On 6 July 1987, Sir Neil Lawson, sitting as judge in chambers, made an order for the trial of a preliminary issue, as follows:
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] AC 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, 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] AC 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] AC 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] AC 728, 751–752:
“Through the trilogy of cases in this House — Donoghue
v.
Stevenson
[1932] AC 562, Hedley Byrne & Co. Ltd.
v.
Heller & Partners Ltd.
[1964] AC 465, and Dorset Yacht Co. Ltd.
v.
Home Office
[1970] AC 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 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] AC 1004 per Lord Reid at p. 1027.”
But since the Anns case 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. [1985] 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] AC 473, 501d–g; Hill
v.
Chief Constable of West Yorkshire
[1989] AC 53, 60b–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:
“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:” see 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 Corporation Ltd.
v.
Mitsui O.S.K. Lines Ltd.
[1986] AC 1 and Leigh & Sillavan Ltd.
v.
Aliakmon Shipping Co. Ltd.
[1986] AC 785. In the former case Lord Fraser of Tullybelton, delivering the judgment of the Privy Council, said, at p.
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 [Oil (Australia) Pty. Ltd.
v.
Dredge “Willemstad”(1976)], 136 C.L.R. 529, and their Lordships are not aware that a
view
to the contrary has ever been judicially expressed.”
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 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 pp. 42–43:
“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 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 Hedley Byrne & Co. Ltd.
v.
Heller & Partners Ltd.
[1964] AC 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 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:” see 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” *Reporter"s noteCandlewood Navigation Corporation Ltd
v
Mitsui OSKLines Ltd [1986]
AC
1,
25
* 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, 180–181, 182–184 in the following passages:
“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.”
“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 £
2,000.
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 £
200.
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 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 [
1990]
1 A.C. 831, 862, 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.
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 atttract 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.”
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 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 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:” see 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.
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.
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 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
to
246
of the Companies
Act
1985, was first introduced by the Companies
Act
1879 (
25
&
26
Vict.c.
76) 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 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] AC 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.”
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] AC 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.
Worsley
[1969] 1 AC 191 was such a case, as was Hill
v.
Chief Constable of West Yorkshire
[1989] AC 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 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
[1978] AC 728. 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] AC 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 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 Dorset Yacht Co. Ltd.
v.
Home Office
[1970] AC 1004, P. Perl (Exporters) Ltd.
v.
Camden London Borough Council
[1984] QB 342, Smith
v.
Littlewoods Organisation Ltd. [1987] A.C.
241
and, indeed, Anns
v.
Merton London Borough Council
[1978] AC 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.
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 analogous. 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 & Sons (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 in 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
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] AC 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] AC 793, from which Lord Reid and Lord Morris dissented, would have confined the duty of care to cases 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] AC 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 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 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 [
1990]
1 A.C. 831 which were heard together — does 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. 847–848:
Lord Griffiths at p. 862, rejected the
voluntary
“assumption of responsibility” as a helpful formula for testing the existence of a duty of care observing that the phrase:
“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.”
He continued, at pp. 862, 864–865:
“The essential distinction between the present case and the situation being considered in Hedley Byrne
[1964] AC 465 and in the two earlier cases, is that in those cases the advice was being given with the intention of persuading the recipient to
act
upon it. In the present case, the purpose of providing the report is to advise the mortgagee but it is given in circumstances in which it is highly probable that the purchaser will in fact
act
on its contents, although that was not the primary purpose of the report. I have had considerable doubts whether it is wise to increase the scope of the duty for negligent advice beyond the person directly intended by the giver of the advice to
act
upon it to those whom he knows may do so.”
Finally, in relation to the Smith appeal, Lord Jauncey of Tullichettle observed, at p. 871–872:
“The four critical facts are that the appellants knew from the outset: (1) that the report would be shown to Mrs. Smith; (
2)
that Mrs. Smith would probably rely on the
valuation
contained therein in deciding whether to buy the house without obtaining an independent
valuation;
(3) that if, in these circumstances, the
valuation
was, having regard to the
actual
condition of the house, excessive, Mrs. Smith would be likely to suffer loss; and (4) that she had paid the building society a sum to defray the appellants' fee. In the light of this knowledge the appellants could have declined to
act
for the building society, but they chose to proceed. In these circumstances they must be taken not only to have assumed contractual obligations towards the building society but delictual obligations towards Mrs. Smith, whereby they became under a duty towards her to carry out their work with reasonable care and skill. It is critical to this conclusion that the appellants knew that Mrs. Smith would be likely to rely on the
valuation
without obtaining independent advice. In both Candler
v.
Crane, Christmas & Co. [1951]
2
K.B. 164 and Hedley Byrne & Co. Ltd.
v.
Heller & Partners Ltd.
[1964] AC 465, the provider of the information was the obvious and most easily available, if not the only available, source of that information. It would not be difficult therefore to conclude that the person who sought such information was likely to rely upon it. In the case of an intending mortgagor the position is
very
different since, financial considerations apart, there is likely to be available to him a wide choice of sources of information, to wit, independent
valuers
to whom he can resort, in addition to the
valuer
acting
for the mortgagee. I would not therefore conclude that the mere fact that a mortgagee's
valuer
knows that his
valuation
will be shown to an intending mortgagor of itself imposes upon him a duty of care to the mortgagor. Knowledge,
actual
or implied, of the mortgagor's likely reliance upon the
valuation
must be brought home to him. Such knowledge may be fairly readily implied in relation to a potential mortgagor seeking to enter the lower end of the housing market but non constat that such ready implication would arise in the case of a purchase of an expensive property whether residential or commercial.”
