ASSIGNMENT
TASK- 1
SUBJECT : COMMON LAW 1
BATCH : OCT HND IN BUSINESS 2010
STUDENT ID : 1030010
STUDENT NAME : KAMRUJJAMAN SAJIB
SUBMISSION DATE : 29.11.10
SUBMISSION TO: COURSE TEACHER- Md. TARIQ BIN AZIZ
GUILDHALL COLLEGE
COMMON LAW
Task-1
P1. CONTRACT:
A contract is an agreement between two or more parties which is supported by
consideration and enforced by law.
AGREEMENT:
Agreement is an offer, acceptance to create legal relations, legal capacity.
DIFFERENT OF BUSINESS AGREEMANT :
1.
According to their subject matter. E,g Contract of sale of goods land, insurance
employment, consumer credit etc.
2.
According to their parties. E,g commercial & noncommercial contracts.
3.
According to their form (whether contained indeed on in writing,whether express
on implied) e,g formal and informal contracts.
4.
According to their effect (whether bi-lateral or unilateral,whether
valid,void,voidable or unenforceable.) (Chitty on contracts 30th edtn vol 1)
REQUIRED KEY ELEMEANTS:
contract:
1. Agreement
2.
Consideration 3. Enforced by law
P2.
To determine we need to full-feel between John and Robert. we need to full-feel the
following requirement .
OFFER: an offer as expression of willingness to entering to a contract on certain
terms.( stores v Manchester city council )
According to the definition it’s an offer because there some evidence like John phoned
Robert and offered $5000 for the ovens and an email where was mentioned that no
need to reply.
ACCEPTANCE: An acceptance is a final and unqualified acceptance of the terms of
offer I , e
mirror image of an offer (stores v mcc)
in our given fact , Robert accepted that offer as it is however, Robert was silent about
the acceptance.
In this case of Felthouse v Brindly (1862)
it was held that '' silent can not amount an acceptance''in the light of this case we may
say that this is not an acceptance.
INTENTION TO CREATE A LEGAL RELATION :
In this case its clear that they are adult and they have the ability for legal relation were
interested for that business. because they are friends and they were going for
commercial arrangement.
LEGALCAPACITY :
Here partners should be over 18 years old.

Legal capacity is what a human being can do within the framework of the legal
system.

It is a construct which has no objective reality but is a relation every legal
system creates between its subjects and itself.

Legal capacity gives the right to access the civil and juridical system and the
legal independence to speak on one’s own behalf.
In this case its clear that john and Robert they tried to do that business in the
framework of legal system.
CONSIDERATION :
one of the three main building blocks of a contract.
in contract law,a contract to be valid, there must be an exchange of goods
and/services. because the vast majority of contracts are for sales of some type.
Consideration usually takes the form of an exchange of money for goods or services.
So in this case we may say that there was a consideration between John and Robert
about that transaction.
Consideration in English law is
ENFORCED BY LAW:
its mean that business or agreement should be enforced by law which mean every
thing should be under the specific law.
So John and Robert was under the law. What they wanted to do that was enforced by
the law.
If we fallow those steps we can say every thing was there except the acceptance so it
was not a valid contract.
''The general instantaneous it should be communicated '' ( Entores v miles far east
corp)
E-mail are not entirely or almost instantaneous.
E-mail,in particular ,it may be take some time to arrive its destination ,depending the
route it takes to its recipient.
When the communication will be in e-mail mode:
Has the offered incorporated his/her name within the body of the mail?
The sending of an e-mail where the ISP adds the sender’s name after transmission
might be insufficient proof of an intention to accept an offer (J Pereira v Fernandes SA
v Mehta[2006]
and in this case they communicate by phone. So there is a communication way
between John and Robert.
P3.
IMPORTANCE OF THE RULES OF INTENTION:
1.
An essential element for the formation of a valid contract.
2.
In case of domestic and social agreements,that presumption is that there is no
intention to create legal relations. e.g Balbour v MIB (1919)
in domestic matter there is no intention to create legal relationship.
3.
In case of commercial agreement ,the presumption that there is an intention to
create legal relation. e.g stoner v mcc
carlim v corbolic acid smoke ball
bowermah v ABTA (1996)...
CONSIDERATION:
1.Consideration lies at the heart of English Contract Law.
