Caparo Industries Plc v Dickman

 
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[1990] UKHL J0208-2

House of Lords

Lord Bridge of Harwich

Lord Roskill

Lord Ackner

Lord Oliver of Aylmerton

Lord Jauncey of Tullichettle

Caparo Industries Plc
(Respondents)
and
Dickman and Others
(Appellants)
Caparo Industries Plc
(Original Cross-Respondents and Cross-Appellants)
and
Dickman and Others
(Original Appellants and Cross-Respondents)
Lord Bridge of Harwich

My Lords,

1

The appellants are a well-known firm of chartered accountants. At all times material to this appeal, they were the auditors of a public limited company, Fidelity Plc. ("Fidelity"), which carried on business as manufacturers and vendors of electrical equipment of various kinds and whose shares were quoted on the London Stock Exchange. On 22 May 1984 the directors of Fidelity announced the results for the year ended 31 March 1984. These revealed that profits for the year fell well short of the figure which had been predicted, and this resulted in a dramatic drop in the quoted price of the shares which had stood at 143p per share on 1 March 1984 and which, by the beginning of June 1984, had fallen to 63p. Fidelity's accounts for the year to 31 March 1984 had been audited by the appellants and had been approved by the directors on the day before the results were announced. On 12 June 1984 they were issued to the shareholders, with notice of the annual general meeting, which took place on 4 July 1984 and at which the auditor's report was read and the accounts were adopted.

2

Following the announcement of the result, the respondent Caparo Industries Plc. ("Caparo") began to purchase shares of Fidelity in the market. On 8 June 1984 they purchased 100,000 shares but they were not registered as members of Fidelity until after 12 June 1984 when the accounts were sent to shareholders although they had been registered in respect of at least some of the shares which they purchased by the date of the annual general meeting, which they did not attend. On 12 June 1984, they purchased a further 50,000 shares, and by 6 July 1984 they had increased their holding in Fidelity to 29.9 per cent. of the issued capital. On 4 September 1984 they made a bid for the remainder at 120p per share, that offer being increased to 125p per share on 24 September 1984. The offer was declared unconditional on 23 October 1984, and two days later Caparo announced that it had acquired 91.8 per cent. of the issued shares and proposed to acquire the balance compulsorily, which it subsequently did.

3

The action in which this appeal arises is one in which Caparo alleges 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 £1.3m. should in fact have been shown as a loss of over £400,000. Had the true facts been known, it is alleged, Caparo would not have made a bid at the price paid or indeed at all. Caparo accordingly commenced proceedings on 24 July 1985 against two of the persons who were directors at the material time, claiming that the overvaluations were made fraudulently, and against the appellants, claiming that they were negligent in certifying, as they did, that the accounts showed a true and fair view of Fidelity's position at the date to which they related. The substance of the allegation against the appellants is contained in paragraph 16 of the statement of claim which is in the following terms:

"Touche Ross, as auditors of Fidelity carrying out their functions as auditors and certifiers of the accounts in April and May 1984, owed a duty of care to investors and potential investors, and in particular to Caparo, in respect of the audit and certification of the accounts. In support of that duty of care Caparo will rely upon the following matters:

"'(1) Touche Ross knew or ought to have known (a) that in early March 1984 a press release had been issued stating that profits for the financial year would fall significantly short of £2.2m., (b) that Fidelity's share price fell from 143p per share on 1 March 1984 to 75p per share on 2 April 1984, (c) that Fidelity required financial assistance.

(2) Touche Ross therefore ought to have foreseen that Fidelity was vulnerable to a take-over bid and that persons such as Caparo might well rely on the accounts for the purpose of deciding whether to take over Fidelity and might well suffer loss if the accounts were inaccurate.'"

4

On 6 July 1987, Sir Neil Lawson, sitting as judge in chambers, made an order for the trial of a preliminary issue, as follows:

"Whether on the facts set out in paragraphs 4 and 6 and in sub-paragraphs (1) and (2) of paragraph 16 of the statement of claim herein, the third defendants, Touche Ross & Co., owed a duty of care to the plaintiffs, Caparo Industries Plc, (a) as potential investors in Fidelity Plc.; or (b) as shareholders in Fidelity Plc from 8 June 1984 and/or from 12 June 1984; in respect of the audit of the accounts of Fidelity Plc. for the year ended 31 March 1984 published on 12 June 1984."

