Facts
In Caparo Industries plc v. Dickman [1990] 2 AC 605, the plaintiff, Caparo Industries, had taken over a company and sued the company’s auditors, Dickman, for negligence. Caparo alleged that it had relied on Dickman’s audit reports in connection with the takeover bid.
Issue
The key issue was whether Dickman’s audit reports could form the basis for a claim by Caparo for economic loss due to negligence.
Holding
The House of Lords ruled that liability for economic loss due to negligent misstatement is confined to cases where the statement or advice was given to a known recipient for a specific purpose, which the maker was aware of, and upon which the recipient had relied and acted to their detriment. In this case, Dickman was found not to owe Caparo a duty of care.
The Court held that defendants carrying out the statutory audit of a public company owe a duty of care (by contract) only to the company and, therefore, to the general body of shareholders as a collective. This duty does not extend to individual buyers of the company’s shares (even if they are existing shareholders) nor to creditors of the company.
While reliance on the accounts for such purposes is foreseeable, as Lord Bridge described it as highly probable, this foreseeability alone is not enough to establish a duty of care. Several reasons underlie this restrictive approach, including concerns over a multiplicity of claims and the ability of the liability insurance market to handle the potential risks of an inadequate audit. There is also the concern of fairness, with Lord Bridge noting that to hold the auditor liable to anyone who deals with the company based on the audit report would “confer on the world at large a quite unwarranted entitlement to appropriate for their own purposes the benefit of the expert knowledge or professional experience attributed to the maker of the statement,” for which they have not paid.
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