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The case of Caparo Industries Plc v Dickman (‘Caparo’) [1] caught my attention whilst studying Unit 6 of my Tort module when the module stated, “the facts of Caparo do not particularly matter for the purpose of this section” (The Open University (“OU”) 2024a, negligence).

As much as I understand the aim was for me to learn about the three-stage negligence test that came about as a result of the Caparo ruling, reading that the specifics did not matter, peaked my interest.

So here, for my January 2025 case summary, I aim to answer my own question: Caparo – what was it all about?

Citation: Caparo Industries Plc v Dickman [1990] UKHL 2

Court: House of Lords

 

Date: 8^th February 1990

 

Procedural History: Court of Appeal, 29^th July 1998, in front of Lord Justice O’Connor, Lord Justice Bingham and Lord Justice Taylor.

Dissenting opinion – Lord Justice O’Connor.

 

Judges: Lord Bridge of Harwich, Lord Roskill, Lord Ackner, Lord Oliver of Aylmerton and Lord Jauncey of Tullichettle

 

Legal Issues:

The tort of negligence.

 

Concurring opinions:

Lord Bridge of Harwich

Lord Roskill

Lord Ackner

Lord Oliver of Aylmerton

Lord Jauncey of Tullichettle

 

Dissenting opinion:

None

 

Facts:

A firm of chartered accountants appealed a Court of Appeal ruling that they owed a duty of care to shareowners when preparing an auditor’s report, which was required of them by statute.

Caparo Industries Plc (“Caparo”) had purchased shares of a public company named Fidelity Plc (“Fidelity”) as part of a takeover bid. Caparo had purchased more shares upon the release of the auditor’s report.

By 23 October 1984, Caparo owned 91.8% of Fidelity shares.

However, following this, the auditor’s report was subsequently found to have been colourful, having painted a false picture of Fidelity’s profits, and rather than the expected pre-tax profit of £1,300,000, Caparo instead made a loss of over £400,000.

Caparo took action on the 24 July 1985 for shares that were purchased after 12 June 1984, against two of Fidelity directors, claiming the overvaluations had been made fraudulently, as well as against the chartered accountants, who Caparo claimed were negligent in certifying Fidelity’s audits and accounts.

The appeal to the House of Lords, followed a Court of Appeal ruling that the chartered accountants owed a duty of care to existing shareholders but not potential investors.

Both sides made ‘with leave’ appeals to the House of Lords.

The chartered accounts appeal was that they owed no duty of care to either the shareholders or potential investors due to a lack of proximity between the two, and Caparo’s cross-appeal was that there was a duty of care to potential investors.

 

Decision:

Lord Bridge of Harwich concluded that an individual shareholder, as a purchaser of additional shares made in the reliance of the auditor’s report, is in no different position as to any other investing member of the public, who the auditor owes no duty to. He would allow the appeal and dismiss the cross-appeal.

Lord Roskill and Lord Ackner also agreed in allowing the appeal and dismiss the cross-appeal.

Lord Oliver of Aylmerton stated that the audit was nothing more than a statutory obligation as required by the Companies Act 1985 [2]. Lord Oliver of Aylmerton went on to explain the reason and function of the audit was to protect the company and provide information to those who are entitled to receive it so that they can act accordingly. He explained that the audit was not for individual speculation with a view to profit and agreed with Lord Justice O’Connor (when the case had been before the Court of Appeal) that the duty of care is to the shareholders as a whole, not individually. He also did not agree that the scope of duty needed to include loss by an individual, when Caparo were relying on a supplied audit that was not intended for them. He agreed to allow the appeal and dismiss the cross-appeal.

Lord Jauncey of Tullichettle concluded the judgment by stating that a company may, at the time of an audit being prepared, be vulnerable to a takeover bid but that does not create a relationship of proximity between the auditor and whoever the successful bidder may ultimately be. The auditor is under no statutory duty to any bidder as the auditor will not know who the bidder is, nor the terms of the bid, and he agreed to allow the appeal.

What happened next?

The chartered accountants were successful in their appeal with costs, and Caparo were unsuccessful in their cross-appeal with costs.

The judgments from Lord Bridge of Harwich, Lord Roskill, Lord Ackner, Lord Oliver of Aylmerton and Lord Jauncey of Tullichettle created a new three-part test which superseded Donoghue (‘Donoghue’) [3].

·         that a duty of care exists

·         that the duty of care has been breached

·         that the damage is both a direct and foreseeable consequence of the breach.

However, the more recent judgment of Robinson (‘Robinson’) [4] means that Caparo is no longer the leading case on negligence, however it is still good law that can be used.

The use of the Caparo test will be decided on a case-by-case basis. If the case is something completely new or novel, then it will be the Caparo test.

Otherwise, the original Donoghue “neighbour principal and reasonable foreseeability” test will apply for cases that are either:

a) a category of liability that has previously been recognised by law (an established duty) or

b) whether a similar established duty is found from previous cases that are similar enough to the new case, so that judges can extend those decisions to the present case.

What impact this decision will have on cases going forward remains to be seen but given that the Robinson decision has been handed down from the Supreme Court, it is going to take a very unique case indeed, for the negligence test to be challenged again.

Development of negligence timeline:

1) Donoghue v Stevenson [1932] AC 562

2) Caparo Industries plc v Dickman [1990] UKHL 2

3) Robinson v Chief Constable of West Yorkshire Police [2018] UKSC 4