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The plaintiffs owned shares in a public company that was audited by the defendant for the purpose of an annual statutory audit. The plaintiffs then purchased further shares, embarking on a successful takeover bid of the company. They subsequently suffered a substantial loss and sued the auditor in negligence. It was alleged that the shares had been purchased in reliance on the defendant's audit, which was negligently prepared and provided a misleading impression of the company's financial condition. (The auditor's report did fail to make clear that the company had been operating at a loss.)

The loss suffered by the plaintiffs in this case was pure economic loss and not normally recoverable. The plaintiffs argued that the facts came within the remit of Hedley Byrne v Heller (1963), which was taken to indicate that pure economic loss was recoverable when it resulted from negligent misstatement. The statements of Lord Bridge in Carparo are presently considered to represent the law where the attribution of a duty of care is concerned. If a case has a fact situation in which a duty of care has been attributed in the past, a duty of care can be attributed without further analysis. If the facts represent a novel situation, one should then ask whether the loss was foreseeable (this is essentially the 'neighbour principle' of Donoghue v Stevenson (1932)). If so, one should further inquire whether there was a sufficient relationship of proximity between the parties to warrant (possible) attribution of liability to the defendant. Again, if so, the final question to ponder is whether it would be 'fair, just and reasonable' to impose such a liability.

The court felt that the loss in this instance was foreseeable. It further agreed that it was at least arguable that sufficient proximity could have existed between the parties. However, the court held that the plaintiffs failed with respect to the third part of the test. In the court's view, the auditor had been carrying out a duty to the company directors and, while it could have been foreseen that its report would be read by the investors, it was not reasonable to expect the auditor to foresee that the investors would actually rely upon it to for their own investment purposes.

In short, the court held that the auditor owed no duty of care in relation to the accuracy of its audit to either members of the general public or existing shareholders who sought to invest in the company. Sufficient proximity between the plaintiffs and defendants did not in this instance exist, principally because the audit was not intended for the use made of it by the plaintiffs. In fact, the audit had been prepared for the purpose of enabling the shareholders as a body to exercise control over the company; it had not been prepared for the purpose of providing information for individual investors to purchase additional company shares.

Note that in this case, the purported misstatement (or audit) had been placed into general circulation as opposed to the 'one to one' situations encountered in Hedley Byrne v Heller (1963) and Smith v Bush (1990). Lord Bridge suggested that an essential ingredient of the required proximity in situations where a statement is put into more or less general circulation is to prove 'the defendant knew that his statement would be communicated to the plaintiffs, either as an individual or as a member of an identifiable class, specifically in connection with a particular transaction or transactions of a particular kind ... and that the plaintiff would be very likely to rely on it'. The court viewed the plaintiff as having failed at this task.

See also Hedley Byrne v Heller (1963).

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External links

• Full text from BaiLII.org
• Duty of Care