tort law Cases

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Case Summary of Caparo Industries plc v Dickman [1990] UKHL 2

Introduction

Caparo1 is the landmark case which has created the tripartite test in establishing duty of care2. This test departs from Donoghue v Stevenson3 and the Wilberforce test laid down in Anns v Merton London Borough Council4 which starts from the assumption that there is a duty of care and that harm was foreseeable unless there is good reason to judge otherwise5. Whereas Caparo starts from the assumption no duty is owed unless the criteria of the three stage test is satisfied. These criteria are: Foreseeability, Proximity and whether it is fair, just and reasonable to impose such a duty6. Yet this approach has been critiqued7 by over complicating "neighbour" principle in Donoghue. Moreover, there is an abundance of case law which moves away from the Caparo test altogether8.

Facts

A firm of accountants appealed against a decision of the Court of Appeal in which it was decided that the accountants owed a duty of care to the appellant shareholders when producing an audit report required by statute. The claim was for negligent misstatement. Caparo had bought shares in the company of which the report was about as part of a takeover. The appellant had relied upon the results of the report. However, it was later found that the results of the report had misrepresented the profits of the firm, in turn causing a loss for Caparo9.

Decision

The House of Lords reversed the decision of the COA and held that no duty of care had arisen in relation to existing or potential shareholders. The only duty of care the auditor`s owed was to the governance of the firm. It was found that three factors had to exist for there to be a duty of care which where: Proximity, Knowledge of who the report would have been communicated to and for what purposes it would have been used. Lord Bridge commented that cases where duty of care did arise10 was illustrated in Smith v Eric S Bush.11 The case holds the principle that it is reasonable to impose a duty of care for valuers of a property to those those purchasing a family home as this was commonplace. Finally, there had to be knowledge that the shareholders or investors would rely on the report in regards to the transaction. Furthermore, the judges noted that audit reports of plc`s are regularly carried out which differs from reports carried out for specific purposes and for an identified audience. Thus, the accountants owed no duty to the entire public who might or might not place reliance on the report when making financial decisions. Moreover, appointing liability would open the floodgates to society as JEB Fasteners Ltd v Marks Bloom & Co12 distinguished. Thusly, limitations have to be set when pure economic loss occurs in the absence of contractual agreements between parties. It is also noted that the judgement accepts that there are circumstances where an auditor will owe a duty of care in respect of reports produced. These are conditional that at the time the report is prepared that is known by the auditors that the results are for a specific class for a specific purpose13. This is acknowledged in Morgan Crucible v Hill Samuel14 and Law Society v KPMG Peat Marwick15.

Analysis

Although the facts of Caparo16 where based on the pure economic loss, the HOL developed the tripartite test in establishing a general duty of care.17Yet Lord Bridge acknowledged:

"The inability of any single general principle to provide a practical test which can be applied to every situation to determine whether a duty of care is owed and if so, what is its scope.18"

Thus rendering the general application unclear. This is poignant in cases of physical injury illustrated by Perrett v Collins19 in which the last two stages of the Caparo test where debated20. It was Hobhouse LJ who argued that adopting the stipulations of Caparo: "extended decisions upon `economic` loss to cases of personal injuries".21 Mirroring Lord Bridge in Caparo itself. Hobhouse LJ added that: "In the common law there has always been a distinct category for causing physical injury to the human body and to goods22". This distinction is echoed by many academics who state that personal loss is the very substance on which the law of negligence is established.23 Therefore, the courts contend that it is this reasoning that issues that derive from economic loss, are different from issues of personal loss .Furthermore, Lord Hobhouse uses case law which corresponds with the case rather than the tripartite test24. This stance is upheld by the dissenting opinion of Lord Lloyd in Mark Rich & Co. v Bishop Rock Marine25 who concluded that in order to resolve the case the clear-cut application of Donoghue need only apply.

This stance has been reiterated in the 21st Century, even in cases of pure economic loss.26 This is exemplified in Arthur JS Hall & Co. v Simons27, which mainly considers the third stage of the test, in which stage one and two where so obvious that discussion was left absent. This same approach in which judges see no reason to create a complicated three stage test is reverberated further in Customs & Excise v. Barclays Bank28. In the case it was considered whether the bank owed a duty of care when given knowledge that Customs had acquired a freezing order over the accounts of some of their customers. The judges ruled upon analysis of the third stage of the tripartite test29. Which has been regarded by some academics as: "A simple search for the best result30". Further examination of the tripartite test in regards to pure economic loss is considered by Lord Geoff in Henderson v Merrett Syndicates Ltd31 which is, Identified as falling within the "Hedley Byrne32 principle"33 in which the test of Caparo is set aside34.

Issues

To conclude the issues of the case is surmised perfectly by the legal stance in Coulthard and others v Neville35 which concludes that the application of Caparo is:

"In a state of transition or development as the HOL pointed out .... this is an area of law which is developing pragmatically and incrementally. It is pre-eminently an area in which the legal result is sensitive to the facts."

Thus, judges are more and more using their discretion not only in cases of physical injury but in cases of pure economic loss in order to achieve the best result deriving from the specifics of that case, limiting the scope and application of Caparo.

Footnotes

1 1990 UKHL 2

2 Mark Godfrey, `The categories of negligence revisited: Harrison v West of Scotland Kart Club & Noble v De Boer`. 2005 2 SLT 9

3 1932 UKHL 100

4 1978 AC 728

5 Kirsty Horsey & Erica Rackley , Tort Law (4th edn, OUP Oxford 2015) 60

6 Ibid at 66.

7 Mark Godfrey , `The categories of negligence revisited : Harrison v West of Scotland Kart Club & Noble v De Boer 9

8 Ibid at 9-15

9 1990 UKHL 2

10 Jenny Steele, Tort Law: Text Cases & Materials (3rd edn, OUP Oxford 2014). 369

11 1990 1 AC 831

12 1981 3 ALL ER 289

13 Jenny Steele, Tort Law: Text Cases & Materials (3rd edn, OUP Oxford 2014). 370

14 1991 1 ALL ER 148

15 2000 4 ALL ER 540

16 1990 UKHL 2

17 Mark Godfrey, `The categories of negligence revisited: Harrison v West of Scotland Kart Club & Noble v De Boer`. 2005 2 SLT 9

18 1990 UKHL 2 p 617

19 1998 2 Lloyd's Rep 255

20 Aleka Mandaraka-Sheppard, Modern Maritime Law: Managing Risks and Liabilities (2nd edn, CRC Press United States 2013) 381

21 1998 2 Lloyd's Rep 255

22 Ibid p 260

23 Nicolai I. Lagoni, The Liability of Classification Societies (Springer New York 2007) 131

24 Ibid. 131

25 1996 AC 211

26 Keith Stanton, `Professional negligence: A duty of care methodology in the 21st century`. 2006 22 (3) 135

27 2002 1 AC

28 2006 UKHL 28

29 Keith Stanton, `Professional negligence: A duty of care methodology in the 21st century`. 2006 22 (3) 135

30 Ibid. 136

31 1994 UKHL 5

32 Hedley Byrne & Co Ltd v Heller & Partners Ltd 1964 AC 465

33 1994 UKHL 5 p 181

34 Rt. Hon Lord Justice Buxton, ` How the Common Law gets made: Hedley Byrne and other cautionary tales`. 2009 125 LQR 60-78

35 1998 PLNR 276