2.The traditional definition of consideration was set out in Currie v Misa [1875],is that a
valuable consideration, ‘may consist either in some right ,interest, profit,or benefit
accruing to the one party,detriment,loss,or responsibility given , suffered,or undertaken
by the other’.
CONSIDERATION RULES:
Consideration should move from the promises, but need not move to the promissory (
Thomas v Thomas [1842] , Tweddle v Atkinson [1861], Carlill v Carboli Smoke Ball
Co[1893]).
Consideration must be sufficient ,but need not be adequate ( Chappell & Co v Nestle
Co. Ltd [1960], White v Bluett [1853]).
Past consideration is not a good consideration (Roscorla v Thomas [1842] , Re Mc
Ardle [1951]). Exceptions : Pao On v Lau Yiu Long [1980] conditions are
The act must have been done at the promisor’s request.
The parties must have understood that the act was to be rewarded may be by money
or some sort of benefits..
The payment,or conferment of other benefits, must have been legally enforceable by
law and had it been promised in advance.
Past consideration is not a good consideration (Roscorla v Thomas [1842] , Re Mc
Ardle [1951]). Exceptions : Pao On v Lau Yiu Long [1980] conditions are
1.The act must have been done at the promisor’s request.
2.The parties should have understand that the act was to be rewarded may by a
payment or the conferment of some other benefit.
3.payment,or conferment of other benefits, should have been legally enforceable had
it been promised in advance.
P4.

There are some rules on capacity to contract for those who are less capable to
looking after of their own selves. Such as minor, the mentally handicapped.

The rules of the governing capacity does exist on behalf of those who are may
be vulnerable however they can also those people make contracts with that sort of
limited capacity.

Who are adult means over 18 years of age have full contractual capacity ,if they
are sound mind and they will not be victim of a factor ruling out capacity like as
drunkenness.
1.Minor: normally one person will not be bound to get it to a contract who is under 18
even if the other party do a contract and if he does not know of his fact or the minor
has lied about their age, subject to exceptions.
2.Mental incapacity: A person who is in lack of capacity under s2 of the mental
capacity act 2005 if he or she is unable to make this sort of dicision for thei self selves
in realation to the matter ' at the same time the contract is made.
P5.
DEFINITION OF TERMS:
statements can be terms which are part of the contract.
It can be classified into two way:
express terms:
which one is clearly stated in the contract is called express terms. Moreover, here it is
necessary to analyse the express of intention of parties.
Implied terms:
which term is not clearly stated in the contract is called implied terms.
However implied terms can be broken down into three ways such as:
1.implied by statue
2.implied by custom
3.implied by court
In our given fact, terms are : ( salem v robin )
terms:
1.express term:
bicycle will be fitted with an unique gear system.
2.implied term:
sufficient number of unique gear?
Yes, to give the business efficacy it can be said that court will imply on that fact.
If the term is broken or according to the broken term, again term can be divided into two
catagories. like:1.condition 2.warranty.
1.condition:
major terms are known as condition, here victim can terminate or affirm his contract or he can
claim his damages.
2.warranty:
minor terms are known as warranty, here victim has got only option which is about claim
damages, briefly if the product is not good victim can claim only for damages.
P6.
if there is any contract like deliver a product and after delivering something problem
with that product then they will compensate. Who gave the standard form they can not
change any thing but they can if that is mentioned in the contract before.
(xlo v zion):
xlo: in no circumstances they are liable to pay.
Incorporation: an exemption clause can be operated if it is a part of the contract. Three ways
an exemption clause may be incorporated into a contract. These are given below:
1.notice/display
2.signature
3.in the case of dealing
According to unfair contract terms act 1977:
s.2(1): death or personal injury can not be excluded.
s.2(2): property damage can be excluded if that is reasonable.
s.3: standard form contracts:
the meaning of standard form contract is pre-drafted contract. Two things are included into
standard form contracts and they are: 1.the parties who gave the standard form, they are at
breach.
2.then the parties can rely on the exclusion clause, if that is reasonable.
Finally, it can be said that if xlo wants to rely he should proof that exemption clause is
reasonable.
P7.
EXEMPTION OF CLAUSE :
The clause or statement which are used to exempt the contractual liability is called exemption
clause. Exemption clause can be classified into two ways:
1.exclusion clause
2.limiting clause
exclusion clause:
exclusion clauses, which seek to absolve a party for some or to exclude liability from breach of
a contract.
