Court: House of Lords
Judgment Date: 8 February 1990
Where Reported: [1990] 2 A.C. 605; [1990] 2 W.L.R. 358; [1990] 1 All E.R. 568
Legal Issues in Caparo Industries plc v Dickman
The legal issue in Caparo Industries plc v Dickman centred on the extent of the duty of care owed by auditors to third parties.
Specifically, it examined whether auditors owe a duty of care to outside investors who rely on audited financial statements for making investment decisions.
The case questioned if this duty extends to any investor, including those who are not shareholders at the time of the audit but who may purchase shares based on the audited accounts.
Material Facts in Caparo Industries Plc v Dickman
Caparo Industries, a public limited company, acquired shares of Fidelity plc, following a takeover.
Caparo initiated legal action against Fidelity’s directors for fraudulent misrepresentation and against its auditors for negligence in conducting the audit and preparing the financial report as required under the Companies Act 1985.
Caparo alleged that it began purchasing Fidelity’s shares before the annual accounts were published and made further purchases based on these accounts to complete the takeover.
They claimed that the auditors owed a duty of care to both shareholders and potential investors regarding the accuracy of the certified accounts.
Caparo argued that due to inaccuracies in the accounts, which portrayed Fidelity’s profits and share price as higher than actual, they were misled into acquiring the company’s shares.
Judgment in Caparo Industries Plc v Dickman
The House of Lords held that the auditors did not owe a duty of care to Caparo as investors, either as shareholders or non-shareholders.
The Court found that liability for economic loss due to negligent misstatement is confined to cases where the statement or advice had been given to a known recipient for a specific purpose.
The statutory requirement for an audit of public companies is to report to shareholders to exercise their class rights in general meetings, not to provide information for investment decisions.
The Court concluded that auditors do not have a special relationship with non-shareholders contemplating investment based on published accounts, even when a company is susceptible to a takeover.
Therefore, the auditors had no duty of care towards Caparo in respect of their purchase of Fidelity’s shares.
Reason for the Decision in Caparo Industries Plc v Dickman
The House of Lords’ decision in Caparo v Dickman was based on the principles of establishing a duty of care in negligence, particularly regarding economic loss arising from negligent misstatements.
The Court emphasised that such liability is limited to situations where the statement was made to a known recipient for a specific purpose, known to the maker, upon which the recipient relied and acted to their detriment.
The decision underscored the traditional legal principle that the primary purpose of an auditor’s duty is to the shareholders as a body for the specific purpose of enabling them to exercise their rights at general meetings. It does not extend to providing information for individual investment decisions.
This interpretation is consistent with the statutory framework of the Companies Act 1985, which governs the preparation and dissemination of financial reports.
The judgment also reflected a cautious approach towards extending duties of care, particularly in the context of professional services where the risk of indeterminate liability to an indeterminate class of persons for an indeterminate period could arise.
The Court was mindful of the potential for wide-ranging economic consequences if a duty of care was found to exist in such cases.
Moreover, the Court emphasised the concept of proximity in establishing a duty of care, noting that a necessary relationship characterised by proximity must exist between the party owing the duty and the party to whom it is owed.
This relationship was not present between the auditors and Caparo, a non-shareholding investor at the time of the audit.
The decision in Caparo v Dickman represents a balancing act between protecting the interests of investors and safeguarding professionals from unreasonable and unforeseeable extents of liability.
It clarified the boundaries of liability for negligence in the context of financial and professional services.
Caparo Industries Plc v Dickman has overruled Anns v Merton London Borough Council.
Conclusion
Caparo v Dickman is a seminal case that significantly shaped English law on negligence, particularly concerning the duty of care owed by auditors.
The decision in Caparo v Dickman clarified that auditors’ duty of care is limited to the company’s shareholders for specific purposes and does not extend to outside investors making investment decisions based on the audited accounts – see Percival v Wright (1902).
Caparo v Dickman addressed the scope of duty of care in relation to economic loss due to negligent misstatements and highlighted the need for a relationship characterised by proximity between the party owing the duty and the party to whom it is owed.
This case is crucial for understanding the limitations of liability in professional negligence, especially in the financial and auditing sectors
