Ratio Decidendi
A duty of care in negligence arises only where three criteria are satisfied: (1) the damage must be a reasonably foreseeable consequence of the defendant's conduct; (2) there must be a sufficient relationship of proximity between the parties; and (3) it must be fair, just and reasonable to impose a duty. This three-stage test replaced the broad two-stage test from Anns v Merton [1978].
Facts
Caparo Industries purchased shares in Fidelity plc, relying on the audited accounts prepared by Dickman (the auditors). The accounts showed a profit of £1.3 million when the true position was a loss of £400,000. After acquiring control of Fidelity, Caparo discovered the true financial position and sued the auditors for negligence, claiming they had relied on the inaccurate accounts when deciding to purchase additional shares and make a takeover bid.
Judgment Summary
The House of Lords held that the auditors owed no duty of care to Caparo. Lord Bridge formulated the three-stage test for establishing a duty of care: foreseeability of damage, proximity of relationship, and whether it is fair, just, and reasonable to impose a duty. The purpose of the statutory audit was to enable shareholders as a body to exercise informed control of the company, not to provide information for individual investment decisions. There was insufficient proximity between the auditors and a potential takeover bidder, and it would not be fair, just, or reasonable to impose a duty in those circumstances.
Key Quotes
"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."
— Lord Bridge
Subsequent Treatment
The three-stage test is the current framework for establishing novel duties of care in English tort law.
Applied across a wide range of duty of care cases, particularly in professional negligence, pure economic loss, and public authority liability.