My Lords, no decision of this House has gone further than Smith
v.
Eric S. Bush, but your Lordships are asked by the respondents to widen the area of responsibility even beyond the limits to which it was extended by the Court of Appeal in this case and to find a relationship of proximity between the adviser and third parties to whose attention the advice may come in circumstances in which the reliance said to have given rise to the loss is strictly unrelated either to the intended recipient or to the purpose for which the advice was required. My Lords, I discern no pressing reason of policy which would require such an extension and there seems to me to be powerful reasons against it. As Lord Reid observed in the course of his speech in Hedley Byrne
[1964] AC 465, 483, words can be broadcast with or without the consent or foresight of the speaker or writer; and in his speech in the same case, Lord Pearce drew attention to the necessity for the imposition of some discernible limits to liability in such cases. He said, at p. 534:
As I have already mentioned, it is almost always foreseeable that someone, somewhere and in some circumstances, may choose to alter his position upon the faith of the
accuracy
of a statement or report which comes to his attention and it is always foreseeable that a report — even a confidential report — may come to be communicated to persons other than the original or intended recipient. To apply as a test of liability only the foreseeability of possible damage without some further control would be to create a liability wholly indefinite in area, duration and amount and would open up a limitless
vista
of uninsurable risk for the professional man.
On the basis of the pleaded case, as amended, it has to be assumed that the appellants, as experienced
accountants,
were aware or should have been aware that Fidelity's results made it
vulnerable
to take-over bids and that they knew or ought to have known that a potential bidder might well rely upon the published
accounts
in determining whether to
acquire
shares in the market and to make a bid. It is not, however, suggested that the appellants, in certifying the
accounts,
or Parliament, in providing for such certification, did so for the purpose of assisting those who might be minded to profit from dealings in the company's shares. The respondents, whilst
accepting
that it is no part of the purpose of the preparation, certification and publication of the
accounts
of a public company to provide information for the guidance of predators in the market, nevertheless argue that the appellants' knowledge that predators might well rely upon the
accounts
for this purpose sufficiently establishes between them and potential bidders that relationship of “proximity” which founds liability. On the face of it, this submission appears to equate “proximity” with mere foreseeability and to rely upon the
very
misinterpretation of the effect of the decision of this House in the Anns case
[1978] AC 728 which was decisively rejected in the Governors of Peabody Donation Fund
v.
Sir Lindsay Parkinson & Co. Ltd. [1985] A.C.
210
and in Yuen Kun Yeu
v.
Attorney-General of Hong Kong [1988] A.C. 175. Your Lordships have been referred, however, to three authorities, one from New Zealand and two from the United Kingdom, which do undoubtedly support the respondents' contention.
In Scott Group Ltd.
v.
McFarlane [1978] N.Z.L.R. 553, the defendants were the auditors of a company which had been successfully taken over in reliance upon certified consolidated
accounts
in which, as a result of double-counting, the assets were overstated. It was admitted that the failure of the defendants to discover the discrepancy was due to negligence. In the Supreme Court of New Zealand, Quilliam J. dismissed the plaintiffs' claim on the ground that the appellants, though careless, owed them no duty of care. An appeal to the Court of Appeal failed but the court was divided as to the reasons. Richmond P. held that the appeal failed for the same reason as that stated by the trial judge. Woodhouse J. would have allowed the appeal. Cooke J., on the other hand, whilst concurring with Woodhouse J. that the respondents did in fact owe a duty of care to the appellants, held that the appeal failed because they had failed to show any recoverable loss.
The more restrictive
view
was expressed by Richmond P. in the following terms, at pp. 566–567:
“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. It would be going too far to treat
accountants
as assuming a responsibility towards all persons dealing with the company or its members, in reliance to some greater or lesser degree on the
accuracy
of the
accounts,
merely because it was reasonably foreseeable, in a general way, that a transaction of the kind in which the plaintiff happened to become involved might indeed take place. The relationship between the parties would, I think, be too general and not sufficiently ‘special’ to come within the principles underlying the decision in Hedley Byrne. As I have said, I believe it to be essential to the existence of a ‘special relationship’ that the maker of the statement was or should have been aware that his advice was required for use in a specific type of contemplated transaction. This requirement has not always required emphasis in the course of judicial discussion as to the nature of a special relationship. Probably this is because in most cases the purpose for which the information was required was, on the facts, quite obvious. But certainly this particular point was made
very
clear indeed in Denning L.J.'s judgment in Candler
v.
Crane, Christmas & Co. I would think that it must almost inevitably follow, once the maker of the statement is aware of a specific purpose for which his information will be used, that he will also have in direct contemplation a specific person or class of persons, even though unidentified by name.”
