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You are here: BAILII >> Databases >> United Kingdom House of Lords Decisions >> Caparo Industries pIc v Dickman & Ors [1990] UKHL 2 (08 February 1990) URL: http://www.bailii.org/uk/cases/UKHL/1990/2.html Cite as: [1990] UKHL 2, [1990] 2 AC 605, [1990] 1 All ER 568 |
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Parliamentary
Archives,
HL/PO/JU/18/250
Caparo Industries plc (Repondents v Dickman and others
(Appellants)
Caparo Industries plc (Original
Respondents and Cross-appellants) v.
Dickman and others (Original
Appellants and Cross-respondents)
JUDGMENT
Die Jovis 8° Februarii 1990
Upon Report from the Appellate
Committee to whom was referred
the Cause Caparo Industries plc
against Dickman and others et e
contra, That the Committee
had heard Counsel on Thursday the 16th,
Monday the 20th, Wednesday
the 22nd, Thursday the 23rd, Monday the
27th and Tuesday the 28th
days of November last, upon the Petition
and Appeal of Touche Ross
and Company, of Hill House, 1 Little New
Street, London EC4A 3TR,
praying that the matter of the Order set
forth in the Schedule
thereto, namely an Order of Her Majesty's
Court of Appeal of the
29th day of July 1988, might be reviewed
before Her Majesty the
Queen in Her Court of Parliament and that the
said Order might be
reversed, varied or altered or that the
Petitioners might have
such other relief in the premises as to Her
Majesty the Queen in
Her Court of Parliament might seem meet; as
upon the case of
Caparo Industries plc lodged in answer to the said
Appeal; as also
upon the Petition and Cross-appeal of Caparo
Industries plc, of
Caparo House, 103 Baker Street, London Wl,
praying that the matter
of the Order set forth in the Schedule
thereto, namely an Order of
Her Majesty's Court of Appeal of the
29th day of July 1988, might
be reviewed before Her Majesty the
Queen in Her Court of
Parliament and that the said Order might be
reversed, varied or
altered or that the Petitioners might have such
other relief in
the premises as to Her Majesty the Queen in Her
Court of
Parliament might seem meet; as also upon the case of Touche
Ross
and Company lodged in answer to the said Cross-appeal; and
due
consideration had this day of what was offered on either side
in
this Cause:
It is Ordered and Adjudged,
by the Lords Spiritual and Temporal
in the Court of Parliament of
Her Majesty the Queen assembled, That
the said Order of Her
Majesty's Court of Appeal (Civil Division) of
the 29th day of July
1988 complained of in the said Appeal and the
said Cross-Appeal
be, and the same is hereby, Set Aside and that the
Order of
Sir Neil Lawson Q.C. (sitting as a Judge of the High Court)
of the
17th day of December 1987 be, and the same is hereby,
Restored:
And it is further Ordered, That the said Cross-appeal be,
and
the same is hereby, dismissed this House: And it is also
further
Ordered, That the said Original Respondents and
Cross-
appellants do pay or cause to be paid to the said
Original
Appellants and Cross-respondents the Costs incurred by
them in the
Courts below and also the Costs incurred by them in
respect of the
said Appeal and the said Cross-appeal to this
House, the amounts of
such last-mentioned Costs to be certified by
the Clerk of the
Parliaments if not agreed between the parties:
And it is also
further Ordered, That the Cause be, and the
same is hereby, remitted
back to the Queen's Bench Division of the
High Court of Justice to
do therein as shall be just and
consistent with this Judgment.
Cler: Parliamentor
Judgment: 8.2.90
HOUSE OF LORDS
CAPARO INDUSTRIES
PLC
(RESPONDENTS)
v.
DICKMAN AND OTHERS
(APPELLANTS)
CAPARO INDUSTRIES PLC
(ORIGINAL
CROSS-RESPONDENTS AND CROSS-APPELLANTS)
v.
DICKMAN AND OTHERS
(ORIGINAL
APPELLANTS AND CROSS-RESPONDENTS)
Lord Bridge of Harwich
Lord
Roskill
Lord Ackner
Lord Oliver of Aylmerton
Lord Jauncey of
Tullichettle
LORD BRIDGE OF HARWICH
My Lords,
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.
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.
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."'
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
184 and/or from
- 2 -
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."
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.
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.
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.
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,
- 3 -
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."
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."
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 there is
some justification or valid explanation for
its exclusion."
The most comprehensive attempt to
articulate a single
general principle is reached in the well-known
passage from the
speech of Lord Wilberforce in Anns v. Merton
London Borough
Council [1978] A.C. 728, 751-752:
"Through the trilogy of cases
in this House - Donoghue v.
Stevenson [1932] A.C. 562,
Hedley Byrne & Co. Ltd. v.
Heller & Partners Ltd.
[1964] A.C. 465, and Dorset Yacht
Co. Ltd. v. Home Office
[1970] A.C. 1004, the position has
now been reached that in order
to establish that a duty of
care arises in a particular situation,
it is not necessary to
bring the facts of that situation within
those of previous
situations in which a duty of care has been held
to exist.
Rather the question has to be approached in two
stages.
First one has to ask whether, as between the
alleged
wrongdoer and the person who has suffered damage there
is
a sufficient relationship of proximity or neighbourhood
such
that, in the reasonable contemplation of the
former,
carelessness on his part may be likely to cause damage
to
the latter - in which case a prima facie duty of care
arises.
Secondly, if the first question is answered affirmatively,
it
is necessary to consider whether there are any
considerations
which ought to negative, or to reduce or limit
- 4 -
the scope of the duty or the class
of person to whom it is
owed or the damages to which a breach of
it may give rise:
see Dorset Yacht case [1970] A.C 1004 per
Lord Reid at p.
1027."
But since Anns a series of
decisions of the Privy Council and of
your Lordships' House,
notably in judgments and speeches delivered
by Lord Keith of
Kinkel, have emphasised the inability of any
single general
principle to provide a practical test which can be
applied to
every situation to determine whether a duty of care is
owed and,
if so, what is its scope: see Governors of Peabody
Donation
Fund v. Sir Lindsay Parkinson & Co. Ltd. [1983] A.C.
210,
239F-241C; Yuen Kun Yeu v. Attorney-General of Hong Kong
[1988]
A.C. 175, 190E-194F; Rowling v. Takaro Properties Ltd.
[1988] A.C. 473, 501D-G; Hill v. Chief Constable of West
Yorkshire
[1989] A.C. 53, 60 B-D. What emerges is that, in
addition to the
foreseeability of damage, necessary ingredients in
any situation
giving rise to a duty of care are that there should
exist between
the party owing the duty and the party to whom it
is owed a
relationship characterised by the law as one of
"proximity"
or "neighbourhood" and that the situation should be one
in
which the court considers it fair, just and reasonable that the
law
should impose a duty of a given scope upon the one party for
the
benefit of the other. But it is implicit in the passages
referred
to that the concepts of proximity and fairness embodied
in these
additional ingredients are not susceptible of any such
precise
definition as would be necessary to give them utility as
practical
tests, but amount in effect to little more than
convenient labels
to attach to the features of different specific
situations which,
on a detailed examination of all the
circumstances, the law
recognises pragmatically as giving rise to a
duty of care of a
given scope. Whilst recognising, of course, the
importance of the
underlying general principles common to the
whole field of
negligence, I think the law has now moved in the
direction of
attaching greater significance to the more traditional
categorisation
of distinct and recognisable situations as guides to
the
existence, the scope and the limits of the varied duties of
care
which the law imposes. We must now, I think, recognise the
wisdom
of the words of Brennan J. in the High Court of Australia
in
Sutherland Shire Council v. Heyman (1985) 60 A.L.R. 1,
43-44,
where he said:
"It is preferable in my view,
that the law should develop
novel categories of negligence
incrementally and by analogy
with established categories, rather
than by a massive
extension of a prima facie duty of care
restrained only by
indefinable 'considerations which ought to
negative, or to
reduce or limit the scope of the duty or the class
of person
to whom it is owed."'
