Caparo Industries Plc v Dickman [1990] 2 AC 605

KEY POINTS

• A duty of care may arise when advice or information is communicated directly or indirectly to a plaintiff who relies on it to their detriment.

• However, the court distinguished between those to whom the report was specifically directed (e.g., shareholders) and potential investors, establishing that a duty of care existed towards the former group but not necessarily the latter.

FACTS

• The appellants, a prominent accounting firm, were auditors for Fidelity Plc., a public company in the business of electrical equipment manufacturing. Fidelity's audited accounts for the year were approved by the directors.

• The results were below expectations, leading to a sharp decline in share prices. Caparo Industries Plc began purchasing Fidelity shares after the announcement, eventually acquiring a significant stake.

• Caparo alleged that the accounts were inaccurate and misleading, particularly in overvaluing stock and under-providing for after-sales credits. Caparo claimed that their purchases and subsequent bid were based on these misleading accounts and seeks redress for their losses.

• The case centered on whether the misleading accounts led to Caparo's actions and losses.

COMMENTARY

• Lord Bridge's critique of a broad and universal approach to establishing a duty of care emphasized the importance of maintaining legal certainty and avoiding an excessive spread of liability. Instead, he proposed a more focused categorization of circumstances where duties of care might arise, based on established categories or the criteria of foreseeability, proximity, and fairness.

• In essence, Caparo v Dickman refined the duty of care principle and established a framework for determining when a duty of care arises in negligence cases involving professional advice and reports.

ORIGINAL ANALYSIS

• Respondent falsely misrepresented the value of a company in audit on the basis of this unrealistically good report, Plaintiff, already a shareholder, bought the rest of the company’s shares and claimed that R had been negligent in making the report, upon discovering the true value of he company.

• HL held that Respondent had a duty of care to people to whom the report was directed for its specific purpose (i.e. shareholders) so that it had been negligent towards Plaintiff as a shareholder but NOT as a potential investor.

• NEW TEST for duty of care: EITHER a duty of care has been established in these circumstances previously OR:

  1. There is reasonable foreseeability of harm,

  2. There is proximity, and

  3. It would be fair, just and reasonable to impose a duty of care.

Lord Bridge

• He criticises the broad approach to finding a duty of care by saying:

  1. Firstly that attempts at universal or general approaches are necessarily vague, especially step 2 - bad for legal certainty.

  2. Secondly, the broad approach would lead to a flood of claims, spreading liability too wide.

• He says there should be a broad categorisation of circumstances where duties of care may be found, e.g. the Anns v Merton LBC case “is failure to perform properly a statutory duty claimed to have been imposed for the protection of the plaintiff either as a member of a class or as a member of the public”, while this case is “advice which has been communicated, directly or indirectly, to the plaintiff and upon which he has relied”.

• He says that to establish a duty of care there should be:

  1. Reasonably foreseeable harm,

  2. Proximity, and

  3. Fair, just and reasonable that an extension of the duty of care occur OR an established category where duty of care has been held to exist

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