The New Zealand Companies
Act
1955 contained provisions relating to the auditors' report which is similar in substance to those contained in the United Kingdom legislation but with this
variation,
that the “true and fair
view”
which group
accounts
are certified to give are qualified by the words “so far as concerns members of the company.” In relation to these provisions, Richmond P. observed, at p. 568:
“The provisions of the
Act
to which I have just referred are aimed essentially at the protection of the members of the company and of course the auditors, whose contract of employment is with the company itself, are under a contractual duty of care to the company. These provisions do not encourage me to take the
view
that there is any reason why the auditors of a public company should thereby come under a common law duty of care to third persons dealing with the company or its members on the faith of their audit certificate, such liability being in some way based on a much wider principle than would apply, for example, in the case of auditors certifying the
accounts
of a private company. Like Quilliam J., I can also see no reason to differentiate between auditors as such and a firm of chartered
accountants
employed to prepare the
accounts
of the company. The only point which has given me some concern, so far as the statutory provisions are concerned, is the requirement of section 133(1) whereby a copy of the balance sheet and auditors' report is required to be annexed to the annual return and thus becomes available to the public under section 9(1) of the
Act.
But on reflection, this only means that the auditor of the
accounts
of a public company knows that the
accounts
and his report will become available to the public generally and, consequently, may be relied on by one or more members of the public, to some greater or lesser degree, as the basis of some business transaction. It is not suggested, however, that the Companies
Act
imposes any statutory duty of care as between auditors and members of the public who rely on the
accounts.
In the case of a company whose shares are listed on the Stock Exchange the auditor will also know that under the Stock Exchange rules a copy of the
accounts
must be made available. He knows, too, that shareholders will receive copies of the
accounts
and that the company itself may well make copies available to business institutions and individuals for
various
purposes. In the end all these matters merely add up to the fact that the auditor of a public company will necessarily have in his contemplation the possibility that the
accounts
may be relied on in all sorts of ways by persons other than the company and its members. This, as I have said, is not sufficient to bring about a ‘special relationship.’”
Both Woodhouse and Cooke JJ., who favoured a wider
view
of responsibility, based themselves upon an interpretation of the speech of Lord Wilberforce in the Anns case
[1978] AC 728 which required, as the first stage of the two-stage inquiry to which he there referred, no more than a consideration of whether harm was foreseeable, thus equating the “proximate relationship” as comprehending foresight and nothing more. This is made quite clear from the following passage in the judgment of Woodhouse J., at p. 574:
“In this regard it will be noticed that although the first part of the inquiry outlined by Lord Wilberforce is to ask whether ‘there is a sufficient relationship of proximity’ in order to decide whether there is a prima facie duty of care, he would test the sufficiency of proximity simply by the reasonable contemplation of likely harm. And, with respect, I do not think that there is any need for or any sound reason in favour of a more restrictive approach. The issue has been made increasingly complex by the successive and
varying
formulas that have been used in an effort to confine the general area of responsibility, in particular for negligent words or in respect of purely economic losses. At this initial stage at least it should be possible to remove some degree of uncertainty — in my opinion it is done by the comprehensible and straightforward test of foreseeability.”
Woodhouse J., again emphasised foreseeability as the relevant test for the creation of the relationship of proximity in his judgment where he said, at p. 575:
Cooke J. was to the same effect. At p. 583 he adopted, as the first step of Lord Wilberforce's two-stage approach, the formulation which equates the relationship of proximity with foreseeability, although at an earlier stage of his judgment he seemed to be disposed to regard the essential relationship as arising not simply from the foreseeability that a member of the public might rely on the
accounts
as a basis of some transaction but, for a reason which I confess I do not fully understand, from the foreseeability that some member of the public might rely on the
accounts
for the making of a take-over bid. He said, at p. 581:
“The learned judge in the Supreme Court was disposed to regard the requirement of filing audited
accounts,
which are available for public inspection, as not imposed by Parliament for the purpose of enabling people to deal confidently in reliance on the
accuracy
of the
accounts.
He thought it much more likely that the purpose was to enable a proper supervision to be exercised over the
activities
of companies, and to enable those concerned to ensure that the companies were not trading illegally or dishonestly. With respect, I am unable to agree with him on that point. The statutory requirements regarding the filing of financial information stem, I think, from the
view
that those
dealing with or
investing in a limited liability company have a legitimate interest in being afforded reasonable
access
to relevant information; and that this interest has to be balanced against the wish for confidentiality naturally entertained by family companies and the like which do not appeal to the public for funds …. I would agree, though, that the provisions are probably not aimed, or at least not primarily, at protecting purchasers of shares in the market.”
Thus the majority of the Court of Appeal favoured a more extensive
view
of the circumstances from which the essential relationship between plaintiff and defendant may be inferred in a negligent statement case than had yet emerged from any decision in the United Kingdom.
Now, of course, any decision of the Court of Appeal of New Zealand is entitled to the
very
greatest respect, but it has to be observed that the majority
view
was based upon an interpretation of Lord Wilberforce's observations in the Anns case
[1978] AC 728, 751–752 which has since been severely qualified by subsequent decisions of this House.
The Scott Group case [1978] N.Z.L.R. 553 has, however, since been referred to and
accepted
in two cases decided in the United Kingdom. In JEB Fasteners Ltd.
v.
