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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)
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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:

    - 26 -