Facts
Caparo Industries bought shares in Fidelity plc, a company whose accounts had been audited by Touche Ross (the defendants included the auditors and Fidelity's directors). Caparo relied on the audited accounts, which showed a pre-tax profit of about £1.3 million. It went on to buy more shares and make a successful takeover bid.
In fact, Fidelity had made a loss of around £400,000. Caparo said it had paid far too much and sued the auditors in negligence, claiming they owed a duty of care both as an existing shareholder and as a potential investor.
Issue
Did auditors who prepare a company's statutory accounts owe a duty of care to existing shareholders or members of the public who rely on those accounts to buy shares?
Decision
The House of Lords held that no duty of care was owed to Caparo, either as an existing shareholder or as a potential investor.
Reasoning
Pure economic loss through statements. Caparo's loss was purely financial, caused by relying on a statement. The law is cautious about such claims, because statements can be relied on by an unlimited number of people for an unlimited range of purposes.
The purpose of the accounts. Under the Companies Act 1985, audited accounts were prepared for the company's shareholders as a body, so they could exercise their governance rights, such as holding the directors to account. They weren't prepared to help individuals decide whether to buy shares. An auditor who reports for that statutory purpose doesn't assume responsibility to everyone who might use the accounts for something else.
Proximity. To owe a duty for a negligent statement, the defendant usually needs to know that the statement will be communicated to the claimant, specifically or as a member of an identifiable class, in connection with a particular transaction, and that the claimant is likely to rely on it. That wasn't the case here.
The three factors. Lord Bridge described the ingredients of a duty as foreseeability of damage, a relationship of proximity, and a situation where it is fair, just and reasonable to impose a duty. He added that the law should develop new categories of negligence incrementally, by analogy with established ones.
Why it matters
Caparo became the most cited case on duty of care for nearly 30 years. Its "three-stage test" was widely used as a checklist in every negligence case.
In Robinson v Chief Constable of West Yorkshire Police [2018] UKSC 4, the Supreme Court corrected that reading. Where a duty is already established, as for physical injury caused by positive acts, courts simply apply it. The Caparo factors matter in novel situations, guiding incremental development.
Caparo remains central to negligent misstatement and pure economic loss, alongside Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465 (assumption of responsibility) and later cases such as Customs and Excise Commissioners v Barclays Bank plc [2006] UKHL 28.
How it comes up in exams
Look for these signals:
- Pure economic loss caused by a statement or advice: start with Hedley Byrne and Caparo. Ask who the statement was made to, for what purpose, and whether the defendant knew it would be relied on for this transaction.
- A novel duty situation: use the Caparo factors, but frame them as Robinson requires, reasoning by analogy from decided cases.
- An established duty (for example, a driver to other road users): don't apply Caparo at all. Cite the established category and move on.
Frequently asked questions
What was decided in Caparo v Dickman?
The House of Lords held that auditors owed no duty of care to Caparo, which had relied on the audited accounts to buy shares and launch a takeover. The accounts' statutory purpose was to inform shareholders as a body, not to guide investors.
What is the Caparo test?
It's usually described as three stages. The damage must be reasonably foreseeable, there must be sufficient proximity between the parties, and it must be fair, just and reasonable to impose a duty. Lord Bridge also stressed developing new duties incrementally, by analogy with existing ones.
Is the Caparo test still used?
In novel cases, its factors are still relevant. But in Robinson v Chief Constable of West Yorkshire Police [2018] UKSC 4, the Supreme Court said courts shouldn't apply it as a universal test where a duty is already well established.
How does Caparo relate to Hedley Byrne v Heller?
Both concern liability for careless statements causing pure economic loss. Hedley Byrne recognised such liability where there's an assumption of responsibility; Caparo emphasised the purpose of the statement and whether the defendant knew it would be relied on for a particular transaction.