Caparo Industries plc v Dickman [1990] 2 AC 605 (HL)

Facts

Caparo Industries plc purchased shares in Fidelity plc after relying on the company’s audited accounts, which showed a healthy financial position. The accounts had been prepared by the defendants, Dickman, who were the company’s auditors. In reality, Fidelity plc was in a much worse financial state than the accounts suggested.

Caparo later took over the company and suffered financial losses as a result. Caparo brought a claim in negligence against the auditors, arguing that they owed a duty of care in relation to the accuracy of the accounts.

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Issue

The key legal issue was whether the auditors owed a duty of care in negligence to Caparo, a third party who relied on the company’s accounts when deciding to invest.

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Decision

The House of Lords held that the auditors did not owe Caparo a duty of care. The court found that the accounts had been prepared for the purpose of informing shareholders as a body, not for potential investors considering the purchase of shares. As a result, the claim in negligence failed.

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Legal Principle

The House of Lords established a three-stage test to determine whether a duty of care exists in novel situations:

1. Was the damage reasonably foreseeable?

2. Was there a relationship of proximity between the parties?

3. Is it fair, just and reasonable to impose a duty of care?

This test limits the scope of duty of care and prevents liability from being extended too widely.

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Importance

• Introduced the Caparo three-stage test for duty of care.

• Restricted the expansion of negligence claims, particularly for pure economic loss.

• Clarified that foreseeability alone is not sufficient to establish a duty of care.

• Continues to be used in novel duty of care cases.