Caparo Industries plc v Dickman is a landmark case in English tort law that established the three-stage test for determining the existence of a duty of care in the context of negligence. The case was heard by the House of Lords (now the Supreme Court) in 1990 and has since been widely cited in legal jurisprudence.
The background of the case is as follows: Caparo Industries, a company that manufactured electrical equipment, purchased shares in Fidelity plc, a company that produced printed circuit boards. Caparo relied on the audited accounts of Fidelity, which were prepared by the accounting firm Ernst & Whinney (now Ernst & Young). However, it was later revealed that the accounts were misleading and Fidelity’s financial position was significantly worse than reported, resulting in a loss for Caparo. Caparo sued Ernst & Whinney for negligence, alleging that they had a duty of care to Caparo as a shareholder of Fidelity.
The central issue in the case was whether Ernst & Whinney owed a duty of care to Caparo. The House of Lords formulated a three-stage test to determine the existence of a duty of care, which has become known as the “Caparo test.” The three stages are:
- Foreseeability: It must be reasonably foreseeable that the defendant’s actions or omissions could cause harm to the plaintiff. In other words, the defendant must have reasonably anticipated that their conduct could harm the plaintiff.
- Proximity: There must be a relationship of proximity between the defendant and the plaintiff. Proximity can be established by physical closeness, a contractual relationship, or any other relevant relationship that creates a close connection between the parties.
- Fair, just, and reasonable: It must be fair, just, and reasonable to impose a duty of care on the defendant in the circumstances. This stage involves a policy-based assessment of whether it would be fair and reasonable to impose a duty of care on the defendant.
The House of Lords held that Ernst & Whinney did not owe a duty of care to Caparo. They concluded that there was no proximity between the parties, as the audited accounts were prepared for the benefit of Fidelity’s shareholders as a whole and not specifically for Caparo. The court also held that it would not be fair, just, and reasonable to impose a duty of care on Ernst & Whinney, as it would open auditors to an indeterminate and potentially unlimited liability to shareholders of their clients.
The Caparo test has since been widely followed and applied in subsequent cases to determine whether a duty of care exists in various scenarios. It has provided clarity and guidance for courts in determining the scope of a duty of care in negligence claims, and remains an important precedent in English tort law.