Chapter 11Business and the law of tortMore recently, the courts have retreated from the
foresight test advocated by Woolf J in JEB Fastenersand
reaffirmed the requirement of knowledge of the user of
the statement and the purpose to which it will be put to
establish liability.
The law relating to the duty of care owed by profes-
sionals, such as accountants and auditors, is still being
developed. The following cases are examples of how the
extent of liability is being tested.345
were not liable because of the lack of a causal connec-
tion between the defendants’ alleged carelessness and
the claimants’ loss. It was, therefore, unnecessary to con-
sider Woolf J’s views on the scope of an accountant’s
liability when auditing company accounts.Caparo Industries plcv Dickman(1990)Caparo, which already held shares in Fidelity plc, acquired
more shares in the company and later made a takeover
bid on the strength of accounts prepared by the defend-
ant auditors. Caparo alleged that the accounts were
inaccurate in that they showed a pre-tax profit of £1.3
million when there had been a loss of £400,000. Caparo
claimed that, if they had known the true situation, they
would not have made a bid at the price they did, and
may not have made a bid at all. They argued that they
were owed a duty of care as new investors and as exist-
ing shareholders, who in reliance on the accounts had
bought more shares. The House of Lords held that no
duty was owed by auditors to members of the public in
general who might invest in a company in reliance on
published accounts. Although it was foreseeable that the
accounts might be used by members of the public con-
templating investing in the company, foreseeability alone
was not sufficient to create liability. If it were otherwise,
auditors might face almost unlimited liability. The purpose
of preparing audited accounts under the Companies Act
1985 is to provide shareholders with certain information
so that they can exercise their rights in respect of the
company, i.e. voting at company meetings. The auditors
did not owe a duty of care to individual shareholders,
such as Caparo (which used the information for a quite
different purpose), but to shareholders as a body. The
auditors were, therefore, not liable.
Comment. This judgment confirms that liability for a
negligent statement causing economic loss is based on
knowledge of the persons relying on the statement and
the likely purpose to which it will be put. If during a con-
tested takeover bid the directors and financial advisers
of a victim company make express statements to an
identifiable bidder intending them to be relied upon,
there will be sufficient proximity to establish a duty of care
(MorganCrucible Co plcv Hill Samuel Bank Ltd(1991)).Coulthardv Neville Russell(1998)A firm of accountants sought to have a statement of
claim in negligence against them struck out. It was
alleged that they had failed to advise the directors of a
company that a transaction that they intended to carry
out might be in breach of the financial assistance provi-
sions of the Companies Act 1985. The Court of Appeal
refused to strike out the claim as there was an arguable
case. The courts may be prepared to extend liability to
omissions as well as positive statements.Yorkshire Enterprise Ltdv Robson
Rhodes(1998)
The claimants, who were providers of venture capital,
invested £250,000 in a shopfitting company, which 18
months later went into liquidation. The claimants, having
lost most of their investment, brought an action for dam-
ages against the shopfitters’ auditors, claiming that they
had relied on negligent misstatements contained in the
audited accounts and in letters sent to the claimants.
The main problem with the accounts was that the pro-
vision for bad debts was inadequate with the result
that the shopfitting company appeared to be profitable
when, in fact, it was not. The High Court held that the de-
fendant auditors were liable. They were aware of the
claimants as potential investors and the use to which the
accounts would be put. The claimants were not contri-
butory negligent in relying on the information contained in
the accounts and subsequent letters, without instituting
their own enquiries. They were entitled to take the infor-
mation they received at face value.Royal Bank of Scotland plcv Bannerman
Johnstone Maclay (a firm)(2003)
RBS lent over £33 million to APC Ltd, most of which it
lost when APC went into administrative receivership.
RBS claimed to have made its lending decisions on
the basis of accounts which had been audited by the
defendant accountants, BJM. BJM had prepared APC’s
accounts in their capacity as the company’s auditors but
they had been provided to RBS in compliance with obliga-
tions set out in overdraft facility letters. In defending