NEGLIGENCE, DUTY OF CARE AND THE RISE OF THE TRIPARTITE TEST IN
REFERENCE TO CAPARO INDUSTRIES PLC VS DICKMAN.
Citation: Caparo Industries plc v Dickman (1990) 2 AC 605 (HL)
The issue concerning breach of duty of care is key concern when discussing about
negligence in various circumstances and the case of Caparo Industries plc v Dickman is one
of the cases that have contributed vastly in shaping how negligence cases are to be handled.
The Facts in this case were as follows; in the mid-1980s, Caparo Industries plc had begun
purchasing shares from Fidelity plc; a public limited company that carried on business as
manufacturers and vendors of electrical appliances of different kind whose share prices had
been stated in the London stock exchange market whereby the price was outlined to be
143p per share. By 8th June 1984 Caparo had acquired 100,000 shares then went ahead and
purchased 50,000 more shares by 12th June 1984 when the shareholders general meeting
was carried out. By 6th July the same year Caparo had already occupied 29.9% of the issued
capital. Later they went further and proposed a bid to purchase the rest of the shares in
order to take over the entire company shares which they accomplished as of 23 october
that year. However a controversy broke out when Caparo alleged that the purchases of
shares which took place after 12 June 1984 and the subsequent bid were all made in
reliance upon the accounts and that those accounts were inaccurate and misleading in a
number of respects and in particular in overvaluing stock and underproviding for after-sales
credits, with the result that an apparent pre-tax profit of some l.3m Euros which instead led
to them suffering a staggering loss of 400,000Euros.Caparo sued the auditors to acquire
remedies for the economic loss they faced due to the auditor’s negligence in preparing the
accounts reports. However, the common law found that the auditors owed no duty of care
to shareholders nor any potential investors like Caparo. This led to an appeal to the court of
appeal whereby a majority held that the auditors owed a duty of care to the plaintiff as a
shareholder of Fidelity plc not as a potential investor .This case further escalated through an
appeal by the auditors to the House of Lords which took its time for consideration before
coming up with the tripartite test to determine whether the Fidelitie’s auditors were liable
for Caparo’s economic losses.
, From the facts drawn from the case, several legal questions are triggered which gives rise to
the relevant legal issues in the case that need to be checked on;
1.Did the auditor of the accounts owe a duty of care to Caparo the shareholder of the
company?
2. Was there proximity between Dickman, the auditor, and the shareholders?
3. Did the defendant foresee the harm that would be resulted by his actions?
4. Was it fair, just and reasonable to impose such a duty?
Did the auditors owe Caparo, as an investor, a duty of care in negligence?
Firstly, Caparo industries relied on audited accounts supplied by Dickman to buy shares from
Fidelity Industries. One of the questions that arises from this is –The auditors maintained
that their reports were meant for use by the shareholders and not meant to be used by
investors. Since neither of the parties were in a relationship of proximity to each other prior
to this, the judge ruled that Caparo was not owed a duty of care since the duty was to the
company and its shareholders, not the investors.
Can a claimant recover for pure economic loss, that is, loss of money without
accompanying physical damage, caused by negligent misstatements?
One can only recover money if there was a negligence of duty of care. This can only be
determined if the following conditions are met: There must be reasonable foresight of harm
arising from the defendants’ actions, the parties must be in a relationship of proximity and it
must be fair, just and reasonable to impose liability. However, in this case, there was no
relationship of proximity and reliance between Caparo and Dickman. Therefore, Caparo
could not recover the economic loss begotten from the bought investments from Fidelity.
To reach the final decision by the house of lords several case laws were used. However a
key one that closely relates to this one which would later be extrapolated is the neighbour
principle. Before Caparo Industries plc v Dickman (1990) 2 AC 605 (HL), courts have often
used the famous “Neighbour Principle" by Lord Atkin from the Donoghue v Stevenson (1932)
AC 562 (HL). The issue was with such the frameworks struggled to handle complex cases
such as the Caparo case which involved economic loss from negligent misstatements,
especially when the claimant wasn't in a direct relationship with the defendant.
Caparo refined the principle and narrowed it to a three-stage test as stated below. The
house of Lords introduced a structured test to determine whether a duty of care arose from
the mentioned case.