5

Paragraphs 4 and 6 of the Statement of Claim are those paragraphs in which are set out the purchases of shares by Caparo to which I have referred and in which it is claimed that the purchases made after 12 June 1984 were made in reliance upon the information contained in the accounts. There is, however, one correction to be made. Paragraph 4 alleges that the accounts were issued on 12 June 1984 "to shareholders, including Caparo" but it is now accepted that at that date Caparo, although a purchaser of shares, had not been registered as a shareholder in Fidelity's register of members.

6

On the trial of this preliminary issue Sir Neil Lawson, sitting as a judge of the Queen's Bench Division, held [1988] B.C.L.C. 387 (i) that the appellants owed no duty at common law to Caparo as investors and (ii) that, whilst auditors might owe statutory duties to shareholders as a class, there was no common law duty to individual shareholders such as would enable an individual shareholder to recover damages for loss sustained by him in acting in reliance upon the audited accounts.

7

Caparo appealed to the Court of Appeal [1989] Q.B. 653 which, by a majority (O'Connor L.J. dissenting) allowed the appeal holding that, whilst there was no relationship between an auditor and a potential investor sufficiently proximate to give rise to a duty of care at common law, there was such a relationship with individual shareholders, so that an individual shareholder who suffered loss by acting in reliance on negligently prepared accounts, whether by selling or retaining his shares or by purchasing additional shares, was entitled to recover in tort. From that decision the appellants now appeal to your Lordships' House with the leave of the Court of Appeal, and the respondents cross-appeal against the rejection by the Court of Appeal of their claim that the appellants owed them a duty of care as potential investors.

8

In determining the existence and scope of the duty of care which one person may owe to another in the infinitely varied circumstances of human relationships there has for long been a tension between two different approaches. Traditionally the law finds the existence of the duty in different specific situations each exhibiting its own particular characteristics. In this way the law has identified a wide variety of duty situations, all falling within the ambit of the tort of negligence, but sufficiently distinct to require separate definition of the essential ingredients by which the existence of the duty is to be recognised. Commenting upon the outcome of this traditional approach, Lord Atkin, in his seminal speech in Donoghue v. Stevenson [1932] A.C. 562, 579-580, observed:

"The result is that the courts have been engaged upon an elaborate classification of duties as they exist in respect of property, whether real or personal, with further divisions as to ownership, occupation or control, and distinctions based on the particular relations of the one side or the other, whether manufacturer, salesman or landlord, customer, tenant, stranger, and so on. In this way it can be ascertained at any time whether the law recognises a duty, but only where the case can be referred to some particular species which has been examined and classified. And yet the duty which is common to all the cases where liability is established must logically be based upon some element common to the cases where it is found to exist."

9

It is this last sentence which signifies the introduction of the more modern approach of seeking a single general principle which may be applied in all circumstances to determine the existence of a duty of care. Yet Lord Atkin himself sounds the appropriate note of caution by adding, at p. 580:

"To seek a complete logical definition of the general principle is probably to go beyond the function of the judge, for the more general the definition the more likely it is to omit essentials or to introduce non-essentials."

10

Lord Reid gave a large impetus to the modern approach in Dorset Yacht Co. Ltd. v. Home Office [1970] A.C. 1004, 1026-1027, where he said:

"In later years there has been a steady trend towards regarding the law of negligence as depending on principle so that, when a new point emerges, one should ask not whether it is covered by authority but whether recognised principles apply to it. Donoghue v. Stevenson [1932] A.C. 562 may be regarded as a milestone, and the well-known passage in Lord Atkin's speech should I think be regarded as a statement of principle. It is not to be treated as if it were a statutory definition. It will require qualification in new circumstances. But I think that the time has come when we can and should say that it ought to apply unless...

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