One of the most important
distinctions always to be
observed lies in the law's essentially
different approach to the
different kinds of damage which one
party may have suffered in
consequence of the acts or omissions of
another. It is one thing
to owe a duty of care to avoid causing
injury to the person or
property of others. It is quite another to
avoid causing others to
suffer purely economic loss. A graphic
illustration of the
distinction is embodied in the proposition
that:
- 5 -
"In case of a wrong done to a
chattel the common law does
not recognise a person whose only
rights are a contractual
right to have the use or services of the
chattel for purposes
of making profits or gains without possession
of or property
in the chattel. Such a person cannot claim for
injury done
to his contractual right." (Elliott Steam Tug
Co. Ltd. v.
Shipping Controller [1922] 1 K.B. 127, 139 per
Scrutton L.J.)
The proposition derives from
Cattle v. Stockton Waterworks Co.
(1875) L.R. 10 Q.B. 453.
It has recently been reaffirmed in
Candlewood Navigation Corpn.
v. Mitsui O.S.K. Lines Ltd. [1986]
A.C. 1 and Leigh &
Sillavan Ltd. v. Aliakmon Shipping Co. Ltd.
[1986] A.C. 785.
In the former case Lord Fraser of Tullybelton,
delivering the
judgment of the Privy Council, said [1986] A.C. 1,
25:
"Their Lordships consider
that some limit or control
mechanism has to be imposed upon the
liability of a
wrongdoer towards those who have suffered
economic
damage in consequence of his negligence. The need
for
such a limit has been repeatedly asserted in the cases,
from
Cattle's case, L.R. 10 Q.B. 453, to Caltex, 136
C.L.R. 529,
and their Lordships are not aware that a view to
the
contrary has ever been judicially expressed."
The damage which may be caused by
the negligently spoken
or written word will normally be confined
to economic loss
sustained by those who rely on the accuracy of
the information or
advice they receive as a basis for action. The
question what, if
any, duty is owed by the maker of a statement to
exercise due
care to ensure its accuracy arises typically in
relation to
statements made by a person in the exercise of his
calling or
profession. In advising the client who employs him
the
professional man owes a duty to exercise that standard of
skill and
care appropriate to his professional status and will be
liable both
in contract and in tort for all losses which his
client may suffer
by reason of any breach of that duty. But the
possibility of any
duty of care being owed to third parties with
whom the
professional man was in no contractual relationship was
for long
denied because of the wrong turning taken by the law in
Le Lievre
v. Gould [1893] 1 Q.B. 491 in overruling Cann
y. Willson. 39 Ch.
D. 39. In Candler v. Crane, Christmas &
Co. [1951] 2 K.B. 164,
Denning L.J., in his dissenting
judgment, made a valiant attempt
to correct the error. But it was
not until the decision of this
House in Hedley Byrne & Co.
Ltd. v. Heller Partners Ltd. [1964]
A.C. 465 that the law was
once more set upon the right path.
Consistently with the traditional
approach it is to these
authorities and to subsequent decisions
directly relevant to this
relatively narrow corner of the field
that we should look to
determine the essential characteristics of
a situation giving rise,
independently of any contractual or
fiduciary relationship, to a
duty of care owed by one party to
another to ensure that the
accuracy of any statement which the one
party makes and on
which the other party may foreseeably rely to
his economic
detriment.
In Cann v. Willson, 39 Ch.
D. 39 mortgagees advanced
money in reliance on a valuation of the
mortgaged property
- 6 -
supplied to them by a valuer
employed by the mortgagor. On the
mortgagor's default, the
property, having been negligently
undervalued, proved insufficient
to cover the mortgage loan. The
mortgagees recovered their loss
from the valuer. In his judgment,
Chitty J. said at p. 42:
"In this case the document
called a valuation was sent by
the defendants direct to the agents
of the plaintiff for the
purpose of inducing the plaintiff and his
co-trustee to lay
out the trust money on mortgage. It seems to me
that the
defendants knowingly had placed themselves in that
position,
and in point of law incurred a duty towards him to
use
reasonable care in the preparation of the document called
a
valuation."
In Candler v. Crane, Christmas
& Co. Ltd. [1951] 2 K.B.
164 the plaintiff invested money
in a limited company in reliance
on accounts of the company
prepared by the company's
accountants at the request of the
managing director, which were
shown to the plaintiff and discussed
with him by the accountants
in the knowledge that he was
interested as a potential investor in
the company. The accounts
were inaccurate and misleading and
the plaintiff, having invested
in the company in reliance upon
them, lost his money. Denning
L.J., in his dissenting judgment,
held the plaintiff entitled to
recover damages for the accountants'
negligence.
In Hedley Byrne [1964] A.C 465 bankers were asked about
the financial stability of a customer
of the bank. They gave a
favourable reference, albeit with a
disclaimer of responsibility.
The circumstances of the inquiry
made it clear to the bankers that
the party on whose behalf the
inquiry was made wanted to know if
they could safely extend credit
to the bank's customer in a
substantial sum. Acting on the
reference given, the plaintiffs
extended credit to the bank's
customer who in due course
defaulted. Although the House held that
the bankers were
protected by the disclaimer of responsibility,
the case provided the
opportunity to review the law, which led to
the reinstatement of
Cann v. Willson, the overruling of the
majority decision in the
Candler case and the approbation
of the dissenting judgment of
Denning L.J. in that case.
The most recent decision of the
House, which is very much
in point, is that of the two appeals
heard together of Smith v.
Eric S. Bush and Harris v.
Wyre Forest District Council [1989] 2
W.L.R. 790. The
plaintiffs in both cases were house purchasers
who purchased in
reliance on valuations of the properties made by
surveyors acting
for and on the instructions of the mortgagees
proposing to advance
money to the plaintiffs to enable them to
effect their purchases.
In both cases the surveyors' fees were
paid by the plaintiffs and
in both cases it turned out that the
inspections and valuations
had been negligently carried out and
that the property was
seriously defective so that the plaintiffs
suffered financial
loss. In the case of Smith the mortgagees were
a building
society, the surveyors who carried out the inspection
and
valuation were a firm employed by the building society and
their
report was shown to the plaintiff. In the case of Harris
the
mortgagees were the local authority who employed a member
of
their own staff to carry out the inspection and valuation. His
- 7 -
report was not shown to the
plaintiff, but the plaintiff rightly
assumed from the local
authority's offer of a mortgage loan that
the property had been
professionally valued as worth at least the
amount of the loan. In
both cases the terms agreed between the
plaintiff and the
mortgagee purported to exclude any liability on
the part of the
mortgagee or the surveyor for the accuracy of the
mortgage
valuation. The House held that in both cases the
surveyor making
the inspection and valuation owed a duty of care
to the plaintiff
house purchaser and that the contractual clauses
purporting to
exclude liability were struck down by section 2(2)
and section
11(3) of the Unfair Contract Terms Act 1977.
The salient feature of all these
cases is that the defendant
giving advice or information was fully
aware of the nature of the
transaction which the plaintiff had in
contemplation, knew that the
advice or information would be
communicated to him directly or
indirectly and knew that it was
very likely that the plaintiff would
rely on that advice or
information in deciding whether or not to
engage in the
transaction in contemplation. In these circumstances
the defendant
could clearly be expected, subject always to the
effect of any
disclaimer of responsibility, specifically to anticipate
that the
plaintiff would rely on the advice or information given by
the
defendant for the very purpose for which he did in the event
rely
on it. So also the plaintiff, subject again to the effect of
any
disclaimer, would in that situation reasonably suppose that he
was
entitled to rely on the advice or information communicated to
him
for the very purpose for which he required it. The situation
is
entirely different where a statement is put into more or less
general
circulation and may foreseeably be relied on by strangers
to the
maker of the statement for any one of a variety of
different
purposes which the maker of the statement has no
specific reason
to anticipate. To hold the maker of the statement
to be under a
duty of care in respect of the accuracy of the
statement to all
and sundry for any purpose for which they may
choose to rely on it
is not only to subject him, in the classic
words of Cardozo C.J.
to "liability in an indeterminate amount for
an indeterminate
time to an indeterminate class" (Ultramares
Corporation v.
Touche (1931) 174 N.E. 441, 444); it is also to
confer on the
world at large a quite unwarranted entitlement to
appropriate for
their own purposes the benefit of the expert
knowledge or
professional expertise attributed to the maker of the
statement.