Marks Bloom & Co. [1981] 3 All E.R.
289,
the plaintiffs who had
acquired
the shares of the company as a result of a take-over, claimed damages against the company's auditors who, it was claimed, had been negligent in certifying the
accounts.
Woolf J. dismissed the claim on the ground that the plaintiffs failed to show the causative connection between reliance on the erroneous
accounts
and the take-over and his decision was subsequently affirmed by the Court of Appeal [1983] 1 All E.R. 583. In the course of his judgment, however, Woolf J. made the following observation with regard to the auditors' liability [1981] 3 All E.R.
289,
296–297:
“Without laying down any principle which is intended to be of general application, on the basis of the authorities which I have cited, the appropriate test for establishing whether a duty of care exists appears in this case to be whether the defendants knew or reasonably should have foreseen at the time the
accounts
were audited that a person might rely on those
accounts
for the purpose of deciding whether or not to take over the company and therefore could suffer loss if the
accounts
were inaccurate. Such an approach does place a limitation on those entitled to contend that there has been a breach of duty owed to them. First of all, they must have relied on the
accounts
and, second, they must have done so in circumstances where the auditors either knew that they would or ought to have known that they might. If the situation is one where it would not be reasonable for the
accounts
to be relied on, then, in the absence of express knowledge, the auditor would be under no duty. This places a limit on the circumstances in which the audited
accounts
can be relied on and the period for which they can be relied on. The longer the period which elapses prior to the
accounts
being relied on, from the date on which the auditor gave his certificate, the more difficult it will be to establish that the auditor ought to have foreseen that his certificate would, in those circumstances, be relied on.”
The third case upon which the respondents rely is the decision of the Outer House of the Court of Session in Twomax Ltd.
v.
Dickson, McFarlane & Robinson, 1982 S.C. 113, the facts in which have a broad similarity to those in the JEB Fasteners case and in the instant case. The court was concerned with three separate claims from investors (one of whom was a company and two of whom were individuals) who had
acquired
shares in a private company which, shortly after the investments were made, went into receivership and was subsequently wound up. All three investors claimed that their respective investments were made on the faith of the company's audited
accounts
which had been negligently prepared and certified by the defenders, the company's auditors, in the course of their statutory audit. The Lord Ordinary (Lord Stewart), at pp. 122–124, having contrasted the limitations appearing from the speeches of Lord Morris and Lord Hodson in the Hedley Byrne case with the broader formulation of general principle in the speech of Lord Wilberforce in the Anns case,
accepted
the latter as governing the proper approach to the question of whether or not the essential relationship between pursuers and defenders was established in a negligent statement case and followed the guidance of the majority judgments of the New Zealand Court of Appeal in the Scott Group case, save that he could not draw any sensible distinction between the case of the corporate pursuer, which had
acquired
the controlling interest, and that of the individual minority investors. He thus, by implication, rejected the suggestion that a potential bidder in the market is in some special position as compared with other investors such as to create between him and the auditors carrying out their statutory duties, a special relationship which does not arise in the case of an investor concerned to
acquire
only a minority interest. And this, with respect, must be correct, for there can be no logical distinction
according
to whether an investor is likely to
acquire
many shares or only a few. Such distinction as there is lies only in the scale of the potential loss which may be little or great
according
to the magnitude of the investment. Indeed, as he pointed out, it could legitimately be said that the smaller the investment the greater the likelihood of the investor
accepting
the audited
accounts
as the basis for his
action
without making any independent investigation. In the result, Lord Stewart held that the knowledge to be imputed to the defenders that there would or might well be potential investors in the market who would be interested in purchasing existing shares or subscribing for new shares and who might be influenced by the
accounts
was sufficient to create between them and such investors the relationship of proximity which gave rise to an enforceable duty of care.
This case, therefore, falls into the same category as the other two cases. All three were based upon the
view
of Lord Wilberforce's exposition in the Anns case
[1978] AC 728 which would result in foreseeability and proximity being treated as synonymous — a
view
which this House (and, indeed, Lord Wilberforce himself in McLoughlin
v.
O'Brian
[1983] 1 AC 410) has now decisively rejected. That, of course, does not conclude the question for it would still be open to your Lordships to find in the circumstances of this case that a special relationship existed between the auditor conducting an annual audit in pursuance of his statutory duty and every potential investor in the market or, indeed, any other person who might do business with the company without relying solely upon the foreseeability of potential damage to such person. Just as, for instance, in Smith
v.
Eric S. Bush [
1990]
1 A.C. 831, one of the factors giving rise to the relationship in that case was the circumstance that the plaintiff was the person who paid for the report upon which the reliance was placed, so here it might be said that a special relationship was to be found in the nature and extent of the statutory duties which the auditor is called upon to fulfil.
For my part, however, I can see nothing in the statutory duties of a company's auditor to suggest that they were intended by Parliament to protect the interests of investors in the market and I see no reason in policy or in principle why it should be either desirable or appropriate that the ambit of the special relationship required to give rise to liability in cases such as the present should be extended beyond those limits which are deducible from the cases of Hedley Byrne and Smith
v.
