After Caparo- Liability in Business Transactions Revisited

Abstract

In view of the House of Lords' preoccupation throughout the 1980s with curbing the lower courts' expansion of negligence aiFter Anns,' its decision in Caparo Industries v Dickman2 was not unexpected. Essentially, Caparo held that anyone, whether individual shareholder, general investor or institutional lender3 who makes an investment or lending decision in reliance upon a negligently prepared or misleading annual report and accounts which carry an unqualirled opinion, will be unable to sue the auditor for any losses.4 Given the range of commercial situations in which the services of accountants and other rlnancial advisers are called upon, Caparo could not, of course, provide a conclusive ruling on all matters concerning their liability for negligent misstatement. Nevertheless, it is arguable that the House of Lords intended that the maxim caveat emptor should always apply to transactions involving the acquisition of shares, irrespective of the type of document which had been relied upon.5 On this interpretation, in the case of a takeover, the prudent would-be predator should conduct its own investigation into a target company rather than rely on information produced by the target company's advisers. It is indicative of the level of takeover activity in the 1980s that the issue of liability for negligent misstatement in such transactions should have re-emerged so soon after Caparo. The purpose of this note is to review two recent Court of Appeal decisions in this area and then to consider both them and Caparo itself within a wider commercial context. James McNaughton Paper Group v Hicks Anderson & Co6 concerned the friendly takeover of a small group of companies, MK Paper Group Holdings Ltd [MK] by the plaintiffs, a larger group in a related line of business. By 1982 MK was in financial difficulties, and in June that year MK's managing director had started negotiations with the plaintiffs regarding a possible takeover. The acquisition of the group was completed by the end of September and, shortly after, the plaintiffs claimed, they became aware that MK's f1nancial position was far worse than they had expected. Proceedings were eventually instituted against MK's auditors, alleging that a set of draft accounts which they had prepared and which were shown to the plaintiffs, and upon which the plaintiffs had relied in acquiring MK, had negligently