Hence, looking only at the circumstances of these
decided cases
where a duty of care in respect of negligent
statements has been
held to exist, I should expect to find that the
"limit or
control mechanism . . . imposed upon the liability of a
wrongdoer
towards those who have suffered economic damage in
consequence of
his negligence" rested in the necessity to prove, in
this
category of the tort of negligence, as an essential ingredient
of
the "proximity" between the plaintiff and the defendant,
that
the defendant knew that his statement would be communicated
to
the plaintiff, either as an individual or as a member of
an
identifiable class, specifically in connection with a
particular
transaction or transactions of a particular kind (e.g.
in a
prospectus inviting investment) and that the plaintiff would
be very
likely to rely on it for the purpose of deciding whether
or not to
enter upon that transaction or upon a transaction of
that kind.
I find this expectation fully
supported by the dissenting
judgment of Denning L.J. in Candler
v. Crane, Christmas & Co.
[1951] 2 K.B. 164, 179-184 in
the following passages:
- 8 -
"Let me now be constructive
and suggest the circumstances
in which I say that a duty to use
care in statement does
exist apart from a contract in that behalf.
First, what
persons are under such duty? My answer is those
persons
such as accountants, surveyors, valuers and analysts,
whose
profession and occupation it is to examine books,
accounts,
and other things, and to make reports on which other
people
- other than their clients - rely in the ordinary course
of
business. . . .
"Secondly, to whom do these
professional people owe this
duty? I will take accountants, but
the same reasoning
applies to the others. They owe the duty, of
course, to
their employer or client; and also I think to any
third
person to whom they themselves show the accounts, or to
whom
they know their employer is going to show the
accounts, so as to
induce him to invest money or take some
other action on them. But
I do not think the duty can be
extended still further so as to
include strangers of whom
they have heard nothing and to whom
their employer
without their knowledge may choose to show their
accounts.
Once the accountants have handed their accounts to
their
employer they are not, as a rule, responsible for what
he
does with them without their knowledge or consent. . .
"The test of proximity in
these cases is: did the accountants
know that the accounts were
required for submission to the
plaintiff and use by him? . . .
'Thirdly, to what transactions
does the duty of care extend?
It extends, I think, only to those
transactions for which the
accountants knew their accounts were
required. For
instance, in the present case it extends to the
original
investment of 2,0001. which the plaintiff made in
reliance on
the accounts, because the accountants knew that
the
accounts were required for his guidance in making
that
investment; but it does not extend to the subsequent
2001.
which he made after he had been two months with the
company.
This distinction, that the duty only extends to
the very
transaction in mind at the time, is implicit in the
decided cases.
. . .
It will be noticed that I have
confined the duty to cases
where the accountant prepares his
accounts and makes his
report for the guidance of the very person
in the very
transaction in question. That is sufficient for the
decision
of this case. I can well understand that it would be
going
too far to make an accountant liable to any person in
the
land who chooses to rely on the accounts in matters
of
business, for that would expose him to 'liability in
an
indeterminate amount for an indeterminate time to
an
indeterminate class:" see Ultramares Corporation v.
Touche
per Cardozo C.J. Whether he would be liable if
he
prepared his accounts for the guidance of a specific class
of
persons in a specific class of transactions, I do not say.
I
should have thought he might be, just as the analyst and
lift
inspector would be liable in the instances I have
given
earlier. It is perhaps worth mentioning that Parliament has
- 9 -
intervened to make the
professional man liable for negligent
reports given for the
purposes of a prospectus: see sections
40 and 43 of the Companies
Act 1948. That is an instance
of liability for reports made for
the guidance of a specific
class of persons -investors, in a
specific class of
transactions - applying for shares. That
enactment does not
help, one way or the other, to show what result
the
common law would have reached in the absence of
such
provisions; but it does show what result it ought to reach.
"My conclusion is that a duty
to use care in statement is
recognised by English law, and that
its recognition does not
create any dangerous precedent when it is
remembered that
it is limited in respect of the persons by whom
and to
whom it is owed and the transactions to which it applies."
It seems to me that this masterly
analysis, if I may say so
with respect, requires little, if any,
amplification or modification
in the light of later authority and
is particularly apt to point the
way to the right conclusion in
the present appeal.
Some of the speeches in the Hedley
Byrne case derive a
duty of care in relation to negligent
statements from a voluntary
assumption of responsibility on the
part of the maker of the
statements. In his speech in Smith v.
Eric S. Bush, [1989] 2
W.L.R. 790, 813 Lord Griffiths
emphatically rejected the view that
this was the true ground of
liability and concluded that:
"The phrase 'assumption of
responsibility' can only have any
real meaning if it is understood
as referring to the
circumstances in which the law will deem the
maker of the
statement to have assumed responsibility to the
person who
acts upon the advice."
I do not think that in the context
of the present appeal anything
turns upon the difference between
these two approaches.
These considerations amply justify
the conclusion that
auditors of a public company's accounts owe no
duty of care to
members of the public at large who rely upon the
accounts in
deciding to buy shares in the company. If a duty of
care were
owed so widely, it is difficult to see any reason why it
should not
equally extend to all who rely on the accounts in
relation to other
dealings with a company as lenders or merchants
extending credit
to the company. A claim that such a duty was owed
by auditors
to a bank lending to a company was emphatically and
convincingly
rejected by Millett J. in Al Saudi Banque v. Clark
Pixley [1989] 3
All E.R. 361. The only support for an
unlimited duty of care
owed by auditors for the accuracy of their
accounts to all who
may foreseeably rely upon them is to be found
in some
jurisdictions in the United States of America where there
are
striking differences in the law in different states. In
this
jurisdiction I have no doubt that the creation of such an
unlimited
duty would be a legislative step which it would be for
Parliament,
not the courts, to take.
The main submissions for Caparo
are that the necessary
nexus of proximity between it and the
appellants giving rise to a
duty of care stems (1) from the
pleaded circumstances indicating
- 10 -
the vulnerability of Fidelity to a
take-over bid and from the
consequent probability that another
company, such as Caparo,
would rely on the audited accounts in
deciding to launch a take-
over bid, or (2) from the circumstance
that Caparo was already a
shareholder in Fidelity when it decided
to launch its take-over bid
in reliance on the accounts. In
relation to the first of these two
submissions, Caparo applied, in
the course of the hearing, for leave
to amend paragraph 16(2) of
the statement of claim by adding the
words "or alternatively
that it was highly probable that such
persons would rely on the
accounts for that purpose."
The case which gives most
assistance to Caparo in support
of this submission is Scott
Group Ltd. v. McFarlane [1978] 1
N.Z.L.R. 553. The audited
consolidated accounts of a New
Zealand public company and its
subsidiaries overstated the assets
of the group because of an
admitted accounting error. Under the
relevant New Zealand
legislation its accounts were, as in England,
accessible to the
public. The circumstances of the group's affairs
were such as to
make it highly probable that it would attract a
take-over bid. The
plaintiffs made such a bid successfully and
when the accounting
error was discovered claimed from the
auditors in respect of the
shortfall in the assets. Quilliam J. held
that the auditors owed
the plaintiffs no duty of care. The
majority of the New Zealand
Court of Appeal (Woodhouse and
Cooke JJ.) held that the duty of
care arose from the probability
that the company would attract a
take-over bid and the bidder
would rely on the audited accounts,
although Cooke J. held that
the shortfall in the assets below that
erroneously shown in the
accounts did not amount to a loss
recoverable in tort. Richmond
P. held that no duty of care was
owed. He said, at p. 566:
"All the speeches in Hedley
Byrne seem to me to recognise
the need for a 'special'
relationship: a relationship which
can properly be treated as
giving rise to a special duty to
use care in statement. The
question in any given case is
whether the nature of the
relationship is such that one
party can fairly be held to have
assumed a responsibility to
the other as regards the reliability
of the advice or
information. I do not think that such a
relationship should
be found to exist unless, at least, the maker
of the
statement was, or ought to have been, aware that his
advice
or information would in fact be made available to and
be
relied on by a particular person or class of persons for
the
purposes of a particular transaction or type of transaction.
I
would especially emphasise that to my mind it does not
seem
reasonable to attribute an assumption of responsibility
unless the
maker of the statement ought in all the
circumstances, both in
preparing himself for what he said
and in saying it, to have
directed his mind, and to have
been able to direct his mind, to
some particular and specific
purpose for which he was aware that
his advice or
information would be relied on. In many situations
that
purpose will be obvious. But the annual accounts of a
company
can be relied on in all sorts of ways and for many
purposes."