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REFERENCE TO CAPARO INDUSTRIES PLC VS DICKMAN.
Citation: Caparo Industries plc v Dickman (1990) 2 AC 605 (HL)
The issue concerning breach of duty of care is key concern when discussing about
negligence in various circumstances and the case of Caparo Industries plc v Dickman is one
of the cases that have contributed vastly in shaping how negligence cases are to be handled.
The Facts in this case were as follows; in the mid-1980s, Caparo Industries plc had begun
purchasing shares from Fidelity plc; a public limited company that carried on business as
manufacturers and vendors of electrical appliances of different kind whose share prices had
been stated in the London stock exchange market whereby the price was outlined to be
143p per share. By 8th June 1984 Caparo had acquired 100,000 shares then went ahead and
purchased 50,000 more shares by 12th June 1984 when the shareholders general meeting
was carried out. By 6th July the same year Caparo had already occupied 29.9% of the issued
capital. Later they went further and proposed a bid to purchase the rest of the shares in
order to take over the entire company shares which they accomplished as of 23 october
that year. However a controversy broke out when Caparo alleged that the purchases of
shares which took place after 12 June 1984 and the subsequent bid were all made in
reliance upon the accounts and that those accounts were inaccurate and misleading in a
number of respects and in particular in overvaluing stock and underproviding for after-sales
credits, with the result that an apparent pre-tax profit of some l.3m Euros which instead led
to them suffering a staggering loss of 400,000Euros.Caparo sued the auditors to acquire
remedies for the economic loss they faced due to the auditor’s negligence in preparing the
accounts reports. However, the common law found that the auditors owed no duty of care
to shareholders nor any potential investors like Caparo. This led to an appeal to the court of
appeal whereby a majority held that the auditors owed a duty of care to the plaintiff as a
shareholder of Fidelity plc not as a potential investor .This case further escalated through an
appeal by the auditors to the House of Lords which took its time for consideration before
coming up with the tripartite test to determine whether the Fidelitie’s auditors were liable
for Caparo’s economic losses.
, From the facts drawn from the case, several legal questions are triggered which gives rise to
the relevant legal issues in the case that need to be checked on;
1.Did the auditor of the accounts owe a duty of care to Caparo the shareholder of the
company?
2. Was there proximity between Dickman, the auditor, and the shareholders?
3. Did the defendant foresee the harm that would be resulted by his actions?
4. Was it fair, just and reasonable to impose such a duty?
Did the auditors owe Caparo, as an investor, a duty of care in negligence?
Firstly, Caparo industries relied on audited accounts supplied by Dickman to buy shares from
Fidelity Industries. One of the questions that arises from this is –The auditors maintained
that their reports were meant for use by the shareholders and not meant to be used by
investors. Since neither of the parties were in a relationship of proximity to each other prior
to this, the judge ruled that Caparo was not owed a duty of care since the duty was to the
company and its shareholders, not the investors.
Can a claimant recover for pure economic loss, that is, loss of money without
accompanying physical damage, caused by negligent misstatements?
One can only recover money if there was a negligence of duty of care. This can only be
determined if the following conditions are met: There must be reasonable foresight of harm
arising from the defendants’ actions, the parties must be in a relationship of proximity and it
must be fair, just and reasonable to impose liability. However, in this case, there was no
relationship of proximity and reliance between Caparo and Dickman. Therefore, Caparo
could not recover the economic loss begotten from the bought investments from Fidelity.
To reach the final decision by the house of lords several case laws were used. However a
key one that closely relates to this one which would later be extrapolated is the neighbour
principle. Before Caparo Industries plc v Dickman (1990) 2 AC 605 (HL), courts have often
used the famous “Neighbour Principle" by Lord Atkin from the Donoghue v Stevenson (1932)
AC 562 (HL). The issue was with such the frameworks struggled to handle complex cases
such as the Caparo case which involved economic loss from negligent misstatements,
especially when the claimant wasn't in a direct relationship with the defendant.
Caparo refined the principle and narrowed it to a three-stage test as stated below. The
house of Lords introduced a structured test to determine whether a duty of care arose from
the mentioned case.
Page | 1