Limiting clause:
This clause is where the liability is accepted for a breach and then limit the amount of
damages payable to a certain sum. Briefly it can be said that which way the liability is
reduced or limited is called limiting clause.
P8.
Nature of general tortious liabilities comparing and contrasting to contractual
liability:
Contract:
As we know contract is an agreement between two or more parties which is supported
by consideration and enforced by law.
Civil liabilities:
Relation between person to person is called civil liability. Two types of liabilities are
based on agreement and tort.
Tort:
This is a civil wrong law or civil liability there is no agreement however someone is
suffering or may be losing something by anyone’s activities. Though it is a contract
however it can be turn to the court under the tort law.
1. Duty of care
2. Breach of that duty of care
3. Who will be wrong he will compensate the other party.
Tortious liability:
Tortious liabilities which mean claim under this law and it is without agreement. In this case
the man will pay to the victim.it can be turn to the court as well but under the tort.
Tortious liability is related with the duty of care, and negligence of that duty, with respect to
persons with whom there is no contractual liability. If someone breaches of that duty or
because of that breach if someone suffers loss, damage or injury then the person who did the
wrong he will compensate the other party.
Contractual liability:
The Contract damages are under expectations damage, and want to put them in position
where they have a contract been performed. Reliance damages for relying on the contract
that was breached. Law of contracts damages does not punish. And it is based on an
enforceable agreement.
P9.
.
Occupiers’ liability is concerned with injury caused by the state or condition of premises or
things done during the occupation of such premises. ( s.1(1)OLA1957).
As we know (OLA 1957)
1. Duty of care
2. Breach
3. Breach caused
4. Wrong DOE will compensate
Occupiers Liability:
The Occupiers Liability Act 1957 is an Act of Parliament which concerns the liability of
occupiers and others to those individuals who are lawfully on their land.
As such, it merely represents an extension to the traditional rules of negligence though, unlike
negligence, it is largely governed by statute.
Vicarious liability:
Vicarious liability is liability imposed by a policy of the law upon a party who is not personally
at fault (May LJ, Viasystems v Thermal Transfer [2005] EWCA).
Personal liability:
An employer is vicariously liable for the torts of an employee committed in the course of
employment. ( Majrowski v Guy’s & St. Thomas NHS Trust [2007] UKHL).
A claim may be brought for breach of the employer’s personal and non-delegable duty of care
(McDermid v Nash Dredging[1987]UKHL,per Lord Hailsham).
According to the case study it is clear that lady Patricia will get compensate from the occupier
Mike.
In this case Dennis made the fault and as occupier Mr. Mike has noticed that there is a
problem with a flying chair but he did not care about it and allowed the ride to go ahead.
Later the evening lady Patricia went to the flying chair and she was taken away suffering from
severe head injuries. So it is clear that Mr. Mike did not take care of his duty.
And according to the act the wrong DOE will compensate the sufferer. So lady Patricia can
claim damages.
P10.
Employers liability:
Getting Injury in a workplace is a big problem. Over 250 people in Great Britain lose
their lives at work in a year. There for we concentrate on an employer’s liability in tort,
which can take three forms.
1.Personal liability in negligence:
A claim may be brought for breach of the employer’s personal and non-delegable duty
of care ( McDermid v Nash Dredging[1987]UKHL,per Lord Hailsham).
The duty is in most respects which are governed by normal principles of the tort of
negligence, however this is distinctive on an account of its non-delegable character.
The leading modern authority on the employer’s personal liability to an employee is the
decision of the House of Lords in Wilson and Clyde Coal Co Ltd v English [1938]; - per
Lord Wright described the employer’s obligation as ‘threefold’ – (1) the provision of a
competent staff of men,(2) Adequate material and (3) a proper system & effective
supervision.
Sometimes the provision of a sale place of work has been added to the list.
Thus, the duty relates to :
1. Providing reasonably competent fellow employees;
2. Safe premises, plant, equipment and materials;
3. A safe system of work.
“The master’s duty as one applicable in all circumstances, namely, to take reasonable
care for the safety of his men” (Wilson v Tyneside window cleaning co, per parker LJ)
2.Vicarious liability for the torts of employees committed in the course of their
employment:
“Vicarious liability is liability imposed by a policy of the law upon a party who is not personally
at fault” ( May LJ, Viasystems v Thermal Transfer [2005] EWCA).