I agree with this reasoning, which
seems to me to be entirely in
line with the principles to be
derived from the authorities to
which I have earlier referred and
not to require modification in
- 11 -
any respect which is relevant for
present purposes by reference to
anything said in this House in
Smith v. Eric S. Bush. I should in
any event be extremely
reluctant to hold that the question
whether or not an auditor owes
a duty of care to an investor
buying shares in a public company
depends on the degree of
probability that the shares will prove
attractive either en bloc to
a take-over bidder or piecemeal to
individual investors. It would
be equally wrong, in my opinion, to
hold an auditor under a duty
of care to anyone who might lend
money to a company by reason
only that it was foreseeable as
highly probable that the company
would borrow money at some time
in the year following
publication of its audited accounts and that
lenders might rely on
those accounts in deciding to lend. I am
content to assume the
high probability of a take-over bid in
reliance on the accounts
which the proposed amendment of the
statement of claim would
assert but I do not think it assists
Caparo's case.
The only other English authority
to which I need refer in
this context in JEB Fasteners Ltd. v.
Marks, Bloom & Co. [1981] 3
All E.R. 289, a decision at
first instance of Woolf J. This was
another case where the
plaintiffs, who had made a successful take-
over bid for a company
in reliance on audited accounts which had
been negligently
prepared, sued the accountants for damages.
Woolf J. held that the
auditors owed the plaintiffs a duty of care
in the preparation of
the accounts. He relied on both the Anns
case [1978] A.C. 728 and Scott Group Ltd. v. McFarlane [1978] 1
N.Z.L.R.
553, in reaching the conclusion that the duty could be
derived
from foreseeability alone. For the reasons already
indicated, I do
not agree with this. It may well be, however, that
the particular
facts in the JEB case were sufficient to establish a
basis
on which the necessary ingredient of proximity to found a
duty of
care could be derived from the actual knowledge on the
part of the
auditors of the specific purpose for which the
plaintiffs intended
to use the accounts.
The position of auditors in
relation to the shareholders of a
public limited liability company
arising from the relevant provisions
of the Companies Act 1985 is
accurately summarised in the
judgment of Bingham L.J. in the Court
of Appeal [1989] Q.B. 653,
680-681:
"The members, or
shareholders, of the company are its
owners. But they are too
numerous, and in most cases too
unskilled, to undertake the day to
day management of that
which they own. So responsibility for day
to day
management of the company is delegated to directors.
The
shareholders, despite their overall powers of control, are
in
most companies for most of the time investors and little
more.
But it would of course be unsatisfactory and open to
abuse if the
shareholders received no report on the financial
stewardship of
their investment save from those to whom
the stewardship had been
entrusted. So provision is made
for the company in general meeting
to appoint an auditor
(section 384 of the Companies Act 1985),
whose duty is to
investigate and form an opinion on the adequacy
of the
company's accounting records and returns and
the
correspondence between the company's accounting records
and
returns and its accounts: section 237. The auditor has
then to
report to the company's members (among other
- 12 -
things) whether in his opinion the
company's accounts give a
true and fair view of the company's
financial position:
section 236. In carrying out his investigation
and in forming
his opinion the auditor necessarily works very
closely with
the directors and officers of the company. He
receives his
remuneration from the company. He naturally, and
rightly,
regards the company as his client. But he is employed
by
the company to exercise his professional skill and judgment
for
the purpose of giving the shareholders an independent
report on
the reliability of the company's accounts and thus
on their
investment.
'"No doubt he is acting
antagonistically to the
directors in the sense that he is
appointed by the
shareholders to be a check upon them:' In re
Kingston
Cotton Mill Co. [1896] 1 Ch. 6, 11, per
Vaughan
Williams J.
"The auditor's report must be
read before the company in
general meeting and must be open to
inspection by any
member of the company: section 241. It is
attached to and
forms part of the company's accounts: sections
238(3) and
239. A copy of the company's accounts, including
the
auditor's report, must be sent to every member: section
240.
Any member of the company, even if not entitled to have
a
copy of the accounts sent to him, is entitled to be
furnished
with a copy of the company's last accounts on demand
and
without charge: section 246."
No doubt these provisions
establish a relationship between
the auditors and the shareholders
of a company on which the
shareholder is entitled to rely for the
protection of his interest.
But the crucial question concerns the
extent of the shareholder's
interest which the auditor has a duty
to protect. The shareholders
of a company have a collective
interest in the company's proper
management and in so far as a
negligent failure of the auditor to
report accurately on the state
of the company's finances deprives
the shareholders of the
opportunity to exercise their powers in
general meeting to call
the directors to book and to ensure that
errors in management are
corrected, the shareholders ought to be
entitled to a remedy. But
in practice no problem arises in this
regard since the interest of
the shareholders in the proper
management of the company's affairs
is indistinguishable from the
interest of the company itself and
any loss suffered by the
shareholders, e.g. by the negligent
failure of the auditor to
discover and expose a misappropriation
of funds by a director of
the company, will be recouped by a claim
against the auditors in
the name of the company, not by individual
shareholders.
I find it difficult to visualise a
situation arising in the real
world in which the individual
shareholder could claim to have
sustained a loss in respect of his
existing shareholding referable to
the negligence of the auditor
which could not be recouped by the
company. But on this part of
the case your Lordships were much
pressed with the argument that
such a loss might occur by a
negligent undervaluation of the
company's assets in the auditor's
report relied on by the
individual shareholder in deciding to sell
his shares at an
undervalue. The argument then runs thus. The
shareholder, qua
shareholder, is entitled to rely on the auditor's
- 13 -
report as the basis of his
investment decision to sell his existing
shareholding. If he sells
at an undervalue he is entitled to recover
the loss from the
auditor. There can be no distinction in law
between the
shareholder's investment decision to sell the shares he
has or to
buy additional shares. It follows, therefore, that the
scope of
the duty of care owed to him by the auditor extends to
cover any
loss sustained consequent on the purchase of additional
shares in
reliance on the auditor's negligent report.
I believe this argument to be
fallacious. Assuming without
deciding that a claim by a
shareholder to recover a loss suffered
by selling his shares at an
undervalue attributable to an
undervaluation of the company's
assets in the auditor's report
could be sustained at all, it would
not be by reason of any
reliance by the shareholder on the
auditor's report in deciding to
sell; the loss would be referable
to the depreciatory effect of the
report on the market value of
the shares before ever the decision
of the shareholder to sell was
taken. A claim to recoup a loss
alleged to flow from the purchase
of overvalued shares, on the
other hand, can only be sustained on
the basis of the purchaser's
reliance on the report. The specious
equation of "investment
decisions" to sell or to buy as
giving rise to parallel claims thus
appears to me to be untenable.
Moreover, the loss in the case of
the sale would be of a loss of
part of the value of the
shareholder's existing holding, which,
assuming a duty of care owed
to individual shareholders, it might
sensibly lie within the scope of
the auditor's duty to protect. A
loss, on the other hand, resulting
from the purchase of additional
shares would result from a wholly
independent transaction having
no connection with the existing
shareholding.
I believe it is this last
distinction which is of critical
importance and which demonstrates
the unsoundness of the
conclusion reached by the majority of the
Court of Appeal. It is
never sufficient to ask simply whether A
owes B a duty of care.
It is always necessary to determine the
scope of the duty by
reference to the kind of damage from which A
must take care to
save B harmless. "The question is always
whether the defendant
was under a duty to avoid or prevent that
damage, but the actual
nature of the damage suffered is relevant
to the existence and
extent of any duty to avoid or prevent it."
(Sutherland Shire
Council v. Heyman, 60 A.L.R. 1, 48, per
Brennan J.). Assuming
for the purpose of the argument that the
relationship between the
auditor of a company and individual
shareholders is of sufficient
proximity to give rise to a duty of
care, I do not understand how
the scope of that duty can possibly
extend beyond the protection
of any individual shareholder from
losses in the value of the shares
which he holds. As a purchaser
of additional shares in reliance on
the auditor's report, he
stands in no different position from any
other investing member of
the public to whom the auditor owes no
duty.
I would allow the appeal and dismiss the cross-appeal.
