a duty of care. The House of Lords held auditors owe no duty to individual shareholders for investment decisions or to potential investors, only to shareholders collectively for proper corporate governance purposes.

Facts

Fidelity Plc’s directors announced results for the year ended 31 March 1984 showing profits well below predictions, causing the share price to fall dramatically from 143p to 63p. The accounts had been audited by Touche Ross (the appellants). Caparo Industries Plc began purchasing Fidelity shares in June 1984, eventually acquiring over 91% through a takeover bid. Caparo alleged the accounts were negligently prepared, overstating profits by approximately £1.7 million, and claimed they relied on these accounts when making their share purchases and takeover bid.

The Preliminary Issue

The court was asked to determine whether Touche Ross owed a duty of care to Caparo (a) as potential investors, or (b) as shareholders from 8 June 1984 and/or 12 June 1984, in respect of the audit of Fidelity’s accounts.

Issues

The central legal issues were:

• Whether auditors of a public company owe a duty of care to members of the public who rely on accounts when deciding to invest
• Whether auditors owe a duty of care to individual shareholders who rely on accounts for investment decisions
• What is the proper test for establishing a duty of care in cases of negligent misstatement causing economic loss

Judgment

The House of Lords unanimously allowed the appeal and dismissed the cross-appeal, holding that auditors owed no duty of care to Caparo either as potential investors or as existing shareholders relying on accounts for investment purposes.

The Test for Duty of Care

Lord Bridge articulated that in determining whether a duty of care exists, three elements must be present: foreseeability of damage, a relationship of proximity, and that it must be fair, just and reasonable to impose such a duty. He emphasised that the law should develop incrementally by analogy with established categories rather than through broad general principles.

Negligent Misstatement Cases

Lord Bridge identified the essential characteristics for a duty of care in negligent statement cases: the defendant must know that the statement will be communicated to the plaintiff (individually or as a member of an identifiable class), specifically in connection with a particular transaction or type of transaction, and that the plaintiff would very likely rely on it for deciding whether to enter that transaction.

Purpose of Statutory Audit

Lord Oliver examined the statutory provisions governing audits and concluded that the primary purpose is to enable shareholders collectively to exercise their powers in general meeting to scrutinise management, not to assist individual investment decisions. He stated that auditors owe their duty to shareholders as a body, not to individual shareholders.

No Duty to Individual Shareholders

Lord Jauncey concluded that the purpose of annual accounts is to enable shareholders to question past management, exercise voting rights, and influence future policy. He held that advice to individual shareholders regarding investment is no part of the statutory purpose of accounts.

Implications

This decision significantly limited the potential liability of auditors and other professionals for negligent misstatements. It established that:

• Foreseeability alone is insufficient to establish a duty of care for economic loss
• Proximity requires knowledge of the specific purpose and recipient of advice
• Auditors’ statutory duties are owed to shareholders collectively, not individually
• The purpose for which information is prepared delimits the scope of any duty

The case remains the leading authority on the duty of care owed by auditors and is frequently cited in professional negligence claims. It effectively prevents auditors being held liable to an indeterminate class for an indeterminate amount, whilst preserving liability where specific reliance is contemplated.

Verdict: Appeal allowed and cross-appeal dismissed. Auditors owed no duty of care to Caparo either as potential investors or as shareholders in respect of investment decisions made in reliance on the audited accounts.

Source: Caparo Industries Plc v Dickman [1990] UKHL 2 (08 February 1990)