An employer is vicariously liable for the torts of an employee committed in the course
of employment. ( Majrowski v Guy’s & St. Thomas NHS Trust [2007] UKHL).
The justifications to put in vicarious liability are benefits and burden principle, the employer is
most likely to take training and supervision seriously of stuff ect.
A claim based to succeed on vicarious liability the claimant has to overcome 3 hurdles:
1.
The alleged tortfeasor is an employee
2.
The employee committed a tort
3.
The employee committed the tort in the course of employment.
3. Liability for breach of statutory duty.
1.
The Health and Safety at Work etc. Act 1974, which applies to all persons at
work in Great Britain have gradually been replacing the previous piecemeal system of
industrial safety legislation to be found in various statutes which governed specific
types of premises, such as the factories Act 1961, the mines and quarries Act 1954
and the offices, shops and railway premises Act 1963.
2.
The Management of Health & safety at Work Regulations 1999. These
regulations, which provide for risk assessments by employers, health and safety
arrangement’s, and heath surveillance of employees, impose general duties somewhat
akin to those provided for in the 1974 Act.
3. The Work Equipment Regulations 1998.
P11.
P11:
Strict Liability:
Strict liability, sometimes its called absolute liability, which the legal responsibility
for damages, or injury.If the person found strictly liable was not at fault or
negligent. Strict liability has been applied to certain activities in TORT, such as
holding an employer absolutely liable for the torts of her employees, but today it
is most commonly associated with defectively manufactured products. In
addition, for reasons of public policy, certain activities may be conducted only if
the person conducting them is willing to insure others against the harm that
results from the risks the activities create.
General tortious liability: its means citizen owes a duty to other citizen and where
the one party is at fault. e.g: negligence.
tortious liability revolves around duties fixed by law. distinguish this from contractual
liability where duties are fixed (barginnd) by the parties.
the courts are clear there is no bar from claiming remedies for breach of a duty and for
breach of contract.
see Hedley Burne v Heler
strict liability is liability without fault (was the damage reasonably forseeable)
remember strict liability is not absolute liablility and is worth researching some of the
law on this area.
Rylands v Fletcher.
Wringe v Cohen
In tortious liability some key requirements and one of them is given below:
duty of care:
citizen owes a duty of care to other citizen which is meant that every citizen will lead a
life in a manner which will not harm other neighbour.
Breach of that duty of care:
if someone breach of that duty of care or because of that breach if someone is
suffered by loss, damage or injury then wrongdoer will compensate. Moreover, the
main aim of tortious liability is to compensate to victim.
P12.
1. Tort of negligence meant, “….a breach of a legal duty to take care which results in
damage to the claimant.”( W. H. Rogers,Winfield and Jolowicz on Tort,16th ed(2002)
P103).
2. Lord Diplock in Doughty v Turner Metal Manufacturing Co[1964] described
negligence as the “ application of common sense and common morality to the activities
of common man.
Its mean if anyone breaches of a legal duty and if it is a cause of any damage he or
she will has to compensate. The manufacturer must be concerned about his service or
product because any wrong step could harm someone in many ways.
Tony and Bony had entered café de tam. Tony purchased a bottle of wine for him and a ginger
beer for bony. Because of the green colour they could not recognize its contents. Bony drunk
some of the beer and as she was pouring more into her glass the party decomposed remains
of a snail came out of the bottle ,as a result bony suffered shock and severe gastro-enteritis.
It is breach of duty of care by the manufacturer. This is the elements of the tort of negligence.
In this case there was a breach of duty of care so bony can claim against the beer
manufacturer.
P13.
Negligence:
Tort of negligence meant, “….A breach of a legal duty to take care which results in
damage to the claimant.”( W. H. Rogers,Winfield and Jolowicz on Tort,16 th ed(2002)
P103).
To establish a tort of negligence, the claimant should establish that the defendant owed the
claimant a duty of care must show a breach of duty of care that caused any damage.
Lord Diplock in Doughty v Turner Metal Manufacturing Co[1964] described negligence
as the “ application of common sense and common morality to the activities of common
man.”