- 14 -
LORD ROSKILL
My Lords,
I have had the advantage of
reading in draft the speeches
prepared by three of your Lordships.
I agree with them and would
allow the appeal and dismiss the
cross-appeal for the reasons there
given. I only add some
observations of my own out of respect for
the two Lords Justices
from whom your Lordships are differing and
because of the
importance of this case in relation to the vexed
question of the
extent of liability of professional men, especially
accountants,
for putting into circulation allegedly incorrect
statements
whether oral or in writing which are claimed to have
been
negligently made or prepared and which have been acted on
by a
third party to that third party's detriment.
That liability for such negligence
if established can exist has
been made clear ever since the
decision of this House in Hedley
Byrne & Co. v. Heller &
Partners Ltd. [1964] A.C. 465 in which
the well known
dissenting judgment of Denning L.J., in Candler v.
Crane,
Christmas & Co. [1951] 2 K.B. 164 was held to have stated
the
law correctly. Thenceforth it was clear that such a duty of
care
could be owed by a professional man to third parties in cases
where
there was no contractual relationship between them, a view
of the
law long denied as the result of a succession of late
nineteenth
century cases of which this House then took the
opportunity of
disapproving.
But subsequent attempts to define
both the duty and its
scope have created more problems than the
decisions have solved.
My noble and learned friends have traced
the evolution of the
decisions from Anns v. Merton London
Borough Council [1977] A.C.
728 until and including the most
recent decisions of your
Lordships' House in Smith v. Eric S.
Bush [1989] 2 W.L.R. 790. I
agree with your Lordships that it
has now to be accepted that
there is no simple formula or
touchstone to which recourse can be
had in order to provide in
every case a ready answer to the
questions whether, given certain
facts, the law will or will not
impose liability for negligence or
in cases where such liability can
be shown to exist, determine the
extent of that liability. Phrases
such as "foreseeability,"
"proximity," "neighbourhood," "just
and
reasonable," "fairness," "voluntary
acceptance of risk," or
"voluntary assumption of
responsibility" will be found used from
time to time in the
different cases. But, as your Lordships have
said, such phrases
are not precise definitions. At best they are
but labels or
phrases descriptive of the very different factual
situations which
can exist in particular cases and which must be
carefully examined
in each case before it can be pragmatically
determined whether a
duty of care exists and, if so, what is the
scope and extent of
that duty. If this conclusion involves a return
to the traditional
categorisation of cases as pointing to the
existence and scope of
any duty of care, as my noble and learned
friend Lord Bridge of
Harwich, suggests, I think this is infinitely
preferable to
recourse to somewhat wide generalisations which
leave their
practical application matters of difficulty and
uncertainty. This
conclusion finds strong support from the
judgment of Brennan J. in
the High Court of Australia in the
passage cited by my noble and
learned friends.
- 15 -
My Lords, I confess that like my
noble and learned friend,
Lord Griffiths, in Smith v. Eric S.
Bush [1989] 2 W.L.R. 790, 813,
I find considerable difficulty
in phrases such as "voluntary
assumption of responsibility"
unless they are to be explained as
meaning no more than the
existence of circumstances in which the
law will impose a
liability upon a person making the allegedly
negligent statement
to the person to whom that statement is
made; in which case the
phrase does not help to determine in
what circumstances the law
will impose that liability or indeed, its
scope. The submission
that there is a virtually unlimited and
unrestricted duty of care
in relation to the performance of an
auditor's statutory duty to
certify a company's accounts, a duty
extending to anyone who may
use those accounts for any purpose
such as investing in the
company or lending the company money,
seems to me untenable. No
doubt it can be said to be foreseeable
that those accounts may
find their way into the hands of persons
who may use them for such
purposes or indeed other purposes and
lose money as a result. But
to impose a liability in those
circumstances is to hold, contrary
to all the recent authorities,
that foreseeability alone is
sufficient, and to ignore the statutory
duty which enjoins the
preparation of and certification of those
accounts.
I think that before the existence
and scope of any liability
can be determined, it is necessary
first to determine for what
purposes and in what circumstances the
information in question is
to be given. If a would-be investor or
predator commissions a
report which he will use, and which the
maker of the report knows
he will use, as a basis for his decision
whether or not to invest or
whether or not to make a bid, it may
not be difficult to conclude
that if the report is negligently
prepared and as a result a
decision is taken in reliance upon it
and financial losses then
follow, a liability will be imposed upon
the maker of that report.
But I venture to echo the caution
expressed by my noble and
learned friend, Lord Oliver of
Aylmerton, that because different
cases may display certain common
features, they are necessarily
all cases in which the same
consequences regarding liability or the
scope of liability will
follow. Moreover, there may be cases in
which the circumstances in
which the report was commissioned
justify the inclusion of and
reliance upon a disclaimer such as
succeeded in Hedley Byrne
but by reason of subsequent statutory
provisions failed in Smith
v. Eric S. Bush.
My Lords it is for these reasons,
in addition to those given
by my noble and learned friends, that,
as already stated, I would
allow this appeal and dismiss the
cross-appeal.
LORD ACKNER
My Lords,
I have had the advantage of
reading the speeches of Lord
Bridge of Harwich, Lord Roskill, Lord
Oliver of Aylmerton and
Lord Jauncey of Tullichettle and for the
reasons they give I, too,
would allow this appeal and dismiss the
cross-appeal.
- 16 -
LORD OLIVER OF AYLMERTON
My Lords,
This appeal, having come to this
House on a preliminary
point, involves the making of a number of
assumptions of fact
which might or might not be substantiated at
the trial of the
action. To begin with, it is to be assumed
against the appellants
that they showed a lack of reasonable care
in certifying that the
accounts of Fidelity for the year ended 31
March 1984 gave a true
and fair view of Fidelity's position. It is
also to be assumed that,
when they certified the accounts, the
appellants knew or would, if
they had thought about it, have known
that Fidelity was vulnerable
to take-over bids, that a potential
bidder would be likely to rely
upon the accuracy of the accounts
in making his bid and that
investors in the market generally,
whether or not already members
of Fidelity, would also be likely
to or might well rely upon the
accounts in deciding to purchase
shares in that company.
Your Lordships are not, however,
either required or entitled
to make any assumption that the
purpose of the certification was
anything other than that of
fulfilling the statutory duty of carrying
out the annual audit
with a view to the circulation of the
accounts to persons who were
either registered shareholders or
debenture-holders of Fidelity
and the subsequent laying of the
accounts before the annual
general meeting of that company.
Thus, if and so far as the purpose
for which the audit was
carried out is a relevent consideration in
determining the extent of
any general duty in tort owed by the
appellants to persons other
than the company which is their
immediate employer, that purpose
was simply that of fulfilling the
statutory requirements of the
Companies Act. That, in turn, raises
the question - and it is one
which lies at the threshold of the
inquiry upon which your
Lordships are invited to embark - of what
is the purpose behind
the legislative requirement for the carrying
out of an annual audit
and the circulation of the accounts. For
whose protection were
these provisions enacted and what object
were they intended to
achieve?
My Lords, the primary purpose of
the statutory requirement
that a company's accounts shall be
audited annually is almost self-
evident. The structure of the
corporate trading entity, at least in
the case of public companies
whose shares are dealt with on an
authorised Stock Exchange,
involves the concept of a more or less
widely distributed holding
of shares rendering the personal
involvement of each individual
shareholder in the day-to-day
management of the enterprise
impracticable, with the result that
management is necessarily
separated from ownership. The
management is confided to a board of
directors which operates in
a fiduciary capacity and is answerable
to and removable by the
shareholders who can act, if they act at
all, only collectively and
only through the medium of a general
meeting. Hence the
legislative provisions requiring the board
annually to give an
account of its stewardship to a general
meeting of the
shareholders. This is the only occasion in each
year upon which
the general body of shareholders is given the
opportunity to
- 17 -
consider, to criticise and to
comment upon the conduct by the
board of the company's affairs, to
vote upon the directors'
recommendation as to dividends, to
approve or disapprove the
directors' remuneration and, if thought
desirable, to remove and
replace all or any of the directors. It
is the auditors' function to
ensure, so far as possible, that the
financial information as to the
company's affairs prepared by the
directors accurately reflects the
company's position in order,
first, to protect the company itself
from the consequences of
undetected errors or, possibly,
wrongdoing (by, for instance,
declaring dividends out of capital)
and, secondly, to provide
shareholders with reliable intelligence for
the purpose of
enabling them to scrutinise the conduct of the
company's affairs
and to exercise their collective powers to reward
or control or
remove those to whom that conduct has been
confided.
