Caparo Industries v. Dickman (1990): The Three-Stage Test for Establishing a Duty of Care
“Can we hold someone liable for every loss?” The court’s answer arrived in Caparo’s three-stage test.
Hello! Today we’ll look at the leading modern tort case on when a duty of care arises: Caparo Industries v. Dickman (1990). When I first met this case, I wondered, “Why not just rely on Donoghue v. Stevenson’s neighbor principle?” Reading the decision, I realized a simple formula wasn’t enough for a complex modern economy. Caparo refines the neighbor principle into a concrete framework that still guides duty analysis today.
Contents
Case Background
Caparo Industries reviewed an audit report on Fidelity as part of a planned acquisition. The report, prepared by the auditor Dickman, appeared to show profits, but in reality the company was in serious deficit. Relying on the report, Caparo bought shares and suffered losses, then sued the auditor. The question was whether the auditor owed a duty of care not only to the company and its shareholders collectively, but also to specific investors like Caparo.
Key Legal Issues
At the heart of the case was the scope of the duty of care. The House of Lords thought the neighbor principle alone could not resolve it and searched for a more structured approach. The key issues:
| Issue | Explanation |
|---|---|
| Scope of Auditor Liability | Does an auditor owe duties to the indeterminate class of shareholders and potential investors, or only to an intended, limited class for a specific purpose? |
| Limits on Duty | Should auditors face open-ended liability for investors’ economic losses? |
| Extent of Legal Protection | How far should tort law protect against pure economic loss? |
The Court’s Decision
The House of Lords dismissed Caparo’s claim. Auditors do not owe a duty to the general body of shareholders or to all potential investors. The essentials:
- An auditor’s duty runs only to a limited class for whom the statement is prepared and for the specific purpose intended.
- No duty is owed to the world at large for investors’ general economic losses.
- Whether a duty exists turns on foreseeability, proximity, and whether it is fair, just and reasonable to impose it.
The Caparo Three-Stage Test
The most enduring contribution of the case is the “Caparo three-stage test.” A duty of care arises only if:
- The harm was foreseeable;
- There was sufficient proximity between claimant and defendant;
- Imposing a duty is fair, just and reasonable as a matter of policy.
Impact and Significance
Caparo clarified the boundaries of duty for pure economic loss and supplied a structured inquiry that incorporates policy considerations beyond the neighbor principle.
| Impact | Examples |
|---|---|
| Duty Criteria Strengthened | Refined the Donoghue neighbor principle into a concrete three-stage test. |
| Limits on Economic Loss | Prevented unlimited auditor liability to investors at large. |
| International Influence | Cited across common-law jurisdictions in duty of care cases. |
Contemporary Meaning
Today, the Caparo test remains the baseline framework for establishing a duty of care—especially in pure economic loss, professional liability, and financial regulation contexts. Its modern significance includes:
- Serving as the standard duty-of-care test in modern negligence law.
- Acting as a gatekeeper against abusive litigation in economic loss claims.
- Continuing debates around the policy-laden “fair, just and reasonable” limb.
FAQ
An investor relied on an audit report, suffered losses, and sued the auditor for negligence.
It articulated, with clarity, the three-stage test for establishing a duty of care.
Foreseeability of harm, proximity between the parties, and whether imposing a duty is fair, just and reasonable.
No. The auditor did not owe a duty to indeterminate investors like Caparo for investment decisions.
It limited duty in pure economic loss and curbed unlimited professional liability.
Yes—especially in finance and accounting when assessing professional duties for economic loss.
Conclusion
Caparo Industries v. Dickman (1990) made the idea of “duty of care” operational and predictable. What struck me is how the court moved beyond moral intuition to a structured test aimed at social balance. “Foreseeable, proximate, and fair”—those three words still echo for me. What do you think? Is it fair to impose liability for every loss, or is it better—socially and legally—to draw principled limits?
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