Eric S. Bush. Those limits appear to me to be correctly and admirably stated in the passages from the judgment of Richmond P. in the Scott Group case to which I have already referred. In particular, I see no reason why any special relationship should be held to arise simply from the circumstance that the affairs of the company are such as to render it susceptible to the attention of predators in the market who may be interested in
acquiring
all or the majority of the shares rather than merely a parcel of shares by way of addition to a portfolio. It follows that I would dismiss the respondents' cross-appeal.
I turn, therefore, to the question raised by the appellants' appeal. The Court of Appeal, whilst rejecting unanimously the respondents' contention that the appellants owed them a duty of care simply as potential investors in the market, nevertheless by a majority allowed their claim that a similar duty was owed to them in their capacity as shareholders from the date when they first became registered in respect of shares which they had purchased. Now it cannot be nor is it claimed that this event created for the appellants any new or greater risk of harm in relation to a certification which had already taken place; nor can it be claimed that it brought about some change in the quality or extent of the respondents' reliance upon the (ex hypothesi) inaccurate information which they had previously received and digested. The only difference in their position before registration and their position afterwards was that, as registered shareholders, they now had the statutory right to receive the
accounts
on which they had already relied in
acquiring
their original shares and to receive notice of and attend the annual general meeting of Fidelity at which the
accounts
were to be read and, if thought fit, approved and passed. This change of position seems, on the face of it, less than momentous and in fact they did not trouble to appoint a representative to attend the meeting on their behalf. If a distinction is to be found at all, therefore, it can only be that the nature and purpose of the statutory provisions governing the appointment and duties of auditors and the certification and publication to shareholders and others of the
accounts
have the effect of creating, between the auditors and individual shareholders, as potential investors in that capacity, that special relationship of proximity which is required to give rise to the duty of care and which does not exist between the auditors and the investing public generally.
Now if it be right, as, for my part, I believe that it is and as the Court of Appeal has held, that no relationship of proximity and thus no duty of care exists between auditors and the investing public generally in relation to the statutory audit — I say nothing, of course, about a case where
accounts
are audited specifically for the purpose of submission to a potential investor — the attribution of such a duty arising from the receipt of exactly the same information by a person who happens to be the registered holder of a share in the company whose
accounts
are in question produces entirely capricious results. O'Connor L.J. [1989] Q.B. 653, 715, in his dissenting judgment, instanced the case of a shareholder who, having purchased further shares at an overvalue on the basis of the
accounts,
shows the
accounts
to a friend who has no existing shareholding but proceeds to make a similar purchase. Each receives exactly the same information; each relies upon it in exactly the same way and for the same purpose; and the loss sustained in both cases is identical and is equally foreseeable. Yet liability is said to exist in the one case but not in the other. One has indeed only to consider the circumstances of the instant case which must ultimately result in drawing a distinction between the loss sustained as a result of the initial purchase of shares (irrecoverable) and that sustained as a result of purchases made after the first registration (recoverable) although all purchases were made in reliance upon exactly the same information.
So unreasonable a distinction must call in question the analysis which leads to it. The majority in the Court of Appeal deduced the relationship from what Bingham L.J. described, at p. 684D, as “the degree of closeness between the parties.” It was pointed out that although the auditors are appointed and paid by the company that is the result of the
vote
of the shareholders in general meeting and their remuneration is paid out of funds which might otherwise be available for distribution to shareholders by way of dividend. Their duty is to report to the shareholders whether the
accounts
give a true and fair
view
of the company's financial position and their report is sent to each shareholder as an identifiable individual. Thus, it was said, the relationship, although not a contractual one, was
very
close to being contractual and was moreover one in which a lack of care would be likely directly to affect the
very
person whose interest the auditor is engaged to protect, should that person choose to rely upon the
accounts
for the purpose of making or disposing of an investment. My Lords, of course I see the force of this, but, as I have already suggested, “proximity” in cases such as this is an expression used not necessarily as indicating literally “closeness” in a physical or metaphorical sense but merely as a convenient label to describe circumstances from which the law will attribute a duty of care. It has to be borne in mind that the duty of care is inseparable from the damage which the plaintiff claims to have suffered from its breach. It is not a duty to take care in the abstract but a duty to avoid causing to the particular plaintiff damage of the particular kind which he has in fact sustained. I cannot improve on the analysis which is to be found in the judgment of Brennan J. in the High Court of Australia in the Shire of Sutherland case, 60 A.L.R. 1 to which I have already referred. After citing the speech of
Viscount
Simonds in The Wagon Mound
[1961] AC 388, 425, where he observed that it was
vain
to isolate the liability from its context and to say that B is or is not liable and then to ask for what damage he is liable, Brennan J. continued, at p. 48:
In seeking to ascertain whether there should be imposed on the adviser a duty to avoid the occurrence of the kind of damage which the advisee claims to have suffered it is not, I think, sufficient to ask simply whether there existed a “closeness” between them in the sense that the advisee had a legal entitlement to receive the information upon the basis of which he has
acted
or in the sense that the information was intended to serve his interest or to protect him. One must, I think, go further and ask, in what capacity was his interest to be served and from what was he intended to be protected? A company's annual
accounts
are capable of being utilised for a number of purposes and if one thinks about it it is entirely foreseeable that they may be so employed. But many of such purposes have absolutely no connection with the recipient's status or capacity, whether as a shareholder,
voting
or non-
voting,
or as a debenture-holder. Before it can be concluded that the duty is imposed to protect the recipient against harm which he suffers by reason of the particular use that he chooses to make of the information which he receives, one must, I think, first ascertain the purpose for which the information is required to be given. Indeed the paradigmatic Donoghue
v.
