After Caparo— Liability in Business Transactions Revisited
| Date | 01 September 1991 |
| DOI | http://doi.org/10.1111/j.1468-2230.1991.tb02667.x |
| Author | Mary Percival |
| Published date | 01 September 1991 |
After
Caparo
-
Liability in Business
Transactions Revisited
Mary
Percival*
In
view of
the
House of Lords’ preoccupation throughout the
1980s
with
curbing
the lower courts’ expansion of negligence after
Arms,'
its decision
in
Caparo
Industries
v
Dickmun2
was not unexpected. Essentially,
Capuro
held that anyone,
whether individual shareholder, general investor or institutional lender3 who makes
an investment or lending decision
in
reliance upon a negligently prepared or mis-
leading annual report and accounts which carry an unqualified opinion,
will
be unable
to sue the auditor for any 10sses.~ Given the range of commercial situations
in
which the services of accountants and other financial advisers are called upon,
Cupuro
could not, of course, provide a conclusive ruling on all matters concerning their
liability for negligent misstatement. Nevertheless,
it
is arguable that the House of
Lords intended that the maxim
caveat emptor
should always apply to transactions
involving the acquisition of shares, irrespective of the type of document which had
been relied upon.s On this interpretation,
in
the case of a takeover, the prudent
would-be predator should conduct its own investigation into a target company rather
than rely on information produced by the target company’s advisers.
It
is indicative
of the level
of
takeover activity
in
the
1980s
that the issue of liability for negligent
misstatement
in
such transactions should have re-emerged
so
soon after
Capuro.
The purpose of this note is to review two recent Court of Appeal decisions
in
this
area and then to consider both them and
Caparo
itself within a wider commercial
context.
James McNaughton Paper Group
v
Hicks Anderson
&
Co6
concerned the
friendly takeover of a small group of companies,
MK
Paper Group Holdings Ltd
IMK]
by the plaintiffs, a larger group
in
a related line of business. By
1982
MK
was
in
financial difficulties, and
in
June that year
MK’s
managing director had started
negotiations with the plaintiffs regarding a possible takeover. The acquisition of
the group was cotnpleted by the end of September and, shortly after, the plaintiffs
claimed, they became aware that
MK’s
financial position was far worse than they
had expected. Proceedings were eventually instituted against
MK’s
auditors, alleging
that a set of draft accounts which they had prepared and which were shown to the
plaintiffs, and upon which the plaintiffs had relied
in
acquiring
MK,
had negligently
*Division of Social Sciences and Law. Hatfield Polytcchnic.
Arrrts
v
Meriorr LBC
[
19781
AC
728.
[I9901
2
WLR
358.
Scc Martin
(1990)
53
MLR
824.
lhe court approved the decision of Millett
J
in
A1
Saudi
Bnrrqite
v
Clarke Pixley
[
19901
2
WLR
344
where he held that
an
auditor,
in
giving an opinion
on
a
company’s annual financial statements, owes
no duty of care
to
any bank which might rely upon them
in
considering whether
to
extend, continue
or renew credit facilities
to
the company.
Critics ofthe decision have argued that
its
narrow intcrpretation of the statutory purpose of the annual
financial statement (see text below) is difficult
to
reconcile with the requirement in
s
241(3)(a)
of
the Cornpanics Act
1985
for directors
to
file a copy
of
the report and accounts with the Registrar
of Companies (where they will be available for public inspection). Against this,
it
is
said,
a
right
of access to information cannot simply be equated
to
a
right
to
sue should such information prove
to be inaccurate: a line must be drawn somewhere beyond which reliance will be a matter of individual
responsibility, and boundaries are invariably arbitrary.
The suggestion that the position of takeover bidders was different from that of the ordinary investor
was rejected by the court. See the remarks of Lord Bridge at p
371
and Lord Olivcr at p
394.
[IYYI]
2
WLR
641.
739
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