The requirement of the appointment
of auditors and annual
audit of the accounts, now contained in
sections 235-246 of the
Companies Act 1985, was first introduced
by the Companies Act
1879 in relation to companies carrying on the
business of banking
and was extended to companies generally by the
Companies Act
1900. Section 23 of that Act required the auditors
to make a
report to the shareholders on the company's balance
sheet laid
before the company in general meeting, stating whether
the
balance sheet exhibited a true and correct view of the state
of
the company's affairs. By the same section, the report
was
required to be read before the company in general
meeting.
Section 19 of the Companies Act 1907 substituted a new
section
23 which, whilst repeating the requirement that the
auditors'
report should be read before the company in general
meeting,
added a requirement that it should be open to inspection
by any
shareholder, who was entitled, on payment of the fee, to
be
furnished with a copy of the balance sheet and report. The
new
section also made it an offence for any officer of the company
to
be party to issuing, circulating or publishing any copy of
the
balance sheet which did not either append or contain a
reference
to the auditors' report. The matter was carried one
stage further
by section 130 of the Companies Act 1929
(consolidating provisions
contained in sections 39 and 41 of the
Companies Act 1928) which
required the annual balance sheet and
auditors' report of a public
company to be sent not less than
seven days before the date of
the meeting to every member of the
company entitled to receive
notice of the meeting and entitled any
member of the company
and any debenture holder to be furnished on
demand and without
charge with a copy of the last balance sheet
and the auditors'
report. Finally, for relevant purposes, section
158 of the
Companies Act 1948 required the accounts and report to
be sent
to every member of the company and to every debenture
holder
not less than 21 days before the general meeting before
which the
accounts are to be laid.
Thus the history of the
legislation is one of an increasing
availability of information
regarding the financial affairs of the
company to those having an
interest in its progress and stability.
It cannot fairly be said
that the purpose of making such
information available is solely to
assist those interested in
attending general meetings of the
company to an informed
supervision and appraisal of the
stewardship of the company's
directors, for the requirement to
supply audited accounts to, for
- 18 -
instance, preference shareholders
having no right to vote at
general meetings and to debenture
holders cannot easily be
attributed to any such purpose.
Nevertheless, I do not, for my
part, discern in the legislation
any departure from what appears to
me to be the original, central
and primary purpose of these
provisions, that is to say, the
informed exercise by those
interested in the property of the
company, whether as proprietors
of shares in the company or as the
holders of rights secured by a
debenture trust deed, of such
powers as are vested in them by
virtue of their respective
proprietary interests.
It is argued on behalf of the
respondent that there is to be
discerned in the legislation an
additional or wider commercial
purpose, namely that of enabling
those to whom the accounts are
addressed and circulated, to make
informed investment decisions,
for instance, by determining
whether to dispose of their shares in
the market or whether to
apply any funds which they are
individually able to command in
seeking to purchase the shares of
other shareholders. Of course,
the provision of any information
about the business and affairs of
a trading company, whether it be
contained in annual accounts or
obtained from other sources, is
capable of serving such a purpose
just as it is capable of serving
as the basis for the giving of
financial advice to others, for
arriving at a market price, for
determining whether to extend
credit to the company, or for the
writing of financial articles in
the press. Indeed, it is readily
foreseeable by anyone who gives
the matter any thought that it
might well be relied on to a
greater or less extent for all or any
of such purposes. It is, of
course, equally foreseeable that
potential investors having no
proprietary interest in the company,
might well avail themselves of
the information contained in a
company's accounts published in the
newspapers or culled from an
inspection of the documents to be
filed annually with the
Registrar of Companies (which includes the
audited accounts) in
determining whether or not to acquire shares
in the company. I
find it difficult to believe, however, that the
legislature, in
enacting provisions clearly aimed primarily at the
protection of
the company and its informed control by the body of
its
proprietors, can have been inspired also by consideration for
the
public at large and investors in the market in particular.
The question is, I think, one of
some importance when one
comes to consider the existence of that
essential relationship
between the appellants and the respondent
to which, in any
discussion of the ingredients of the tort of
negligence, there is
accorded the description "proximity,"
for it is now clear from a
series of decisions in this House that,
at least so far as concerns
the law of the United Kingdom, the
duty of care in tort depends
not solely upon the existence of the
essential ingredient of the
foreseeability of damage to the
plaintiff but upon its coincidence
with a further ingredient to
which has been attached the label
"proximity" and which
was described by Lord Atkin in the course
of his speech in
Donoghue v. Stevenson [1932] A.C. 562, 581 as:
"such close and direct
relations that the act complained of
directly affects a person
whom the person alleged to be
bound to take care would know would
be directly affected
by his careless act."
- 19 -
It must be remembered, however,
that Lord Atkin was using these
words in the context of loss
caused by physical damage where the
existence of the nexus between
the careless defendant and the
injured plaintiff can rarely give
rise to any difficulty. To adopt
the words of Bingham L.J. in the
instant case [1989] Q.B. 653,
686:
"It is enough that the
plaintiff chances to be (out of the
whole world) the person with
whom the defendant collided
or who purchased the offending ginger
beer."
The extension of the concept of
negligence since the decision of
this House in Hedley Byrne &
Co. Ltd. v. Heller & Partners Ltd.
[1964] A.C. 465 to
cover cases of pure economic loss not resulting
from physical
damage has given rise to a considerable and as yet
unsolved
difficulty of definition. The opportunities for the
infliction of
pecuniary loss from the imperfect performance of
everyday tasks
upon the proper performance of which people rely
for regulating
their affairs are illimitable and the effects are far
reaching. A
defective bottle of ginger beer may injure a single
consumer but
the damage stops there. A single statement may be
repeated
endlessly with or without the permission of its author and
may be
relied upon in a different way by many different people.
Thus the
postulate of a simple duty to avoid any harm that is,
with
hindsight, reasonably capable of being foreseen becomes
untenable
without the imposition of some intelligible limits to keep
the law
of negligence within the bounds of common sense and
practicality.
Those limits have been found by the requirement of
what has been
called a "relationship of proximity" between
plaintiff
and defendant and by the imposition of a further
requirement that
the attachment of liability for harm which has
occurred be "just
and reasonable." But although the cases in
which the courts
have imposed or withheld liability are capable of
an approximate
categorisation, one looks in vain for some common
denominator by
which the existence of the essential relationship
can be tested.
Indeed it is difficult to resist a conclusion that
what have been
treated as three separate requirements are, at
least in most
cases, in fact merely facets of the same thing, for
in some cases
the degree of foreseeability is such that it is from
that alone
that the requisite proximity can be deduced, whilst in
others the
absence of that essential relationship can most
rationally be
attributed simply to the court's view that it would
not be fair
and reasonable to hold the defendant responsible.
"Proximity"
is, no doubt, a convenient expression so long as it is
realised
that it is no more than a label which embraces not a
definable
concept but merely a description of circumstances from
which,
pragmatically, the courts conclude that a duty of care
exists.
There are, of course, cases where,
in any ordinary meaning
of the words, a relationship of proximity
(in the literal sense of
"closeness") exists but where
the law, whilst recognising the fact
of the relationship,
nevertheless denies a remedy to the injured
party on the ground of
public policy. Rondel v. Worslev [1969] 1
A.C. 191 was such
a case as was Hill v. Chief Constable of West
Yorkshire
[1989] A.C 53, so far as concerns the alternative ground
of that
decision. But such cases do nothing to assist in the
identification
of those features from which the law will deduce the
essential
relationship on which liability depends and, for my part, I
- 20 -
think that it has to be recognised
that to search for any single
formula which will serve as a
general test of liability is to pursue
a will-o'-the wisp. The
fact is that once one discards, as it is
now clear that one must,
the concept of foreseeability of harm as
the single exclusive test
- even a prima facie test - of the
existence of the duty of care,
the attempt to state some general
principle which will determine
liability in an infinite variety of
circumstances serves not to
clarify the law but merely to bedevil
its development in a way
which corresponds with practicality and
common sense. In
Sutherland Shire Council v. Heyman, 60 A.L.R.
