CAPARO INDUSTRIES PLC v DICKMAN

When predatory investors choose to act upon the advice or information given outside the remit of those assigned to prescribe it, they do so under risk of their own suffering, and within the rules of industry and commerce.

On this occasion, the cross-appellants argued that their reliance upon the annual statement provided by a company’s accountants led to increased investment, despite the fact that the statement turned out to be inaccurate.

When the appellants (a public limited company) fell victim to poor financial trading, their stock market share values began dropping, and were in turn, bought up in considerable number by the cross-appellants.

While buying as outside investors, they secured an almost thirty percent share of the failing company, after which they became registered investors, and acted quickly to gain a majority controlling hold of the firm.

These additional purchases were made after learning from the annual shareholder statement that the company was due a healthy pre-tax profit.

However, after the purchases had been made, it became apparent that the accounts had been poorly prepared, showing instead a considerable loss of profit.

During the appeal, it was claimed that the accountants owed a duty of care to the now primary shareholders of the company when drafting the legally required statement, and that such care rendered them liable for the losses inherited by the investors.

In this instance, a duty of care was determinable by the relationship between (or proximity to) both accountants and investors.

Citing Hedley Byrne & Co Ltd v Heller and Partners,the distinction was made between expert advice (albeit subjective) from a banker, and an annual submission from a firm of accountants, and that despite an implied culpability on the part of the accountants, an error was made; upon which, a negative investment took place. 

What distinguished the two activities was that the former was expressly undertaken to prevent loss upon lending of monies, whereas at no point did the accountants have knowledge of a planned takeover bid (despite suggestions made by the investors during the hearing).

This clear divide presented the notion that a duty of care is always applicable, as the two events are less similar than might first appear.

However, the accountants were only held liable for the losses made as shareholders and not those of outside investors.

The House of Lords concluded that if it were reasonable to place conscious liability upon all acts of certain parties, it would be impossible to distinguish responsibility from neglect; while in this instance, there was clear frustration at an unforeseen outcome, but one requiring mindfulness that the very nature of financial investment is itself prone to loss; hence, the House reminded the parties that:

“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 deductible from the decisions of this House.”