Caparo Industries Research Articles

FROM OPPORTUNITY TO OCCASION: VICARIOUS LIABILITY IN THE HIGH COURT OF AUSTRALIA

IN Prince Alfred College Incorporated v ADC [2016] HCA 37, the High Court of Australia (HCA) has once again considered the appropriate test for establishing vicarious liability of employers for the wrongful acts of their employees. The decision will be of interest to tort lawyers in the common-law world for at least four reasons. First, the Court looked afresh at the test for vicarious liability in the context of intentional wrongdoing and has accordingly clarified the confusion arising from its earlier decision in New South Wales v Lepore [2003] HCA 4; (2003) 212 C.L.R. 511. Secondly, the Court expressed very strong disagreement with the decision of the UK Supreme Court handed down just months earlier in Mohamud v WM Morrison Supermarkets plc [2016] UKSC 11; [2016] A.C. 677. The Court apparently regarded Mohamud as having in effect abandoned the Lister qualification that mere opportunity was not enough to satisfy the close connection test (Lister v Hesley Hall Ltd. [2001] UKHL 22; [2002] 1 A.C. 215). Thirdly, the Court appears to have interpreted the relevant English authorities as espousing a Caparo-like criterion of fairness and justice as a separate stage of the close connection test (Caparo Industries plc v Dickman [1990] 2 A.C. 605). That interpretation is questionable. Finally, the Court has articulated a new test in Australian law for vicarious liability reasoning based on whether the employment provided the “occasion” for the wrongdoing to be committed. This prompts a reflection on the difference between “occasion” and “opportunity”, and how this new test is to be applied in practice.

Case Analysis: Caparo Industries Plc v. Dickman

The Caparo Industries Plc v. Dickman was a landmark case regarding the test for a duty of care. In this case, the question as to when duty of care arises in cases of negligence was discussed in detail. In specific, the question was whether the auditors of the Company Fidelity Plc owed a duty of care to the prospective and the current investors especially Caparo Industries (who had a majority shares of 91.8%) in case of any action taken by Caparo Industries in pursuance of the misleading accounts produced by the auditors. The auditors were thus sued for negligence. In furtherance of the same, the House of Lords laid down the three-fold test. The case has also effectively redefines the neighbourhood principle as laid down in the case of Donoghue v. Stevenson. It also briefly takes into account the other tests for establishing duty of care i.e. Anns test laid down in Anns v. Merton London Borough Council. The question in the current case was thus the scope of the assumption of responsibility, and what the limits of liability ought to be. This paper is a humble effort to throw light on the same.

Limited Liability of Auditors: An Analysis of Caparo Industries plc v. Dickman

This is a case comment on the famous House of Lords judgment in Caparo Industries plc v. Dickman which specified the law on limited liability of auditors in the United Kingdom.

Negligence, Public Bodies, and Ruthlessness

The Law Commission has concluded in a recent consultation paper (‘Administrative Redress’) that claimants are able to sue public bodies successfully in negligence in an unacceptably wide range of circumstances. For this reason, it has proposed the introduction of a new touchstone of liability: ‘serious fault’. The Law Commission regards the liability regime it proposes as superior to the existing law since it would reduce the number of occasions on which claimants deflect public bodies from their core concerns (delivering goods and services that serve the public interest). The Law Commission also finds support for its proposal in a ‘principle of modified corrective justice’. On the analysis offered in this essay, the requirement of ‘serious fault’ is better understood as strengthening a commitment to ruthlessness (in the sense specified by Thomas Nagel) that is present in the existing law. This essay also argues for a reform of negligence law (as it applies to public bodies) that is very different from that proposed by the Law Commission. This is the application of the proportionality principle at the third stage of the duty of care test in Caparo Industries plc v Dickman. More generally, this essay criticises the Law Commission on the ground that it assumes that public bodies have sufficient information to perform a wide range of tasks effectively. This is often not the case. Moreover, negligence law in its existing form is a (non‐market) discovery‐procedure by means of which public bodies can, when defending novel claims, become better acquainted with the environment in which they operate.

Wielding Occam's Razor: Pruning Strategies for Economic Loss

The English Court of Appeal is currently faced with three analytically distinct approaches to the question of when one party owes another a duty of care in respect of her economic interests, all of which bear the authority of the House of Lords. Unable to choose between them, it has recently adopted a fourth approach combining which combines them, in the apparent belief that the combination will eradicate any individual deficiencies. Against the background of a recent case, the author argues that this is a holding strategy at best and methodologically deficient. He also challenges the continuing lip-service paid by courts to models of liability based upon ‘assumptions of responsibility,’ examining and criticising the causes of their persistence in the law in the face of widespread academic criticism. Instead, the author argues, the House of Lords should now clearly endorse a single reasoning strategy to economic loss cases based on the three-stage approach in Caparo Industries v Dickman. Properly understood, this approach offers the best prospect of facilitating consistent and transparent decision-making in the longer term.

Auditors and Professional Opinion: A Comment on Section 52 of the Trades Practices Act

In the wake of the House of Lords decision in Caparo Industries v Dickman there has been some apprehension within the auditing profession that there might be possible alternative liability under section 52 of the Trade Practices Act 1974 (Cth) and associated legislation. Baxt stated shortly after the case that in the absence of common law liability, section 52 ’might well be the way in which individual shareholders will seek to make the auditor liable’. Based on their wide operation in other areas the professional journals have suggested that section 52 and similar provisions of State Fair Trading Acts apply to create strict liability for even honest errors or omissions of auditors. There is particular concern that such strict liability may be owed to a wide range of investors beyond the shareholders of the audited company. These fears are probably unfounded. On the contrary, auditors may be uniquely placed to escape this wide net of liability.

After Caparo- Liability in Business Transactions Revisited

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

Third Party Reliance on Negligent Advice

THE giving of advice can be a perilous undertaking. All the more so where there is the possibility that it will fall into the hands of the wrong persons. Ever since the landmark decision in Hedley Byrne in 1964 the English, Australian and New Zealand courts have assiduously endeavoured to contain within reasonable bounds this action for negligent misstatement. If Hedley Byrne evokes the genie of the ring then, in Australia, section 52 of the Trade Practices Act 1974 (Cth) surely conjures up the more powerful genie of the lamp. Recently, in Caparo Industries plc v. Dickman,1 the House of Lords has held that an auditor of a public company (in the absence of special circumstances, for example where the report is commissioned on behalf of the plaintiff for a particular purpose) does not owe a duty of care with respect to financial losses suffered by either an outside investor or an existing shareholder who purchases shares in the company at an overvalue, in reliance on the report. The purpose of this article is to explore the ramifications of this decision and to attempt a prediction of the response to be expected from Australian courts if and when the same issue arises. In addition, it will be argued that the received view that section 52 will make for an easier road for an Australian plaintiff in this situation cannot be held with absolute certainty. General principles will be addressed to some extent, but the article will focus on the facts illustrated by Caparo and close variants. In this sense the title might appear to be a little grandiose.