1, 43-44,
Brennan J. in the course of a penetrating analysis,
observed:
"Of course, if foreseeability
of injury to another were the
exhaustive criterion of a prima
facie duty to act to prevent
the occurrence of that injury, it
would be essential to
introduce some kind of restrictive
qualification - perhaps a
qualification of the kind stated in the
second stage of the
general proposition in Anns. I am
unable to accept that
approach. It is preferable, in my view, that
the law should
develop novel categories of negligence
incrementally and by
analogy with established categories, rather
than by a
massive extension of a prima facie duty of care
restrained
only by indefinable 'considerations which ought to
negative,
or to reduce or limit the scope of the duty or the class
of
person to whom it is owed."'
The same approach is, I think,
reflected in that passage in the
speech of Lord Devlin in the
Hedley Byrne case [1964] A.C. 465,
524-525 in which he
considered the impact of Donoghue v.
Stevenson on the facts
of that case and in which he analysed and
described the method by
which the law develops:
"In his celebrated speech in
that case Lord Atkin did two
things. He stated what he described
as a 'general
conception' and from that conception he formulated
a
specific proposition of law. In between he gave a
warning
'against the danger of stating propositions of law in
wider
terms than is necessary, lest essential factors be omitted
in
the wider survey and the inherent adaptability of English
law
be unduly restricted.'
"What Lord Atkin called a
'general conception of relations
giving rise to a duty of care' is
now often referred to as
the principle of proximity. You must take
reasonable care
to avoid acts or omissions which you can
reasonably foresee
would be likely to injure your neighbour. In
the eyes of the
law your neighbour is a person who is so closely
and
directly affected by your act that you ought reasonably
to
have him in contemplation as being so affected when you
are
directing your mind to the acts or omissions which are
called in
question. . . .
"Now, it is not, in my
opinion, a sensible application of
what Lord Atkin was saying for
a judge to be invited on the
facts of any particular case to say
whether or not there
was 'proximity' between the plaintiff and the
defendant.
That would be a misuse of a general conception and it
is
not the way in which English law develops. What Lord
- 21 -
Atkin did was to use his general
conception to open up a
category of cases giving rise to a special
duty. It was
already clear that the law recognised the existence
of such
a duty in the category of articles that were dangerous
in
themselves. What Donoghue v. Stevenson did may
be
described either as the widening of an old category or as
the
creation of a new and similar one. The general
conception can be
used to produce other categories in the
same way. An existing
category grows as instances of its
application multiply until the
time comes when the cell
divides. , . .
"In my opinion, the
appellants in their argument tried to
press Donoghue v.
Stevenson too hard. They asked whether
the principle of
proximity should not apply as well to words
as to deeds. I think
it should, but as it is only a general
conception it does not get
them very far. Then they take
the specific proposition laid down
by Donoghue v. Stevenson
and try to apply it literally to a
certificate or a banker's
reference. That will not do, for a
general conception
cannot be applied to pieces of paper in the
same way as to
articles of commerce or to writers in the same way
as to
manufacturers. An inquiry into the possibilities
of
intermediate examination of a certificate will not be
fruitful.
The real value of Donoghue v. Stevenson to the
argument in
this case is that it shows how the law can be
developed to solve
particular problems. Is the relationship
between the parties in
this case such that it can be brought
within a category giving
rise to a special duty? As always
in English law, the first step
in such an inquiry is to see
how far the authorities have gone,
for new categories in the
law do not spring into existence
overnight."
Perhaps, therefore, the most that
can be attempted is a
broad categorisation of the decided cases
according to the type of
situation in which liability has been
established in the past in
order to found an argument by analogy.
Thus, for instance, cases
can be classified according to whether
what is complained of is
the failure to prevent the infliction of
damage by the act of the
third party (such as the Dorset Yacht
Co. Ltd. v. Home Office
case [1970] A.C. 1004, P. Perl
(Exporters) Ltd. v. Camden London
Borough Council [1984] Q.B. 342, Smith v. Littlewoods Organisation
Ltd. [1987] A.C. 241
and, indeed, Anns v. Merton London Borough
Council [1978] A.C. 728 itself), in failure to perform properly a
statutory duty
claimed to have been imposed for the protection of
the plaintiff
either as a member of a class or as a member of the
public (such
as the Anns case, Ministry of Housing and Local
Government
v. Sharp [1970] 2 Q.B. 223, Yuen Kun Yeu v.
Attorney-General of
Hong Kong [1988] A.C. 175) or in the making
by the defendant
of some statement or advice which has been
communicated, directly
or indirectly, to the plaintiff and upon
which he has relied. Such
categories are not, of course,
exhaustive. Sometimes they overlap
as in the Anns case, and
there are cases which do not
readily fit into easily definable
categories (such as Ross v.
Caunters [1980] Ch. 297).
Nevertheless, it is, I think,
permissible to regard negligent
statements or advice as a separate
category displaying common
features from which it is possible to
find at least guidelines by
which a test for the existence of the
relationship which is
essential to ground liability can be
deduced.
- 22 -
The damage which may be occasioned
by the spoken or
written word is not inherent. It lies always in
the reliance by
somebody upon the accuracy of that which the word
communicates
and the loss or damage consequential upon that person
having
adopted a course of action upon the faith of it. In
general, it
may be said that when any serious statement, whether
it takes the
form of a statement of fact or of advice, is
published or
communicated, it is foreseeable that the person who
reads or
receives it is likely to accept it as accurate and to
act
accordingly. It is equally foreseeable that if it is
inaccurate in a
material particular the recipient who acts upon it
may suffer a
detriment which, if the statement had been accurate,
he would not
have undergone. But it is now clear that mere
foreseeability is
not of itself sufficient to ground liability
unless by reason of the
circumstances it itself constitutes also
the element of proximity
(as in the case of direct physical
damage) or unless it is
accompanied by other circumstances from
which that element may
be deduced. One must, however, be careful
about seeking to find
any general principle which will serve as a
touchstone for all
cases, for even within the limited category of
what, for the sake
of convenience, I may refer to as "the
negligent statement cases,"
circumstances may differ
infinitely and, in a swiftly developing
field of law, there can be
no necessary assumption that those
features which have served in
one case to create the relationship
between the plaintiff and the
defendant on which liability depends
will necessarily be
determinative of liability in the different
circumstances of
another case. There are, for instance, at least
four and possibly
more situations in which damage or loss may
arise from reliance
upon the spoken or written word and it must
not be assumed that
because they display common features of
reliance and
foreseeability they are necessarily in all respects
analagous. To
begin with, reliance upon a careless statement may
give rise to
direct physical injury which may be caused either to
the person
who acts on the faith of the statement or to a third
person. One
has only to consider, for instance, the chemist's
assistant who
mis-labels a dangerous medicine, a medical man who
gives negligent
telephonic advice to a parent with regard the
treatment of a sick
child, or an architect who negligently instructs
a bricklayer to
remove the keystone of an archway (as in Clayton
v. Woodman &
Son (Builders) Ltd. [1962] 2 Q.B. 533). In such
cases it is
not easy to divorce foreseeability simpliciter and the
proximity
which flows from the virtual inevitability of damage if
the advice
is followed. Again, economic loss may be inflicted
upon a third
party as a result of the act of the recipient of the
advice or
information carried out in reliance upon it (as, for
instance, the
testator Ross v. Caunters [1980] Ch. 297 or the
purchaser
in Ministry of Housing and Local Government v. Sharp
[1970]
2 Q.B. 223, both cases which give rise to certain difficulties
of
analysis). For present purposes, however, it is necessary to
consider
only those cases of economic damage suffered directly by
a
recipient of the statement or advice as a result of his
personally
having acted in reliance upon it.
In his dissenting judgment in
Candler v. Crane, Christmas &
Co. [1951] 2 K.B. 164,
Denning L.J. suggested three conditions for
the creation of a duty
of care in tort in such cases. First, the
advice must be given by
one whose profession it is to give advice
upon which others rely
in the ordinary course of business, such as
- 23 -
accountants, surveyors, valuers
and the like (p. 179). Secondly, it
must be known to the adviser
that the advice would be
communicated to the plaintiff in order to
induce him to adopt a
particular course of action (p. 180).
