ASSIGNMENT – LAW OF TORTS AND CONSUMER PROTECTION

SUBJECT CODE: LLB 104

TOPIC – CAPARO INDUSTRIES PLC V DICKMAN

Department of Law Trinity Institute of

Submitted to: Submitted by:

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 ACCKNOWLEDGEMENT

I would like to express my heartfelt gratitude to all those who have contributed to the completion
of this assignment.

First and foremost, I extend my deepest appreciation to my professor, Ms.Gaurika Sharma, for
her invaluable guidance and unwavering support throughout the duration of this assignment.

I am also grateful for the support and resources provided by Trinity Institute of Professional
Studies. The conducive academic environment has played a crucial role in the successful
completion of this assignment.

Finally, I am grateful to my family members, classmates and friends for proofreading my work
and catching several errors.

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 INDEX

S.No Particulars Page No.

4. Judgement 5-6

5. Significance 7

6. Caparo Three Part Test 7

7. Conclusion 8

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INTRODUCTION
The case of Caparo Industries PLC v Dickman1 is a landmark decision by the House of Lords
that established the modern legal test for determining whether a duty of care exists in negligence
cases. This case involved a claim by Caparo, a public company, against its auditors for negligent
misstatement in relation to the company's accounts. In this assignment, we will closely examine
the facts, legal issues, and reasoning behind the Caparo Industries v Dickman decision. The
analysis will study the three requirements laid out by Lord Bridge and evaluate the implications
and criticisms of this landmark precedent on the modern duty of care doctrine.

FACTS OF THE CASE

A company called Fidelity plc, manufacturers of electrical equipment, was the target of a
takeover by Caparo Industries plc. Fidelity was not doing well. In March 1984 Fidelity had
issued a profit warning, which had halved its share price. In May 1984 Fidelity's directors made
a preliminary announcement in its annual profits for the year up to March. This confirmed the
position was bad. The share price fell again. At this point Caparo had begun buying up shares in
large numbers.

In June 1984 the annual accounts, which were done with the help of the accountant Dickman,
were issued to the shareholders, which now included Caparo. Caparo reached a shareholding of
29.9% of the company, at which point it made a general offer for the remaining shares, as the
City Code's rules on takeovers required.

But once it had control, Caparo found that Fidelity's accounts were in an even worse state than
had been revealed by the directors or the auditors. It sued Dickman for negligence in preparing
the accounts and sought to recover its losses. This was the difference in value between the
company as it had and what it would have had if the accounts had been accurate.

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[1990] 2 AC 605
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LEGAL ISSUES OF THE CASE

 The key issue was whether the auditors owed a duty of care to Caparo with respect to the
audited accounts, given that Caparo was a third party and had no contractual relationship
with the auditors.
 While this case dealt specifically with duty of care in relation to negligent misstatement,
its ruling would have ramifications for other aspects of tort law, such as general
negligence
 The question before the House of Lords required their Lordships to scrutinise the
effectiveness of the duty of care test as articulated first in Donoghue v Stevenson2 and
then developed in Anns v Merton LBC3.

JUDGMENT

Judges: Lord Bridge of Harwich, Lord Roskill, Lord Ackner, Lord Oliver of Aylmerton and
Lord Jauncey of Tullichettle.
The House of Lords held that there was no duty of care, thereby allowing the appeal in favour of
Dickman. There was a duty of care owed by the accountants, but only to the governance of the
firm, not to existing or potential shareholders.
The duties of an auditor are derived from contract and must be understood in the context of the
relevant statutory provisions and the relevant auditing standards.
The duty of reasonable care is owed to the client company. This does not extend to shareholders,
who have their own legal relationship with the company.
While this was the factual finding of the court, the ratio of the decision had important
implications for the legal concept of establishing duty of care.
While previously the law began with the assumption that there is a duty of care and that harm is
foreseeable unless there is good reason to the contrary, the House of Lords held that the
assumption is that no duty is owed unless the criteria of three-stage test are satisfied.