Stevenson case of a manufactured article requires, as an essential ingredient of liability, that the article has been used by the consumer in the manner in which it was intended to be used: see Grant
v.
Australian Knitting Mills Ltd.
[1936] AC 85, 104 and Junior Books Ltd.
v.
Veitchi
Co. Ltd.
[1983] 1 AC 520, 549, 552. I entirely follow that if the conclusion is reached that the
very
purpose of providing the information is to serve as the basis for making investment decisions or giving investment advice, it is not difficult then to conclude also that the duty imposed upon the adviser extends to protecting the recipient against loss occasioned by an unfortunate investment decision which is based on carelessly inaccurate information. Bingham L.J. did, indeed, conclude that the provision of guidance for the making of investment decisions was one of the purposes to be discerned in the statutory provisions. He observed [1989] Q.B. 653, 681–682:
How far he regarded this as an essential feature of the relationship of proximity which he held to exist between the appellants and the respondents as shareholders is not, however, entirely clear, for he attributed the same intention to the legislature in relation to investors generally. He said, at p. 682:
“The publication of
accounts
must limit, if it cannot eliminate, the scope for rumour-inspired speculation and thus promote an informed and orderly market. It enables prospective investors, like shareholders, to make informed decisions. For such prospective investors the independent opinion of the auditor has the same significance as for existing shareholders.”
As I have already indicated, I am not, for my part, able to share this
view
of the intention of the legislature. I do not believe and I see no grounds for believing that, in enacting the statutory provisions, Parliament had in mind the provision of information for the assistance of purchasers of shares or debentures in the market, whether they be already the holders of shares or other securities or persons having no previous proprietary interest in the company. It is unnecessary to decide the point on this appeal, but I can see more force in the contention that one purpose of providing the statutory information might be to enable the recipient to exercise whatever rights he has in relation to his proprietary interest by
virtue
of which he receives it, by way, for instance, of disposing of that interest. I can, however, see no ground for supposing that the legislature was intending to foster a market for the existing holders of shares or debentures by providing information for the purpose of enabling them to
acquire
such securities from other holders who might be minded to sell.
For my part, I think that the position as regards the auditor's statutory duty was correctly summarised by O'Connor L.J. in his dissenting judgment when he said, at p. 714:
In my judgment,
accordingly,
the purpose for which the auditors' certificate is made and published is that of providing those entitled to receive the report with information to enable them to exercise in conjunction those powers which their respective proprietary interests confer upon them and not for the purposes of individual speculation with a
view
to profit. The same considerations as limit the existence of a duty of care also, in my judgment, limit the scope of the duty and I agree with O'Connor L.J. that the duty of care is one owed to the shareholders as a body and not to individual shareholders.
To widen the scope of the duty to include loss caused to an individual by reliance upon the
accounts
for a purpose for which they were not supplied and were not intended would be to extend it beyond the limits which are so far deducible from the decisions of this House. It is not, as I think, an extension which either logic requires or policy dictates and I, for my part, am not prepared to follow the majority of the Court of Appeal in making it. In relation to the purchase of shares of other shareholders in a company, whether in the open market or as a result of an offer made to all or a majority of the existing shareholders, I can see no sensible distinction, so far as a duty of care is concerned, between a potential purchaser who is,
vis-
-
vis
the company, a total outsider and one who is already the holder of one or more shares. I
accordingly
agree with what has already fallen from my noble and learned friend, Lord Bridge of Harwich, and with the speech to be delivered by my noble and learned friend, Lord Jauncey of Tullichettle, which I have had the advantage of reading, and I, too, would allow the appeal and dismiss the cross-appeal.
LORD JAUNCEY OF TULLICHETTLE. My Lords, it no longer requires a detailed citation of authority to
vouch
the well-established proposition that a negligent statement may, in certain circumstances, render the maker thereof liable for economic loss occasioned thereby to another. It is sufficient to mention Cann
v.
Willson (1888) 39 Ch D. 39, the dissenting judgment of Denning L.J. in Candler
v.
Crane, Christmas & Co. [1951]
2
K.B. 164, and two cases in this House, Hedley Byrne & Co. Ltd
v.
Heller & Partners Ltd.
[1964] AC 465 and Smith
v.
Eric S. Bush [
1990]
1 A.C. 831. Whether liability exists in any particular case will depend upon whether the maker of the statement owes a duty of care to the person who has suffered loss. In this connection I cannot do better than quote the words of Lord Keith of Kinkel in Governors of Peabody Donation Fund
v.
Sir Lindsay Parkinson & Co. Ltd. [1985] A.C.
210,
240–241:
“The true question in each case is whether the particular defendant owed to the particular plaintiff a duty of care having the scope which is contended for, and whether he was in breach of that duty with consequent loss to the plaintiff. A relationship of proximity in Lord Atkin's sense must exist before any duty of care can arise, but the scope of the duty must depend on all the circumstances of the case …. So in determining whether or not a duty of care of particular scope was incumbent upon a defendant it is material to take into consideration whether it is just and reasonable that it should be so.”
