What is the Caparo test for duty of care?

Three steps: (1) foreseeable harm, (2) proximity between parties, and (3) it must be fair, just and reasonable to impose a duty.

Did auditors owe a duty to investors in Caparo?

No. The House of Lords held there was no duty to existing or potential investors relying on published accounts for investment decisions.

Who were the accounts meant for?

For the company and its shareholders as a body to oversee management, not for individual investment or takeover decisions.

Why is proximity important here?

There was no close, direct relationship between the auditors and Caparo as an investor for this specific transaction.

What type of loss was claimed?

Pure economic loss from relying on accounts. The Court limited auditor liability to avoid indeterminate claims by investors.

caparo-industries-plc-v-dickman-the-caparo-test

Caparo Industries PLC v. Dickman [1990] UKHL 2

The Caparo Test for Duty of Care — easy, classroom-style English.

House of Lords 1990 Citation: [1990] UKHL 2 Tort / Negligence Reading: ~7 min Location: India (Explainer)

CASE_TITLE: Caparo Industries PLC v. Dickman PRIMARY_KEYWORDS: Caparo test, duty of care, negligence, auditors, economic loss SECONDARY_KEYWORDS: foreseeability, proximity, fair just and reasonable, investor reliance AUTHOR_NAME: Gulzar Hashmi PUBLISH_DATE: 2025-10-31 Slug: caparo-industries-plc-v-dickman-the-caparo-test

Quick Summary

Caparo v. Dickman sets the three-part test for duty of care in negligence. Caparo bought shares in a struggling company (Fidelity) and relied on audited accounts. After the takeover, Caparo discovered the company was worse than shown. Caparo sued the auditors for negligent accounts. The House of Lords held: no duty of care was owed to investors for investment decisions. The accounts serve shareholders as a body for governance, not individual purchasers.

Caparo Test Proximity Foreseeability Fair, Just & Reasonable Economic Loss

Issues

Did the auditors owe a duty of care to existing shareholders acting as investors and to future investors?

Rules (The Caparo Test)

Foreseeability: Was harm to the claimant reasonably foreseeable if the defendant was careless?
Proximity: Is there a close and direct relationship between the parties in this situation?
Fair, Just & Reasonable: Is it fair, just and reasonable to impose a duty, considering policy and the defendant’s position?

Audited accounts are prepared for corporate governance of shareholders as a whole—not for individual investment or takeover decisions.

Facts (Timeline)

Timeline illustration for Caparo v. Dickman case facts

Caparo Plans Takeover

Caparo targets Fidelity, a maker of electrical equipment, for acquisition.

Profit Warning & Decline

March 1984: Fidelity issues a profit warning; share price halves. May 1984: negative outlook; price falls further.

Share Purchases

Caparo buys shares in bulk and reaches about 29.9% holding.

Accounts Issued

Audited accounts (by Dickman) are published to shareholders as a body.

Takeover & Discovery

After control, Caparo finds the company’s position is worse than shown: reported £1.3m profit vs actual ~£0.4m loss (pre-tax).

Claim

Caparo sues the auditors for negligence in preparing the accounts.

Arguments

Appellant (Caparo)

Auditors should foresee investor reliance on published accounts.
Proximity exists because accounts were directed to shareholders, including Caparo.
Imposing duty is fair to protect investors from negligent audits.

Respondent (Dickman)

Accounts serve governance of shareholders as a whole, not investment decisions.
No special relationship with Caparo for the takeover; proximity is missing.
Policy: Indeterminate liability to a wide class of investors would be unfair.

Judgment

The House of Lords held there was no duty of care owed by the auditors to individual investors (existing or future) for investment decisions. The duty of auditors is to the company and its shareholders as a body for governance. Foreseeability alone is not enough; proximity and policy (fair, just and reasonable) also failed.

Result: Appeal dismissed; decision in favor of the auditors (defendants).

Ratio Decidendi

A duty of care in negligence arises only where harm is foreseeable, there is sufficient proximity, and it is fair, just, and reasonable to impose a duty. Published audits are not aimed at guiding specific investment decisions by individuals; hence no proximity and no duty to investors.

Why It Matters

Defines the modern three-step Caparo test for duty of care.
Limits auditor liability for pure economic loss to avoid open-ended claims.
Clarifies the purpose of audits: corporate oversight, not investment advice.

Key Takeaways

Duty = Foreseeability + Proximity + FJR (fair, just & reasonable).
Auditors’ duty is to the company/shareholders as a body.
No duty to individual investors for takeover decisions.

Foreseeability alone never decides duty.
Policy concerns can limit liability for economic loss.
Caparo is core for negligence and professional liability.

Mnemonic + 3-Step Hook

Mnemonic: “ F-P-FJR” — Foreseeability, Proximity, and Fair, Just & Reasonable.

See it coming? (Foreseeability)
Close enough? (Proximity)
Good policy? (Fair, Just & Reasonable)

IRAC Outline

Issue

Do auditors owe a duty of care to shareholders and future investors who rely on published accounts for buying shares?

Rule

Duty exists only if harm is foreseeable, parties are proximate, and imposing a duty is fair, just and reasonable (Caparo test).

Application

Accounts were for oversight by shareholders as a group, not for specific investment moves by Caparo; proximity and policy fail.

Conclusion

No duty of care to Caparo as investor; claim fails.

Glossary

Duty of Care: A legal obligation to avoid careless acts likely to harm others in a close relationship.
Pure Economic Loss: Financial loss not linked to physical injury or property damage.
Proximity: A close and direct relationship between claimant and defendant in the context of the loss.