Caparo Industries plc v Dickman [1990] 2 AC 605 was itself an auditor case. The claimant bought shares in a target and alleged the audited accounts had overstated profit. The House of Lords held that the auditors owed no duty of care to a bidder relying on the statutory accounts to value a takeover. The decision set the tripartite test that governs when a professional who produces a statement is liable to a third party who reads it.
For accountants and auditors the case shapes every question about who, beyond the audit client, can recover when the numbers turn out to be wrong.
Caparo asks three things. Was the loss to this claimant reasonably foreseeable? Was there sufficient proximity between the professional and the claimant? Is it fair, just and reasonable to impose a duty? In Caparo itself foreseeability was satisfied, but proximity failed. The accounts were prepared for the statutory purpose of allowing existing shareholders, as a class, to exercise governance rights at the AGM. They were not communicated for the very purpose of being relied on by a bidder valuing a takeover.
The purpose-of-statement test is the heart of the proximity limb. The question is not whether reliance was foreseeable in the abstract. It is whether the statement was communicated to the claimant for the very transaction, or type of transaction, on which the claimant acted.
Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465 sits behind Caparo. It establishes that a professional who gives information knowing the recipient will rely on it can owe a duty in tort even without a contract. Williams v Natural Life Health Foods Ltd [1998] 1 WLR 830 refined the assumption-of-responsibility analysis: the test is objective, focused on what the professional conveyed about the basis on which they were acting. An auditor who knows the report is going to a named lender for a specific facility is much closer to assumption of responsibility than one whose accounts simply end up on Companies House.
Galoo Ltd v Bright Grahame Murray [1995] 1 All ER 16 added the causation overlay. Even where a duty exists, the auditor is only liable for loss caused by the negligence in a legally meaningful sense, not for trading losses the company would have made anyway. The point sits alongside the SAAMCO scope-of-duty limit covered in a separate entry.
An auditor signs off a small company's accounts knowing the directors will hand them to a named bank to negotiate an invoice-discounting facility. The auditor speaks to the bank's relationship manager. The accounts overstate profit because of a stock error. The bank lends, the company fails, the bank suffers loss.
Change one fact. The lender never spoke to the auditor. It pulled the same filed accounts off Companies House two years later when assessing an unrelated facility. Proximity fails. The accounts were not communicated to that lender for that purpose. Caparo applies and there is no duty, however foreseeable harm to lenders in general might be.
Royal Bank of Scotland plc v Bannerman Johnstone Maclay [2005] CSIH 39 was a Scottish Inner House decision in which auditors were held to owe a duty to a bank the audit firm knew was relying on the accounts. The case prompted the audit profession to add a standard paragraph to audit reports, known as a Bannerman clause, disclaiming responsibility to anyone other than the company's members as a body. It does not extinguish every duty in every fact pattern, but it shifts the proximity analysis by signalling no third-party responsibility.
Engagement letter drafting matters as much as the audit work. A clear scope, a defined purpose, a list of intended recipients, and an explicit exclusion of third-party reliance all feed into the Caparo analysis. Where a third party is to be permitted to rely, a separate reliance letter brings that party inside the duty on agreed terms.
Apex Insurance Brokers Limited is authorised and regulated by the Financial Conduct Authority. Firm reference number 724952. This entry is general information, not advice on any particular policy.