Caparo v Dickman [1990]

Caparo Industries PLC v Dickman [1990] UKHL 2 is pivotal in English tort law for establishing the modern test for determining the existence of a duty of care in negligence. The House of Lords, affirming the decision of the Court of Appeal, formulated a three-fold test to ascertain when a duty of care arises. This test stipulates that harm must be reasonably foreseeable as a potential result of the defendant's conduct, there must be a relationship of proximity between the parties, and it must be fair, just, and reasonable to impose liability. The context of this case involved the negligent preparation of company accounts and has since influenced how courts address negligent misstatements and the scope of responsibility.

Caparo Industries purchased shares in Fidelity Plc, a company producing electrical equipment that was performing poorly. Following an initial profit warning and subsequent share price drops, Caparo began acquiring a significant number of Fidelity shares. After taking control of Fidelity, Caparo discovered that the company's financial state was worse than had been reported by its directors and auditors. Consequently, Caparo sued the auditor, Dickman, for negligence in preparing the accounts, seeking to recover losses corresponding to the disparity between the reported and actual financial conditions of Fidelity.

The Court of Appeal, particularly through Lord Justice Bingham, held that auditors owed a duty of care to shareholders when preparing accounts intended to inform investment decisions. Bingham LJ noted that as Caparo was a shareholder, it was entitled to rely on the accounts. However, if Caparo had been a mere outside investor without an existing stake in the company, no such duty would exist due to the lack of proximity. Bingham LJ emphasised that proximity and the fairness, justness, and reasonableness of imposing liability were essential in establishing a duty of care. This nuanced approach was not entirely shared by O'Connor LJ, who dissented, arguing that no duty was owed to either shareholders or external investors.

The House of Lords overturned the Court of Appeal’s decision, ruling unanimously that no duty of care was owed by the auditors to Caparo as individual shareholders or to potential investors. Lord Bridge of Harwich, delivering the leading judgment, affirmed the need for a more refined approach than merely relying on foreseeability to establish a duty of care. He emphasised that the duty must be assessed based on the specific relationship between the parties and the context of the harm suffered. Lord Bridge restated the three-fold test, incorporating principles of proximity and fairness, justness, and reasonableness, which have since become fundamental in negligence law.

The Caparo decision clarified the scope of auditors’ duties, limiting their responsibility to providing information for shareholders to exercise their collective rights rather than making individual investment decisions. This judgment influenced subsequent cases, reinforcing the need for careful analysis of proximity and policy considerations when determining the existence of a duty of care. The Caparo three-stage test has become instrumental in addressing novel duty of care issues, ensuring that liability is imposed only where it is justified by the relationship between the parties and the broader implications for fairness and public policy.

Caparo Industries PLC v Dickman established a structured approach to assessing duty of care in negligence, emphasising the importance of foreseeability, proximity, and the fairness, justness, and reasonableness of imposing liability. This case has significantly influenced the development of negligence law, providing a clear framework for courts to analyse complex issues of duty and responsibility. By delineating the limits of auditors' liability, Caparo has shaped the legal landscape, ensuring that duties of care are recognized only when justified by the circumstances and relationships involved.