The relationship of proximity to which Lord Keith referred is not one which is created solely by the foreseeability of harm resulting from carelessness in the statement, but is one in which some further ingredient importing proximity is present. Thus in Hill
v.
Chief Constable of West Yorkshire
[1989] AC 53, 60 Lord Keith said:
“It has been said almost too frequently to require repetition that foreseeability of likely harm is not in itself a sufficient test of liability in negligence. Some further ingredient is invariably needed to establish the requisite proximity of relationship between plaintiff and defendant, and all the circumstances of the case must be carefully considered and analysed in order to ascertain whether such ingredient is present.”
Once foreseeability of likely harm from a careless statement has been established, it becomes necessary to examine the circumstances in and the purposes for which the statement was made in order to determine whether there are also present the further ingredients necessary to establish the requisite proximity of relationship between the maker of the statement and the person who has
acted
upon it. As Bingham L.J. observed in the present case, the concept of proximity is somewhat elusive, extending as it does beyond mere physical proximity. It might be described as the circumstances in which the law considers it proper that a duty of care should be imposed on one person towards another. If in any given circumstances a relation of proximity is found to exist, consideration must still be given to the scope of the duty which arises therefrom. In the case of physical proximity, few problems will arise, but where there exists a duty of care in relation to the making of statements, written or oral, problems may arise if those statements are capable of being used for more than one purpose. It is not disputed in the present case that economic loss to the plaintiff as a shareholder was foreseeable by the auditors as a result of any failure on their part to exercise reasonable care in the conduct of the audit. What is disputed is whether the auditors owed any duty to individual shareholders, and if so, what was the scope of that duty.
Before examining the circumstances in this case which may be relevant to the existence of a relationship of proximity, it is helpful to look in a little more detail at the four cases dealing with negligent statements to which I have already referred. In Cann
v.
Willson,
39 Ch D 39,
valuers
instructed by an intending mortgagor sent the
valuation
to solicitors
acting
for an intending mortgagee knowing that it was hoped thereby to induce the mortgagee to make a loan. Chitty J. held that in the circumstances the
valuers
owed a duty of care to the mortgagee. In Candler
v.
Crane, Christmas & Co. [1951]
2
K.B. 164, the
accountants
were aware that the
accounts
were to be shown by their employer to the plaintiff who was a potential investor, and indeed their clerk discussed those
accounts
with him. Denning L.J., in suggesting the circumstances in which a duty to use care in a statement by professional persons would exist apart from contract, posed three questions: first, what persons are under such duty? Secondly, to whom do those professional people owe this duty? And thirdly, to what transactions does the duty of care extend? In relation to the second question, he said, at pp. 180–181:
“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 …. But excluding such cases as those, there are some cases — of which the present is one — where the
accountants
know all the time, even before they present their
accounts,
that their employer requires the
accounts
to show to a third person so as to induce him to
act
on them: and then they themselves, or their employers, present the
accounts
to him for the purpose. In such cases I am of opinion that the
accountants
owe a duty of care to the third person. 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?”
In relation to the third question, he said, at pp. 182–183, 183–184:
Denning L.J. clearly considered that the scope of any duty of care was limited to the precise transaction for which the
accountants
knew that the
accounts
were to be used. In Hedley Byrne
[1964] AC 465, a company's bankers were asked by the plaintiffs' bankers whether the company “would be good for an advertising contract of £8,000 to £9,000.” The company's bankers answered the question in the affirmative but, “without responsibility on the part of the bank.” When the company failed, the plaintiffs sought to recover damages from the bankers for negligence in making the statement. The
action
failed because of the express disclaimer of responsibility, but this House, after detailed review of authority, held that a negligent statement, oral or written, could give rise to an
action
of damages for economic loss apart from any contractual or fiduciary relationship subsisting between the parties. In the context of this case, Hedley Byrne is perhaps most important for its approval of the dissenting judgment of Denning L.J. in Candler
v.
Crane, Christmas & Co. After setting out the facts in Candler, Lord Reid said
[1964] AC 465, 487:
“This seems to me to be a typical case of agreeing to assume a responsibility: [the
accountants]
knew why the plaintiff wanted to see the
accounts
and why their employers, the company, wanted them to be shown to him, and agreed to show them to him without even a suggestion that he should not rely on them.”
Lord Templeman undoubtedly considered that one of the necessary ingredients of the relationship of proximity was the fact that the
valuer
knew of the particular transaction for the purposes of which reliance would probably be placed on his report.
Lord Griffiths, after setting out three criteria for the imposition of a duty of care on an adviser, namely, foreseeability of damage, proximity of relationship and reasonableness continued, at p. 865:
“The necessary proximity arises from the surveyor's knowledge that the overwhelming probability is that the purchaser will rely upon his
valuation,
the evidence was that surveyors knew that approximately 90 per cent. of purchasers did so, and the fact that the surveyor only obtains the work because the purchaser is willing to pay his fee. It is just and reasonable that the duty should be imposed for the advice is given in a professional as opposed to a social context and liability for breach of the duty will be limited both as to its extent and amount. The extent of the liability is limited to the purchaser of the house — I would not extend it to subsequent purchasers.”
