ACCA F4 - Corp and Business Law (ENG)

116 7: The law of torts and professional negligence  Part B The law of obligations

Caparo Industries plc v Dickman and Others 1990

The facts: Caparo, which already held shares in Fidelity plc, bought more shares and later made a takeover

bid, after seeing accounts prepared by the defendants that showed a profit of £1.3m. Caparo claimed

against the directors and the auditors for the fact that the accounts should have shown a loss of £400,000.

The claimants argued that the auditors owed a duty of care to investors and potential investors in respect

of the audit. They should have been aware that a press release stating that profits would fall significantly

had made Fidelity vulnerable to a takeover bid and that bidders might well rely upon the accounts.

Decision: The auditor's duty did not extend to potential investors nor to existing shareholders increasing

their stakes. It was a duty owed to the body of shareholders as whole.

In the Caparo case the House of Lords decided that there were two very different situations facing a

person giving professional advice.

(a) Preparing information in the knowledge that a particular person was contemplating a transaction

and would rely on the information in deciding whether or not to proceed with the transaction (the

'special relationship').

(b) Preparing a statement for general circulation, which could forseeably be relied upon by persons

unknown to the professional for a variety of different purposes.

It was held therefore that a public company's auditors owe no duty of care to the public at large who rely

on an audit report when deciding to invest – and, in purchasing additional shares, an existing shareholder

is in no different position to the public at large.

In MacNaughton (James) Papers Group Ltd v Hicks Anderson & Co 1991, it was stated that it was

necessary to examine each case in the light of the following.

 Foreseeability

 Proximity

 Fairness

This is because there could be no single overriding principle that could be applied to all individual cases.

Lord Justice Neill set out the matters to be taken into account in considering this.

 The purpose for which the statement was made

 The purpose for which the statement was communicated

 The relationship between the maker of the statement, the recipient and any third party

 The size of any class to which the recipient belonged

 The state of knowledge of the maker

 Any reliance by the recipient

8.1 Non-audit role

The duty of care of accountants is held to be higher when advising on takeovers than when auditing. The

directors and financial advisors of the target company in a contested takeover bid owe a duty of care to a

known takeover bidder in respect of express representations made about financial statements prepared for

the purpose of contesting the bid on which they knew the bidder would rely: Morgan Crucible Co plc v Hill

Samuel Bank Ltd and others 1991.

8.2 The law since Caparo

A more recent case highlighted the need for a cautious approach and careful evaluation of the

circumstances when giving financial advice, possibly with the need to issue a disclaimer.