Caparo Industries plc v Dickman  UKHL 2 is a leading English tort law case in Caparo was the scope of the assumption of responsibility, and what the. Caparo Industries Plc v Dickman . Facts. Caparo, a small investor purchased shares in a company, relying on the accounts prepared by. A company called Fidelity plc, manufacturers of electrical equipments, was the target of a takeover by Caparo Industries plc. Fidelity was not doing well. In March.
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The House of Lords, following the Court of Appeal, set out a “three-fold test”. In order for a duty of care to arise in negligence:.
The decision arose in the context of a negligent preparation of accounts for a company. Previous cases on negligent misstatements had fallen under the principle of Hedley Byrne v Heller. If the statement was made negligently, then he will be liable for any loss which results.
The question in Caparo was the scope of the assumption of responsibility, and what the limits of capaaro ought to be. 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.
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Had Caparo been a simple outside investor, with no stake in the company, it would have had no claim. But because the auditors’ work is primarily intended to be for the benefit of the shareholders, and Caparo did in fact have a small stake when it saw the company accounts, its claim was good.
This was overturned by the House of Lords, which unanimously held there was no duty of care. A company called Fidelity plc, manufacturers of electrical equipment, was the target of a takeover by Caparo Industries plc. Fidelity was not doing well. In March Fidelity had issued a profit warning, which had halved its share price. In May Fidelity’s directors made a preliminary announcement in its annual profits for the year up to March. This confirmed the position was bad.
The share price fell again. At this point Caparo had begun buying up shares in large numbers. In June the annual accounts, which were done with the help of the accountant Dickman, were issued to the shareholders, which now included Caparo.
Caparo reached a shareholding of But once it had control, Caparo found that Fidelity’s accounts were in an even worse state than had been revealed by the directors or the auditors.
It sued Dickman for negligence in preparing the accounts and sought to recover its losses. This was the difference in value between the company as it had and what it would have had if the accounts had been accurate. The majority of the Court of Appeal Bingham LJ and Taylor LJ, O’Connor LJ dissenting held that a duty was owed by the auditor to shareholders individually, industties although it was not necessary to decide that in this case and the judgment was obiterthat a duty would not be owed to an outside investor who had no shareholding.
Bingham LJ held that, for industfies duty owed to shareholders directly, the very purpose of publishing accounts was to inform investors so that they could make choices within a company about how to use their shares. But for outside investors, a relationship of proximity would be “tenuous” at best, and that it would certainly not be “fair, just and reasonable”.
O’Connor LJ, in dissent, would have held that no duty was owed at all to either group. He used the example of a shareholder and his friend both looking at an account report.
He thought that if both went and invested, the friend who had no previous shareholding would certainly not have a sufficiently proximate relationship to the negligent auditor. So it would not be sensible or fair to say that the shareholder did either. Leave was given to appeal. In it he extrapolated from previously confusing cases what he thought were three main principles to be applied across the law of negligence for the duty of care. Others have spoken to similar effect. Their Lordships consider that question to be of an intensely pragmatic character, well suited for gradual development but requiring most careful analysis.
It is one upon which all common law jurisdictions can learn much from each other; because, apart from exceptional cases, no sensible distinction can be drawn in this respect between the various countries and the social conditions existing in them. It is incumbent upon the courts in different jurisdictions to be sensitive to each other’s reactions; but what they are all searching for in others, and each of them striving to achieve, is a careful analysis and weighing of the relevant competing considerations.
The many decided cases on this industroes, if providing no simple ready-made solution to the question whether or not a duty of care exists, do indicate the requirements to be satisfied before a duty is found. The first is foreseeability. It is not, and could not be, in issue between these parties that reasonable foreseeability of harm is a necessary ingredient of a relationship in which a duty of care will arise: It is also common ground that reasonable foreseeability, although a necessary, is not a sufficient condition of the existence of a duty.
The second requirement is more elusive. It is usually described as proximity, which means not simple physical proximity but extends to. Sometimes the alternative expression “neighbourhood” is used, as by Lord Reid in the Hedley Byrne case  A. Sometimes, as in the Indkstries Byrne caseattention is concentrated on the existence of a special relationship.
Sometimes it is regarded as significant iindustries the parties’ relationship is “equivalent to contract” see the Hedley Byrne caseat p. In some cases, and increasingly, reference is made industrries the voluntary assumption of responsibility: Both the analogy with contract and the assumption of responsibility have duckman relied upon as a test of proximity in foreign courts as well as our own: It may very well be that in tortious claims based on negligent misstatement these notions are particularly apposite.
The content of the requirement of proximity, whatever language is used, is not, I think, capable of precise definition.
The approach will vary according to the particular facts of the case, as is reflected in the varied language used. But the focus of the inquiry is on the closeness and directness capsro the relationship between the parties. In determining this, foreseeability must, I think, play an important part: The third requirement to be met before a duty of care will be held to be owed by A to B is that the court should find indutsries just and reasonable to impose such a duty: Contractors Ltd  Q.
