Law on Liability

As a general rule, financial loss resulting from negligence of one can be compensated. This is true even if there is no existing contract between the injured party and the injurer. The claim for compensation for negligence has been allowed by English torts. Apart from that, such common practice is allowed by law of liability wherein the negligent person bears the liability for his own negligent act.

However, in several cases, false statement has not been determined if it falls under the negligence. Apart from that, imposition of liability out of false statement has not been determined by law and by case laws. Although definition of torts may encompass false statement, however, it is not safe to broadly bestow liability because of the circumstances surrounding the case. Hence, in the clarification of the law of liability caused by false statement, it is helpful to rely on the case of Caparo Industries Plc. v Dickman.[1]

Meanwhile, tort has been defined as “part of civil law that is concerned with the actions by private individuals against other individuals or legal persons.”[2] It also refers to “body of law that addresses, and provides remedies for, civil wrongs not arising out of contractual obligations.”[3] Hence, torts have the capacity of a law that gives legal basis for an individual suffering from financial damages through the negligence of other person or legal entity.

In the history of torts, several claims for damages have been grounded on other party’s negligence. By definition, negligence is a “legal cause of damage if it directly and in natural and continuous sequence produces or contributes substantially to producing such damage, so it can reasonably be said that if not for the negligence, the loss, injury or damage would not have occurred.”[4]

Remarkably, false statement has been treated differently in the case of Caparo. In this particular case, the parties involved were Caparo Industries Plc and Dickman of the Fidelity Plc.[5] During that time, Fidelity Plc was experiencing a financial loss and eventually issued profit warning.[6] The price of the shares has dropped. This urged Caparo Industries Plc. to buy shares until it held control of the company.[7]           Unfortunately, upon taking over the company, Caparo discovered that the company is suffering from worst financial loss contrary to what has been declared previously by Fidelity’s directors and auditors.

Caparo, then, sued Dickman, auditor of Fidelity, for being negligent and in presenting a false statement which has been wholly relied upon by Caparo in buying shares from Fidelity.[8] Caparo further relied upon the Companies Act of 1985 which sets out the responsibilities of the companies in “making reports to enable shareholders to exercise their class rights in general meeting.”[9] In addition, according to Caparo, Dickman has a duty of care that he failed to comply with in preparing the report.[10]  In the court of first instance, the court decided in favour of Dickman.

But in the Court of Appeals, Caparo found relief because preparation and presentation of false statement was considered as negligence which is a ground for legal action for Caparo.[11] However, in the House of Lord, the decision was reversed and the law on liability on account of false statement has been clarified.

In the resolution of the case, the Court determined the existence of the duty of care by adopting the tri-partite test.[12] In establishing duty of care or negligence, several requirements must be satisfied. First, it must be proven that the loss suffered as a result of the injurer’s conduct must be of a reasonable and foreseeable consequence.[13] Second, there must be a sufficient degree of proximity of relationship between the injurer and the injured party.[14] Last requirement demands that by reason of public policy, the imposition of liability must be fair, just and reasonable.[15]

In the determination of the duty of care, the court concluded that Dickman owed no duty of care to Caparo even if he is a potential investor.[16] By making auditors of public company to the potential investors, it would deteriorate the auditor because an unlimited liability would be imposed upon them. Apart from that, the statutory function of the preparation of account was merely for the shareholders, as a whole, to be informed as it is their right.[17]

More importantly, the statement of accounts prepared were not legally or statutory be used as a basis for anyone in buying shares, as what Caparo did. Furthermore, the Companies Act 1985 does not contain provision which requires or demands that the information be used in assisting shareholders in making decision as to future investments.[18]

 Hence, in finding that the false statement is not legally and statutory required to be used as a basis for decision-making, the auditor owed no duty of care to shareholders and to potential investors.

Additionally, in establishing the proximity of relationship between Dickman and Caparo, the court held that the relationship only exist when duty of care exists. Aside from that, the damage to be suffered by Caparo should fall under the damages that Dickman is obligated to prevent. Since, the duty of care does not exist, the first requirement failed.

As to the foreseeability , it should be established that Dickman has knowledge that the statement he prepared must be used by other people in making their decisions in buying shares from Fidelity Plc. In this case, the court deduced that no relationship of proximity exist because the auditor published the false statement to the shareholders as a whole and he had no knowledge as to the use of the accounts published.[19]

It can be observed that in the given case, the application of liability is determined on a case to case basis. Several critics found the threefold test to be of little value because it can only be applied when the tests are used to determine the significant features in a situation.[20]  Furthermore, it was simplified that in order for duty of care exists, six considerations should be met. The six considerations are the purpose of the statement, purpose of being communicated, relationship between the advisor and the recipient or other third parties, size of class to which the recipient of advice belongs, knowledge and experience of advisee, and reliability of the advice.[21]

However, it is noteworthy that principle established in the case has been adopted by several countries like New Zealand, Canada and Australia. Several cases have also been decided in the same way. It can be deduced that the case has remarkably changed the existing tort laws in the country. Negligence was, then, a ground for liability. However, the decision in Caparo case has changed the coomon principle because several requirements need to be established.

As has been said, negligence can be a ground of liability even if there is no existing contract. It has also been defined that tort is a legal weapon to be used by the injured parties against the negligent injurer even if there is no contract that bind them.

However, the Caparo case has drastically changed tort law, specifically the law of liability. Hence, in order for damages from negligence to be compensated, duty of care should be established. In determining the duty of care the threefold test should first be satisfied. It can, further, be deduced that liability can be claimed from negligence only when there is a contract between the injured party and the injurer. These have significantly narrowed down liability from negligence.

Bibliography

Absolute Astrnomy.com (2009) Caparo Industries Plc. v Dickman [Internet]. Available from: <http://www.absoluteastronomy.com/topics/Caparo_Industries_Plc._v_Dickman> [Accessed 5 May 2009].

Caparo Industries Plc. v Dickman, [1990] 2 AC 605.

Harpwood, V. (2000) Principles of Tort Law. London, Routledge.

JurisPedia The Shared Law (2008) Caparo Industries [Internet]. Available from:

<http://en.jurispedia.org/index.php/Caparo_industries> [Accessed 5 May 2009].

Lunney, M. & Oliphant, K. (2008) Tort Law: Text and Materials. New York: Oxford University Press.

The Lectric Law Library (2005) Negligence [Internet]. Available from: < http://www.lectlaw.com/def2/n010.htm> [Accessed 5 May 2009].

[1] Caparo Industries Plc. v Dickman, [1990] 2 AC 605. [2] V Harpwood, Principles of Tort Law, London, Routledge,  p. 5. [3] Available at http://www.absoluteastronomy.com/topics/Caparo_Industries_Plc._v_Dickman [4] Available at http://www.lectlaw.com/def2/n010.htm [5] Ibid. [6] Ibid. [7] Ibid. [8] Ibid. [9] Available at http://www.absoluteastronomy.com/topics/Caparo_Industries_Plc._v_Dickman [10] Ibid. [11] Ibid. [12] Available at http://en.jurispedia.org/index.php/Caparo_industries [13] Ibid. [14] Ibid. [15] Ibid. [16] Ibid. [17] Ibid. [18] Available at http://www.absoluteastronomy.com/topics/Caparo_Industries_Plc._v_Dickman [19] Available at http://en.jurispedia.org/index.php/Caparo_industries [20] M Lunney and K Oliphant, Tort Law: Text and Materials, New York: Oxford, p. 450. [21] V Harpwood, 84