Caparo v Dickman

Caparo Industries plc v Dickman [1990] 2 AC 605 is the House of Lords decision that established the tripartite test for the existence of a duty of care in negligence — foreseeability of damage, sufficient proximity between the parties, and that the imposition of a duty is fair, just and reasonable — and that confined the duty owed by auditors to the company itself and to its existing shareholders as a body.

Definition §

Caparo Industries plc v Dickman is the leading authority on the existence of a duty of care in the tort of negligence, particularly in cases of pure economic loss arising from professional advice or information ^[1]. The House of Lords laid down a three-stage test: damage must be reasonably foreseeable, there must be a relationship of proximity between the claimant and the defendant, and it must be fair, just and reasonable for the court to impose a duty in the circumstances.

On the facts of the case, the House of Lords held that the auditors of a public company did not owe a duty of care to potential investors who relied on the statutory accounts in purchasing shares, nor to existing shareholders who increased their holdings on the strength of the accounts. The duty was owed only to the company itself and to its shareholders as a body for the purpose of exercising their rights of supervision and control over the company. The case substantially restricted the broader formulation in Hedley Byrne v Heller in respect of statements that pass beyond their intended recipient ^[2].

The decision is fundamental to the law of professional negligence and to the underwriting of professional indemnity insurance, because it defines the universe of persons who may bring a claim against the insured for pure economic loss caused by negligent advice or information.

Legal / Regulatory basis §

The case concerned the auditors of Fidelity plc, a public company in which Caparo Industries plc had begun to acquire shares. Caparo first bought shares on the market on the strength of the company's published accounts and subsequently launched a successful takeover bid. After acquiring control Caparo alleged that the accounts had been materially misleading and that the company was worth less than it had paid. Caparo sued the auditors in negligence, asserting a duty of care both as an investor and as an existing shareholder.

Lord Bridge of Harwich identified the three elements that, together with the standard incremental approach, are now known as the Caparo test: 'In addition to the foreseeability of damage, necessary ingredients in any situation giving rise to a duty of care are that there should exist between the party owing the duty and the party to whom it is owed a relationship characterised by the law as one of "proximity" or "neighbourhood" and that the situation should be one in which the court considers it fair, just and reasonable that the law should impose a duty of a given scope upon the one party for the benefit of the other' ^[1].

Applying the test to the facts, the House of Lords held that the statutory purpose of the audit, derived from the Companies Acts (now consolidated in the Companies Act 2006 ^[3]), was to enable shareholders to exercise their collective rights — to consider whether to approve the accounts, to call directors to account, and to remove and replace them — not to provide investment advice to individual shareholders or to outsiders. The relationship between auditors and individual investors lacked the necessary proximity for a duty of care.

The decision builds on, but restricts, Hedley Byrne by tying the existence of the duty to the purpose for which the statement was made and the class of persons known to the maker to be likely to rely on it ^[2]. It also marks the rejection of the broader 'just and reasonable' test in Anns v Merton London Borough Council ^[4], which was further confined in Murphy v Brentwood District Council ^[5].

How it works in practice §

For PI underwriters and brokers, the practical significance of Caparo lies in identifying who is, and is not, able to sue the insured for pure economic loss in negligence.

The starting point in every PI claim involving advice or information given to one party but relied on by another is the Caparo purpose-and-class enquiry. Where the statement was provided to a defined client for a defined purpose, and the claimant is the client using the statement for that purpose, the duty is straightforward. Where the statement passes to a third party, the question is whether the maker knew or ought to have known that the statement would be communicated to that third party (or to a class of persons of which that third party is a member) for the purpose for which it was in fact used.

In practice this analysis governs the response to a wide range of professional negligence claims. A lender suing the borrower's valuer must show that the valuer knew the report was for the lender's lending decision (Smith v Eric S Bush) ^[6]. A purchaser of shares suing the company's auditors faces the high Caparo threshold for outsiders. A beneficiary suing a solicitor for negligent will drafting relies on the extended duty recognised in White v Jones ^[7], which is consistent with Caparo because the deceased testator's purpose was specifically to benefit the disappointed beneficiary.

The professional firm's engagement letter and addressee provisions remain the strongest tool for managing the Caparo duty. A report addressed to a named recipient, for a specified transaction, with an express statement that no other party may rely on it, narrows the class of persons to whom the Caparo duty may extend and reinforces the position should an outsider attempt to sue.

For PI claims handling, Caparo informs the strategy for early reasoned defences. If the claimant cannot show that the report was addressed to or made for the purpose now relied on, the duty enquiry can be brought forward on summary judgment or strike-out, potentially limiting defence costs.

Common variations §

Statutory audit context. Caparo itself concerned the statutory audit. The strict outcome on the facts — no duty to investors or to existing shareholders increasing holdings — remains good law and is the starting point for any investor claim against auditors.

Bespoke retainer context. Where an auditor or advisor undertakes work outside the statutory audit (for example, a vendor due diligence report addressed to a buyer), a Hedley Byrne duty may exist to the addressee within the Caparo framework, because the purpose-and-class test is satisfied.

Valuer to lender. Smith v Eric S Bush applies the Caparo analysis to a duty owed by a residential mortgage valuer to a borrower who reasonably foreseeably relied on the valuation ^[6]. The same logic extends to commercial valuations addressed to lenders.

Solicitor to disappointed beneficiary. White v Jones recognises a duty to disappointed beneficiaries where the solicitor was instructed to confer a benefit on them by the testator and failed to do so ^[7].

Subsequent owners of property. Murphy v Brentwood District Council substantially confined any duty in negligence owed to subsequent owners of defective premises ^[5].

Example §

An illustrative example: a firm of corporate finance advisers prepares a confidential vendor due diligence report on a target company for the seller. The report is shared, with the seller's permission, with a single named bidder identified in the engagement letter. The bidder relies on the report and acquires the target for £25m. After completion the bidder discovers that the report materially misstated the recurring revenue. A loss of £4m (illustrative only) is alleged.

A Caparo analysis would identify the bidder as a member of a class known to the advisers — indeed expressly named in the engagement — and identify the purpose as the bidder's acquisition decision ^[1]. A duty of care is therefore likely to exist, subject to any contractual limitation of liability in the reliance letter. If, however, the seller had shared the report with a different bidder not named in the engagement, the duty enquiry would be less straightforward and the advisers might have a Caparo defence on lack of proximity. The PI claim falls within a civil liability wording subject to limit and excess.

See also §

• /wiki/hedley-byrne-v-heller/ — the underlying duty for negligent misstatement
• /wiki/breach-of-duty-of-care/ — the second element of negligence
• /wiki/bolam-test/ — standard of care for breach
• /wiki/bolitho-test/ — logical analysis qualification
• /wiki/civil-liability/ — modern PI trigger
• /wiki/negligent-act-error-or-omission/ — narrower PI trigger
• /wiki/professional-indemnity-insurance/ — parent product

References §

1. ↑ Caparo Industries plc v Dickman [1990] 2 AC 605 (HL)
2. ↑ Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465 (HL)
3. ↑ Companies Act 2006 — https://www.legislation.gov.uk/ukpga/2006/46
4. ↑ Anns v Merton London Borough Council [1978] AC 728 (HL)
5. ↑ Murphy v Brentwood District Council [1991] 1 AC 398 (HL)
6. ↑ Smith v Eric S Bush [1990] 1 AC 831 (HL)
7. ↑ White v Jones [1995] 2 AC 207 (HL)