It was considerations of this kind which Industroes Fraser of Tullybelton had in mind when he said that “some limit or control mechanism has to be imposed upon the liability of a wrongdoer towards those who have suffered economic damage in consequence of his negligence: The requirement cannot, fickman, be better put than it was by Weintraub C.
The inquiry involves a weighing of the relationship of the parties, the nature of the risk, and the public interest in the proposed solution. If the imposition of a duty on a defendant would be for any reason oppressive, or would expose him, in Cardozo C. On the other hand, a duty will be the more readily found if the defendant is voluntarily exercising a professional skill for reward, if the victim of his carelessness has in the absence of a duty no means of redress, if the duty contended for, as in McLoughlin v O’Brian  1 A.
Lord Bridge of Harwich who delivered the leading judgment restated the so-called “Caparo test” which Bingham LJ had formulated below. His decision was, following O’Connor LJ’s dissent in the Court of Appeal, that no duty was owed at all, either to existing shareholders or to future investors by a negligent auditor.
The purpose of the statutory requirement for an audit of public companies under the Companies Act was the making of a report to enable shareholders to exercise their class rights in general meeting.
It did not extend to the provision of information to assist shareholders in the making of decisions as to future investment in the company.
It is necessary to consider the particular circumstances and relationships which exist. Lord Bridge then proceeded to analyse the particular facts of the case based upon principles of proximity and relationship. 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 per Cardozo C. J New York Court of Appeals.
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.
Lord Bridge concluded by answering the specific question of whether auditors should be liable to individual shareholders in tort, beyond a claim brought by a company. He referred to the Companies Act sections on auditors, and continued. I find it difficult to visualise a situation arising in the real world in which the individual shareholder could claim to have sustained a loss in respect of his existing shareholding referable to the negligence of the auditor which could not be recouped by the company.
But on this part of the case your Lordships were much pressed with the argument that such a loss might occur by a negligent undervaluation of the company’s assets in the auditor’s report relied on by the individual shareholder in deciding to sell his shares at an undervalue.
The argument then runs thus.
The shareholder, qua shareholder, is entitled to rely on the auditor’s report as the basis of his investment decision to sell his existing shareholding. If he sells at an undervalue he is entitled to recover the loss from the auditor. There can be no distinction in law between the shareholder’s investment decision to sell the shares he dickkan or to buy additional shares.
Caparo Industries Plc v Dickman 
It follows, therefore, that the scope of the duty of care owed to him by the auditor extends to cover any loss sustained consequent on the purchase of additional shares in reliance on the auditor’s negligent report. I believe this argument to be fallacious. Assuming without deciding that a claim by a shareholder to recover a loss suffered by selling his shares at an undervalue attributable to an undervaluation of the company’s assets in the auditor’s report could be sustained at all, it would not be by reason of any reliance by the shareholder on the auditor’s report in deciding to sell; the loss would be referable to the depreciatory effect of the report on the market value of the shares before ever the decision of the shareholder to sell was taken.
A claim to recoup a loss alleged to flow from the purchase of overvalued shares, on the other hand, can only be sustained on the basis of the purchaser’s reliance on the report. Moreover, the loss in the case of the sale would be of a loss of part of the value of the shareholder’s existing holding, which, assuming a duty of care owed to individual shareholders, it might sensibly lie within the scope of the auditor’s duty to protect.
A loss, on the other hand, resulting from the purchase of additional shares would result from a wholly independent transaction having no connection with the existing shareholding. I believe it is this last distinction which is of critical importance and which demonstrates the unsoundness of the conclusion reached by the majority of the Court of Appeal.
Caparo Industries v Dickman
It is never sufficient to ask simply whether A owes B a duty of care. It is always necessary to determine the scope of the duty by reference to the kind of damage from which A must take care to save B harmless. Heyman60 A. Assuming for the purpose of the argument that the relationship between the auditor of a company and individual shareholders is of sufficient proximity to give rise to a duty of care, I do not understand how the scope of that duty can possibly extend beyond the protection of any individual shareholder from losses in the value of the shares which he holds.
It is usually described as proximity, which means not simple physical proximity but extends to “such close and direct relations that the act complained of directly affects a person whom the person alleged to be bound to take care would know would be directly affected by his careless act: No doubt these provisions establish a relationship between the auditors and the shareholders of a company on which the shareholder is entitled to rely for the protection of his interest.
But the crucial question concerns the extent of the shareholder’s interest which the auditor has a duty to protect. The shareholders of a company have a collective interest in the company’s proper management and in so far as a negligent failure of the auditor to report accurately on the state of the company’s finances deprives the shareholders of the opportunity to exercise their powers in general meeting to call the directors to book and to ensure that errors in management are corrected, the shareholders ought to be entitled to a remedy.
But in practice no problem arises in this regard since the interest of the shareholders in the proper management of the company’s affairs is indistinguishable from the interest of the company itself and any loss suffered by the shareholders, e.