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[1932] AC 562
3
[1978] AC 728

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The three factors which must exist in order for there to be a duty of care (otherwise known as the
‘tripartite test’) are:
1. Foreseeability - Was it foreseeable that the negligent statement would be relied upon by
the plaintiff for the purpose for which it was made?
2. Proximity - Was there a sufficiently close and proximate relationship between the
parties?
3. Fair, Just and Reasonable - Is it fair, just and reasonable in the circumstances to impose a
duty of care?
Lord Bridge, whose judgment outlined the tripartite test, also endorsed an ‘incremental
approach’ when determining duty of care. This means that each case should be considered on the
basis of analogy with earlier comparable categories of duty.
Their Lordships held that the case of Smith v Eric S Bush4 illustrated when a duty of care does
arise as an established category. In Smith, it was held that it was reasonable to impose a duty of
care for values of a property to the subsequent purchasers because this was such a
commonplace transaction, therefore it was foreseeable.
Applying these principles to this case, there would have to be knowledge that the shareholders or
investors would rely on the report in regards to the transaction.
In this case, an audit was carried out as part of a routine process, as opposed to an audit for
a specific purpose, such as in anticipation of a takeover. Therefore, the accountants could
not hold a duty of care to the entire public.
As identified in JEB Fasteners Ltd v Marks Bloom & Co5, this would ‘open the floodgates’ by
widening liability too far. Limitations for duty of care must be set, particularly in the case of pure
economic loss, in the absence of contractual agreements between parties.
Thus, the reasoning in this case can be summarised as a successful appeal because the
defendants /appellants did not have sufficient proximity to Caparo to establish duty of care.
Note that this reasoning means that there are circumstances in which an auditor might owe a duty
of care to shareholders, or specific shareholders, such as if an audit report was prepared for a
specific group. This was noted in Law Society v KPMG6.

SIGNIFICANCE

4
[1989] 2 WLR 790
5
[1983] 1 All ER 583
6
[2000] 4 ALL ER 540
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This case is highly influential as it established the modern three-part test for determining the
existence of a duty of care in negligent misstatement cases involving economic loss.
The "Caparo test" has been widely adopted and applied in common law jurisdictions.
The judgment emphasizes the importance of establishing a close and proximate relationship,
beyond mere foreseeability, in negligence claims.
It illustrates the court's reluctance to impose excessive liability on professionals toward an
indeterminate class of third parties.
While later cases have refined and clarified aspects of the Caparo test, it remains the leading
authority on the duty of care issue in negligent misstatement cases concerning economic loss.

CAPARO THREE-PART TEST

The case of Caparo Industries PLC v Dickman established the “Caparo three-part test” which is
used in English tort law to determine whether a duty of care exists in a particular situation. The
three parts of the test are as follows:
Foreseeability: The first part of the test requires that the harm or damage caused to the claimant
must have been foreseeable by the defendant. In other words, the defendant must have been able
to reasonably anticipate that their actions (or inactions) could have resulted in harm to the
claimant.
Proximity: The second part of the test considers whether there was sufficient proximity between
the defendant and the claimant for a duty of care to arise. This involves a consideration of the
relationship between the parties, including any legal or social ties that may exist.
Fairness, Justice and Reasonableness: The third part of the test considers whether it is fair,
just, and reasonable to impose a duty of care on the defendant in the circumstances. This
involves a consideration of the social and economic consequences of imposing a duty of care, as
well as the potential impact on the defendant.
The Caparo test is commonly used by the courts in determining whether a duty of care exists in
situations where negligence is alleged.
It is a flexible and context-specific test that allows the court to take into account all relevant
circumstances when determining whether a duty of care should be imposed.

CONCLUSION

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In conclusion, the Caparo v Dickman case set out an important legal test for when someone can
sue for being given incorrect or misleading information that caused them to lose money.
The court said there are three main things that must be proven:
 It was foreseeable that the wrong information would be relied upon by the person suing.
 There was a close relationship between the two parties involved.
 It is fair and reasonable in the circumstances to make the party who gave the wrong
information legally responsible.
Professionals like accountants and auditors could not be sued for negligence by just anyone who
relied on information they prepared. There had to be a special close relationship first.
The Caparo case was very influential in limiting when a duty of care exists for economic losses
caused by misleading statements. The strict requirements have sometimes been criticized as too
restrictive, but the "Caparo test" is still a major precedent in negligence law today.