Thirdly, the advice must be
relied upon for the purpose of the
particular transaction for which
it was known to the advisers that
the advice was required (p. 182).
It is plain, however, from other
passages in his judgment, that
Denning L.J. did not consider these
conditions as necessarily
exhaustive criteria of the existence of
a duty and the speeches in
this House in the Hedley Byrne
case [1964] A.C. 465, where his
judgment was approved, indicate a
number of directions in which
such criteria are to be extended. To
begin with, Lord Reid, at p.
486, would not have confined
liability to statements made or
advice given in the exercise of a
profession involving the giving of
such advice but would have
extended it to:
"all those relationships
where it is plain that the party
seeking information or advice was
trusting the other to
exercise such a degree of care as the
circumstances
required, where it was reasonable for him to do
that, and
where the other gave the information or advice when
he
knew or ought to have known that the inquirer was relying
on
him."
Lord Morris of Borth-y-Gest, with
whom Lord Hodson agreed,
whilst initially, at p. 502, referring to
persons "possessed of a
special skill" nevertheless went
on to state the conditions in which
a duty of care might arise in
very much wider terms, at p. 503:
"Furthermore, if in a sphere
in which a person is so placed
that others could reasonably rely
upon his judgment or his
skill or upon his ability to make careful
inquiry, a person
takes it upon himself to give information or
advice to, or
allows his information or advice to be passed on to,
another
person who, as he knows or should know, will place
reliance
upon it, then a duty of care will arise."
Nonetheless, the subsequent
decision of the Privy Council in
Mutual Life and Citizens'
Assurance Co. Ltd. v. Evatt [1971] A.C.
793, from which Lord
Reid and Lord Morris dissented, would have
confined the duty of
care to where the advice relied upon was
given in the course of a
business or profession involving the giving
of advice of the kind
in question. For present purposes, it is
unnecessary to attempt a
resolution of the difference of opinion
arising from the Mutual
Life case, since there is no question here
but that the
certifying of the accounts was something done in the
course of the
ordinary business of the appellants.
Leaving this on one side, however,
it is not easy to cull
from the speeches in the Hedley Byrne
case [1964] A.C. 465 any
clear attempt to define or classify the
circumstances which give
rise to the relationship of proximity on
which the action depends
and indeed Lord Hodson, at p. 514,
expressly stated (and I
respectfully agree) that he did not think
it possible to catalogue
the special features which must be found
to exist before the duty
of care will arise in the given case.
Lord Devlin, at p. 530, is to
the same effect. The nearest that
one gets to the establishment
of a criterion for the creation of a
duty in the case of a
negligent statement is the emphasis to be
found in all the
- 24 -
speeches upon "the voluntary
assumption of responsibility" by the
defendant. This is a
convenient phrase but it is clear that it was
not intended to be a
test for the existence of the duty for, on
analysis, it means no
more than that the act of the defendant in
making the statement or
tendering the advice was voluntary and
that the law attributes to
it an assumption of responsibility if the
statement or advice is
inaccurate and is acted upon. It tells us
nothing about the
circumstances from which such attribution arises.
The point that is, as it seems to
me, significant in the
present context, is the unanimous approval
in this House of the
judgment of Denning L.J. in Candler's
case [1951] 2 K.B. 164, 181
in which he expressed the test of
proximity in these words: "did
the accountants know that the
accounts were required for
submission to the plaintiff and use by
him?" In so far as this
might be said to imply that the
plaintiff must be specifically
identified as the ultimate
recipient and that the precise purpose
for which the accounts were
required must be known to the
defendant before the necessary
relationship can be created,
Denning L.J's. formulation was
expanded in the Hedley Byrne case,
where it is clear that,
but for an effective disclaimer, liability
would have attached.
The respondents there were not aware of
the actual identity of the
advertising firm for which the credit
reference was required nor
of its precise purpose, save that it was
required in anticipation
of the placing of advertising contracts.
Furthermore, it is clear
that "knowledge" on the part of the
respondents embraced
not only actual knowledge but such
knowledge as would be
attributed to a reasonable person placed as
the respondents were
placed. What can be deduced from the
Hedley Byrne case,
therefore, is that the necessary relationship
between the maker of
a statement or giver of advice ("the
adviser") and the
recipient who acts in reliance upon it ("the
advisee")
may typically be held to exist where (1) the advice is
required
for a purpose, whether particularly specified or generally
described,
which is made known, either actually or inferentially, to
the
adviser at the time when the advice is given; (2) the adviser
knows,
either actually or inferentially, that his advice will
be
communicated to the advisee, either specifically or as a
member
of an ascertainable class, in order that it should be used
by the
advisee for that purpose; (3) it is known either
actually or
inferentially, that the advice so communicated is
likely to be
acted upon by the advisee for that purpose without
independent
inquiry, and (4) it is so acted upon by the advisee to
his
detriment. That is not, of course, to suggest that these
conditions
are either conclusive or exclusive, but merely that the
actual
decision in the case does not warrant any broader
propositions.
Those propositions are, I think,
in accord with the two
United States authorities which were
referred to in the course of
the speeches in the Hedley Byrne
decision. In Glanzer v. Shepard
(1922) 135 N.E. 275, where
a public weigher negligently certified
an overweight so that the
purchaser of the goods paid too much
for them, the identity of the
recipient of the certificate was
known, the purpose of the
certificate was known, and the
certificate was issued for the very
purpose of enabling the price
of the goods to be ascertained and
with the knowledge that it
would be acted upon by the recipient
for that purpose. In
Ultramares Corporation v. Touche, 174
N.E. 441, on the other hand
- a case much nearer to the present -
the action failed. There
- 25 -
auditors, although aware generally
that the certified accounts of
the company would be shown to
others by the company as the
basis of financial dealings generally
"according to the needs of the
occasion," were unaware
of the company's specific purpose of
obtaining financial help from
the plaintiff.
The most recent authority on
negligent misstatement in this
House - the two appeals in Smith
v. Eric S. Bush and Harris v.
Wyre Forest District Council
which were heard together [1989] 2
W.L.R. 790 do not, I think,
justify any broader proposition than
that already set out, save
that they make it clear that the
absence of a positive intention
that the advice shall be acted upon
by anyone other than the
immediate recipient - indeed an
expressed intention that it shall
not be acted upon by anyone else
- cannot prevail against actual
or presumed knowledge that it is in
fact likely to be relied upon
in a particular transaction without
independent verification. Both
appeals were concerned with
surveyors' certificates issued to
mortgagees in connection with the
proposed purchases for which the
mortgagees were contemplating
making advances. In each case there
was an express disclaimer of
responsibility, but in each case it
was known to the surveyor that
the substance of the report (in the
sense of what was important to
a purchaser) - that is to say
whether or not any repairs to the
property were considered
essential - would be made known by the
mortgagee to the purchaser,
the plaintiff in the action, and would
be likely to be acted upon
by him in entering into a contract to
purchase the property. In so
far as the case was concerned with
the effects of the disclaimer,
it does not require consideration in
the present context, but
there are important passages in the
speeches in this House bearing
upon the questions which arise on
this appeal and indicative of
the features which, in that case, led
their Lordships to conclude
that the necessary relationship of
proximity existed between the
surveyors and the purchasers of the
respective properties. Lord
Templeman deduced the relationship
from a combination of factors.
He said, at pp. 799-800:
"I agree that by obtaining
and disclosing a valuation, a
mortgagee does not assume
responsibility to the purchaser
for that valuation. But in my
opinion the valuer assumes
responsibility to both mortgagee and
purchaser by agreeing
to carry out a valuation for mortgage
purposes knowing that
the valuation fee has been paid by the
purchaser and
knowing that the valuation will probably be relied
upon by
the purchaser in order to decide whether or not to
enter
into a contract to purchase the house. ... In general I
am
of the opinion that in the absence of a disclaimer of
liability
the valuer who values a house for the purpose of a
mortgage,
knowing that the mortgagee will rely and the
mortgagor will
probably rely on the valuation, knowing that
the purchaser
mortgagor has in effect paid for the
valuation, is under a duty to
exercise reasonable skill and
care and that duty is owed to both
parties to the mortgage
for which the valuation is made."
Lord Griffiths at p. 813, rejected
the "voluntary assumption of
responsibility" as a
helpful formula for testing the existence of a
duty of care
observing that the phrase:
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