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Category: Insurance case law · Reviewed by Mark Fox, Broker · Renewals · Last reviewed June 2026
Caparo Industries plc v Dickman and others [1990] UKHL 2; [1990] 2 AC 605 — House of Lords, 1990.
Citation, court and year verified against the Supreme Court’s account of the decision in Steel and another v NRAM Ltd [2018] UKSC 13 at para 22, published by The National Archives, Find Case Law (https://caselaw.nationalarchives.gov.uk/uksc/2018/13).
Caparo Industries plc, a substantial investor, held shares in Fidelity plc, a listed company manufacturing electrical equipment. In May 1984 Fidelity announced disappointing results which caused its share price to fall sharply. On 12 June 1984 Fidelity published its audited accounts for the year ending 31 March 1984. The accounts had been prepared by the auditors Touche Ross (in the person of Dickman). They showed pre-tax profits of around £1.3 million whereas the market had been led to expect about £2.2 million.
Caparo began buying shares in Fidelity shortly before the audited accounts were issued and, after receiving them, increased its holding substantially. By September 1984 Caparo had acquired enough shares to mount a takeover bid, which it duly completed, taking Fidelity into its ownership.
Caparo subsequently alleged that the audited accounts had been negligently prepared and were misleading: the true position was a loss of over £400,000 rather than the reported profit. Caparo claimed that it had relied on the audited accounts both as an existing shareholder and as a potential bidder, and that, but for the negligent audit, it would not have proceeded with the takeover or would have paid much less.
Caparo brought proceedings against the auditors alleging that they owed a duty of care: (i) to Caparo as an existing shareholder in Fidelity; and (ii) to Caparo as a potential investor or bidder. The High Court struck out the action on the basis that no duty was owed to either category. The Court of Appeal (by a majority) allowed Caparo’s claim in respect of the existing shareholding but agreed there was no duty to it as a potential investor. The auditors appealed to the House of Lords; Caparo cross-appealed on the investor point.
The central issue was whether the auditors of a public company owed a duty of care in tort to: (i) individual shareholders of the audited company who relied on the audited accounts when making decisions to buy further shares; and (ii) members of the public at large who relied on the audited accounts when deciding whether to invest in the company.
A subsidiary but doctrinally important question was the proper formulation of the test for establishing a novel duty of care in negligence following the retreat from Anns v Merton London Borough Council [1978] AC 728 and the search for an analytical framework to confine liability for pure economic loss to manageable boundaries.
The House of Lords unanimously allowed the auditors’ appeal and dismissed Caparo’s cross-appeal. The auditors owed no duty of care either to existing shareholders making investment decisions or to potential investors.
Lord Bridge of Harwich, giving the leading speech, articulated what has come to be known as the threefold Caparo test for the existence of a duty of care: (i) the loss must be a reasonably foreseeable consequence of the defendant’s conduct; (ii) there must be a relationship of sufficient proximity or neighbourhood between the parties; and (iii) it must be fair, just and reasonable to impose a duty in the circumstances. His Lordship also emphasised that the law develops incrementally by analogy with established categories rather than by sweeping generalisation.
Applied to the facts, the statutory purpose of an audit under the Companies Act was to enable shareholders, as a class, to exercise informed control over the management of the company through general meetings, not to facilitate individual investment decisions. The proximity required for a duty to arise in respect of individual investment or takeover decisions was therefore lacking. To impose a duty in such circumstances would expose auditors to indeterminate liability to an indeterminate class.
Lord Oliver added that the necessary ingredients for proximity in cases of negligent statement included that the adviser knew the statement would be communicated to the recipient for a particular purpose and that it would very likely be relied on for that purpose.
To establish a novel duty of care in the tort of negligence, particularly for pure economic loss caused by statements, a claimant must show foreseeability of damage, a relationship of proximity between the parties, and that the imposition of a duty is fair, just and reasonable. The statutory audit of a company’s accounts is undertaken to enable the body of shareholders to exercise collective rights of supervision; it does not give rise to a duty of care owed to individual shareholders or members of the public who use the accounts for personal investment decisions.
Caparo is the principal modern restatement of the law of negligence in England and Wales and is central to professional indemnity practice. By constraining the scope of duty owed by professionals to third parties, the decision provides a doctrinal counterweight to Hedley Byrne and limits the universe of foreseeable claimants whose claims a PI insurer might have to meet.
For PI underwriters and brokers, Caparo matters in three principal ways. First, the proximity requirement means that engagement letters which clearly identify the recipient and purpose of professional output materially shape exposure; conversely, advice or reports circulated widely without controls can expand the duty owed. Second, the fair, just and reasonable limb gives professionals room to argue against new categories of liability on policy grounds, which is particularly relevant for emerging risks (cyber, ESG, AI-assisted advice). Third, the case is the starting point for any analysis of whether third-party claims fall within cover under a civil liability wording.
Insurers frequently invoke Caparo when defending claims by lenders, investors, purchasers and other reliant third parties against auditors, valuers, lawyers and consultants. While Smith v Eric S Bush and White v Jones show that Caparo did not extinguish all third-party duties, the framework laid down here remains the foundational test against which any novel duty argument is judged.
By Apex Insurance Brokers on 2026-06-06. Next review: 2026-12-06.
This entry is part of the Apex Insurance Wiki. Last reviewed by Apex Insurance Brokers on 2026-06-06. Apex Insurance Brokers Limited, FCA FRN 724952, Companies House 07014570. Not regulated advice — consult your broker on your specific position.
| Case | What it decided | Effect on who may sue a professional |
|---|---|---|
| Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465 (House of Lords) | A duty of care can arise for a statement causing purely financial loss where the maker assumes responsibility for it and the recipient relies on it. | Opened liability to people who rely on professional work without any contract. |
| Caparo Industries plc v Dickman [1990] 2 AC 605 (House of Lords) | Duty is tested by foreseeability of damage, proximity, and whether it is fair, just and reasonable to impose liability. Auditors owed no duty to an investor who relied on the audited accounts. | Narrowed the class of people to whom a duty is owed. |
| Smith v Eric S Bush [1990] 1 AC 831 (House of Lords) | A valuer instructed by a prospective mortgagee to value a modest house owed a duty of care to the borrower, and the disclaimer did not satisfy the requirement of reasonableness. | Extended duty to a party who never instructed the professional. |
| Steel and another v NRAM Ltd [2018] UKSC 13 | No assumption of responsibility arose for a careless misrepresentation about a fact wholly within the recipient’s own knowledge. | Limits third-party claims where the recipient could readily have checked the statement. |
Sources: the Supreme Court’s account of these authorities in Steel and another v NRAM Ltd [2018] UKSC 13 and URS Corporation Ltd v BDW Trading Ltd [2025] UKSC 21, and the Court of Appeal’s in Robinson v P E Jones (Contractors) Ltd [2011] EWCA Civ 9, published by The National Archives, Find Case Law.
A threefold enquiry: whether damage to the claimant was foreseeable if the advice was given negligently, whether there was a sufficiently proximate relationship between the parties, and whether it is fair, just and reasonable to impose liability. The Supreme Court set the test out in these terms in Steel v NRAM Ltd.
No. The House of Lords held that the auditors of a company’s accounts did not owe a duty to an investor who took over the company in reliance on those accounts. As the Supreme Court later put it, a duty owed to shareholders for some purposes does not extend to every loss.
Because it governs who can sue a professional at all. The scope of the class of people to whom a duty is owed is one of the main determinants of a firm’s exposure, and therefore of the limit of indemnity it needs.
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