Tort 6 - Duty of care 5

In Caparo Industries v Dickman (1990) Caparo industries wished to acquire a company called Fidelity. At the time of the acquisition the report prepared by the auditors did not accurately reflect the financial status of the company and it was much worse than what had been anticipated.

The plaintiffs (Caparo Industries) acquired shares in Fidelity based on the report by the auditors (defendants) and they incurred loss and as a result sued the defendants for their negligence or for not preparing a report that accurately reflected Fidelity’s status. Caparo has to be distinguished from the other cases that we have done so far because unlike the other cases where there has been some form of damage to property or injury (physical or psychological), the plaintiffs in Caparo Industries v Dickman (1990) were suing for financial loss or pure economic loss.

As we have seen thus far, a duty of care arises when the defendant while carrying out the act ought to have the plaintiffs in contemplation with regards to damage to property, physical injury or psychological illness. Can the same be said for economic loss? The answer in short is no.

There is a distinction between the type of damage that is incurred as a result of one party’s act or omission (failure to act) towards the other and it is one thing to cause physical injury, psychological illness or damage to property and it is another thing to cause others pure economic loss.

If the auditors were to be held liable, then they would be liable to any company that had stepped up and purchased shares in Fidelity based on the report prepared by them. The auditors were held to be not liable.

In Murphy v Brentwood DC (1991) the facts of the case were very similar to that of Anns v Merton London Borough Council (1978) - the plaintiff purchased a house from the respective builders and it was later discovered that the plans, though approved by the council, were faulty and as a result, the foundations for the house were inadequate. The repairs to remedy the defect were substantially more than what the plaintiff could afford and as a result the plaintiff was forced to sell the house at a reduced price. The plaintiff brought an action against Brentwood District Council.

The court however did not look at it from the perspective of a duty of care arising out of physical injury or damage to property or from the perspective of a duty of care arising from a psychological illness or nervous shock but rather looked at it from the perspective of a duty of care arising out of financial loss or economic loss and in line with the decision in Caparo, held that the council was not liable.

Following the decision in Caparo Industries v Dickman (1990) and Murphy v Brentwood DC (1991), the two cases are deemed to have overruled the decision in Anns v Merton London Borough Council (1978), we can see two schools of thoughts emerging. The first school of thought looks at property damage in the ordinary sense of the word i.e. some type of damage to property and would seek to apply the two-fold test in Anns v Merton London Borough Council (1978), while the second school of thought treats damage to property, which is caused by the negligence of another, as pure economic loss in line with the decision in Caparo Industries v Dickman (1990) and Murphy v Brentwood DC (1991). At this stage however it would be fair to say that damage that is caused to property that is due to the negligence of a council is to be treated as pure economic loss.

In Gala v Preston (1991) two youths, the plaintiff and the defendant after they’d spent the afternoon getting drunk decided to steal a car and go for a joyride with the defendant at the wheel. The car crashed and the plaintiff sued the defendant. It was held that there was no duty of care owed because both the plaintiff and the defendant had broken the law, the act of stealing a car was a criminal act and therefore the question of duty, breach, causation and remoteness did not arise.

Would it have been any different if the plaintiff and defendant had not stolen the car? It would. The defendant could plead the defense of volenti i.e. the plaintiff had accepted the risk of some harm occurring by getting into the car with the defendant, but it would depend on how drunk the defendant really was.

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