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Caparo Industries v. Dickman (1990) is a landmark House of Lords case that established the modern three-stage test for determining when a duty of care exists in negligence. This case refined the neighbor principle from Donoghue v. Stevenson and created the framework still used today in English tort law.
Caparo Industries plc v. Dickman [1990] 2 AC 605, [1990] 1 All ER 568 (HL)
Caparo Industries was a shareholder in Fidelity plc and was considering making a takeover bid for the company. Caparo relied on the annual accounts of Fidelity, which had been audited by Touche Ross (the defendants), showing a pre-tax profit of £1.3 million.
Based on these accounts, Caparo increased its shareholding and eventually took over Fidelity. However, it was later discovered that the accounts were inaccurate and that Fidelity had actually made a loss of £400,000. The accounts had been negligently prepared and audited.
Caparo sued the auditors for negligence, claiming they had suffered financial losses by relying on the inaccurate accounts when making their investment and takeover decisions.
Did the auditors owe a duty of care to existing shareholders who relied on the audited accounts to make investment decisions, and what is the proper test for establishing a duty of care in negligence?
A duty of care in negligence exists only if three conditions are satisfied: (1) the harm must be reasonably foreseeable; (2) there must be sufficient proximity between the parties; and (3) it must be fair, just, and reasonable to impose a duty of care in all the circumstances.
No. The House of Lords held that the auditors did not owe a duty of care to Caparo. While the loss was foreseeable, there was insufficient proximity between the parties, and it would not be fair, just, and reasonable to impose liability in these circumstances.
The House of Lords established the three-stage test and applied it to the facts:
The court distinguished between the statutory purpose of audited accounts (regulatory compliance and general information) and the specific purpose for which Caparo used them (investment decisions). The auditors had no knowledge that Caparo specifically would rely on the accounts for takeover purposes.
The decision emphasized that the three-stage test provides a more structured approach than the broad neighbor principle, allowing courts to consider policy factors in the third stage.
Caparo Industries v. Dickman has had profound impact on negligence law:
The case represents a more conservative approach to duty of care than some earlier decisions, emphasizing the need for clear boundaries in negligence liability. It remains the leading authority on duty of care in English law.
The three-stage test requires: (1) reasonable foreseeability of harm, (2) sufficient proximity between the parties, and (3) that it be fair, just, and reasonable to impose a duty of care. All three elements must be satisfied.
Proximity refers to the closeness of the relationship between the parties, both in terms of physical/temporal closeness and the directness of the relationship. It's more than just foreseeability - there must be a sufficiently close connection.
The "fair, just, and reasonable" test allows courts to consider policy factors and prevent liability that might be technically foreseeable and proximate but would be unfair or harmful to society, such as indeterminate liability to unlimited classes of people.
The three-stage test refines and structures the neighbor principle from Donoghue v. Stevenson. Rather than asking broadly about neighbors, it provides specific criteria to determine when a duty of care should exist.
Explore more cases on negligence and duty of care to understand how courts apply the three-stage test.