Court case[1990] 2 AC 605

Caparo Industries held shares in Fidelity plc. After the annual accounts of Fidelity, audited by the defendants (Touche Ross), were published, Caparo bought more shares and then made a successful takeover bid. It alleged that the accounts were inaccurate, showing a pre-tax profit of about 1.3 million pounds when there had in fact been a loss of over 400,000 pounds, that it had relied on them in buying the shares, and that the auditors had been negligent in certifying them. It sued the auditors for its loss.

The House of Lords held that the auditors owed no duty of care to Caparo, either as a potential investor or as an existing shareholder buying more shares. The statutory purpose of an audit is to enable the shareholders as a body to exercise informed control over the company's management, not to guide individual investment decisions. Lord Bridge said that, besides foreseeability of damage, the ingredients necessary for a duty are a relationship of "proximity" between the parties and a situation in which the court considers it fair, just and reasonable that the law should impose a duty of a given scope on one party for the benefit of the other. The law should develop novel categories of negligence incrementally and by analogy with established categories.