Here Lord Griffiths is limiting the existence and scope of the duty of care to the
very
person and the
very
transaction which were in the contemplation of the surveyor at the material time.
My Lords, in each of these cases where a duty of care has been held to exist, the statement in question has, to the knowledge of its maker, been made available to the plaintiff for a particular purpose upon which he has relied. In the present case, the auditors, by
accepting
office, came under a statutory duty to make their report to the members of the company. The crucial issue is the purpose for which the report was made. To quote the words of Denning L.J. in the Candler case [1951]
2
K.B. 164, 183, what was the “
very
transaction” for which it was provided? To answer this question, it is necessary to look at the relevant provisions of Part
VII
of the Companies
Act
1985.
In terms of section
235
the directors are required to prepare a report “containing a fair review of the development of the business of the company and its subsidiaries during the financial year and of their position at the end of it,” and giving particulars of, inter alia, changes in asset
values,
directors' shareholdings and other interests and contributions for political and charitable purposes. Section
236
makes provision for an auditors' report in the following, inter alia, terms:
Section
237(1)
defines auditors' duties as follows:
“It is the duty of the company's auditors, in preparing their report, to carry out such investigations as will enable them to form an opinion as to the following matters — (
a) whether proper
accounting
records have been kept by the company and proper returns adequate for their audit have been received from branches not
visited
by them, (
b) whether the company's balance sheet and (if not consolidated) its profit and loss
account
are in agreement with the
accounting
records and returns.”
Section
241
provides, inter alia:
“(1) In respect of each financial year of a company the directors shall lay before the company in general meeting copies of the
accounts
of the company for that year. (
2)
The auditors' report shall be read before the company in general meeting, and be open to the inspection of any member of the company. (3) In respect of each financial year the directors — (
a) shall deliver to the registrar of companies a copy of the
accounts
for the year ….”
So much for the circumstances in which company
accounts
reach the members. Circumstances which render it inevitable that auditors will be aware that their reports will be seen and relied upon by the members. However, that does not answer the fundamental question of the purpose, and hence the
very
transactions, for which the annual
accounts
of a company are prepared and distributed to its members. Mr. Goldsmith, for the auditors, submitted that the principal purpose was to provide an
account
of the stewardship of the directors to the shareholders as a body, and not to provide individual investors, whether shareholders or members of the public, with comparative information. Mr. Bathurst, for
Caparo,
on the other hand, argued that the purpose was to enable shareholders to make such individual decisions as they wished in relation to the company, including decisions as to investment, they already being investors, and decisions as to
voting
in general meetings.
In the Court of Appeal [1989] Q.B. 653, 685d–690f Bingham L.J. concluded that the auditors had
voluntarily
assumed direct responsibility to individual shareholders to whom they owed a duty to exercise reasonable care in carrying out their audit. He further concluded that such duty was owed to a shareholder in respect of any loss sustained by him in selling, retaining, or buying shares in the company. Bingham L.J. referred to the approval by Cardozo C.J. in Ultramares Corporation
v.
Touche, 174 N.E. 441, 447 of an earlier statement that:
He then said, at p. 686:
“This formulation would not exclude the finding of a sufficiently proximate relationship in the present case if the words ‘will be
acted
upon’ are replaced, as in English law I think they should be, by ‘may be
acted
upon.’”
Taylor L.J. said, at p. 703g:
“once proximity to the shareholder is established, the auditor ought prima facie to be liable for any loss suffered in foreseeable reliance upon the report; …”
I do not understand that either Bingham L.J. or Taylor L.J., in reaching their conclusions, relied to any material extent upon the purpose for which
accounts
of a company, including the auditors' report, are provided to members or consequentially upon the transactions for which the members were expected to use them. O'Connor L.J., in a dissenting judgment, considered that the statutory duty owed by auditors to shareholders was owed to them as a body and not as individuals.
My Lords, Part
VII
of the Companies
Act
1985 provides that the
accounts
of a company for each financial year shall be laid before the company's general meeting, that is to say before the members in general meeting. Copies of the
accounts
must be sent to the members at least
21
days in advance, and it is obvious that the reason for this is to enable the members to prepare themselves for attendance at and participation in the meeting. The annual general meeting provides the opportunity for members to question the stewardship of the company during the preceding year, to
vote
for or against election or re-election of directors, to approve or disapprove the appointment or re-appointment of auditors and to take other decisions affecting the company as a whole or themselves as members of a particular class of shareholders. There is nothing in Part
VII
which suggests that the
accounts
are prepared and sent to members for any purpose other than to enable them to exercise class rights in general meeting. I therefore conclude that the purpose of annual
accounts,
so far as members are concerned, is to enable them to question the past management of the company, to exercise their
voting
rights, if so advised, and to influence future policy and management. Advice to individual shareholders in relation to present or future investment in the company is no part of the statutory purpose of the preparation and distribution of the
accounts.
It follows that I am in agreement with the
views
of O'Connor L.J. as to the nature of the statutory duty owed by auditors to shareholders.
For the foregoing reasons, I would allow the appeal.