According to the case study Hab was strolling along a beach when he saw a person
named Fay , in difficulties in the water. Hab make no attempt to rescue Fay and leaves
the scence without raising the alarm. And as a result Fay drowns. In this fact Hab was
not responsible for this because according to the law there was not any breach of duty
care the reason is Hab was not at duty to take care of this. This is the duty of rescue
team or other persons. There was not any legal duty to take care. As we know by the
law claimant will have to show there is a legal duty of care which has been breached
by duty officer or employee. Hab did not breach any legal duty of care, so Fay cannot
claim compensate from Hab.
One reason why a high standard of care is imposed on drivers is that the magnitude of
risk associated with driving is high, i.e road traffic accidents are relatively common
events, which can cause fatal injuries.
The reason for the imposition of a high standard of case is that drivers have
compulsory liability insurance, with the result that the tort system can provide an
effective mechanism for compensation in such causes.
M1.
Manchester City Council was being run by the Conservative Party, which was running a
policy of selling council houses to the occupants. Mr Gibson applied for details of his
house price and mortgage terms on a form of the council. In February 1971, the treasurer
replied,
The corporation may be prepared to sell the house to you at the purchase price of £2,725
less 20% = £2,180 (freehold)… This letter should not be regarded as a firm offer of a
mortgage. If you would like to make formal application to buy your Council house
please complete the enclosed application form and return it to me as soon as possible.
In March 1971, Mr Gibson completed the application form, except for the purchase
price and returned it to the council. In May, the Labour party came back to power and
halted sales. Mr Gibson was told that he could not complete the purchase. So Mr Gibson
sued the council, arguing that a binding contract had already come into force.
Lord Denning MR held that there was a contract, because one should "look at the
correspondence as a whole and at the conduct of the parties and see there from whether
the parties have come to an agreement on everything that was material."
Geoffrey Lane LJ dissented, and would have held there was no contract. The Council
appealed.
M2.
The 1977 act
The relevant provisions of the 1977 act are as follows:
1.This section applies as between contracting parties where one of them deals on the
others written standard terms of business.
2.As against that party, the other cannot by reference to any contract term
a. when himself in breach of contract, exclude or restrict any liability on his in respect
of the breach except in so far as the contract term satisfies the requirement of
reasonableness.
Section 11 provides inter aila that:
(3) In relation to a contract term, the requirement of reasonableness for the purposes
of this part of this act is that term shall have been a fair and reasonable one to be
included having regard to the circumstances which were, or *1246 ought
reasonably to have been, known to or in the contemplation of the parties when the
contract was made.
(4) Where by reference to a contract term a person seeks to restrict liability to a
specified sum of money, and the question of arises (under this or any other Act)
whether the term satisfied the requirement of reasonableness, regard shall be hard
in particular to –
(a) The resources which he could expect to be available to him for the purpose of
meeting the liability should it arise: and
(b) How far it was open to him to cover himself by insurance.
(5) It is for those claiming that a contract term… satisfies the requirement of
reaonableness to show that it do
According to the case:
OMS- suppliers of medical equipment
OTS- specialist Haulage Company
According to the case study the facts are under bellow
1. OMS contracted with OTS for the transport of goods and back from Teheran
2. OTS has been requested by OMS to insure the goods
3. OTS failed to insure the goods
4. OTS lost the products on the return journey
Section 3 = if there is any standard form contract and the exclusion clause and if that is
reasonable then it is valid but if the party who proposes to pay breach of contract.
In this case OMS contracted with OTS for the transport of goods to and back from
Tehran. The goods were lost on the return journey and it was discovered that OTS had
failed to ensure the goods. Although it had been requested by OMS.
OMS sued to recover the value of the goods lost. OTS relying on the fact that the
contract was subject to the conditions of the British international freight association
standard conditions 1989, pointed to cl.13B and cl.28A which provided that if the
transporter arranged insurance it did so solely as an agent for the customer and
subject to cl.29, which clause limited liability to GBP 600 for any one claim arising from
a rely on those clauses because it had not been shown that they met the test of
reasonableness set under the unfair contract terms Act 1977 s.11. OTS has applied.
It is clear that OTS has breach the contract and could not complete the business
because of losing their products. As a result OMS claim the money from OTS.
OTS wanted to pay only 600 pounds but OMS said that this amount is not enough to
full fill the loss of their company. And there was a legal contract between OMS and
OTS so they can claim the money against OTS. But according to the Act the
compensate should be enough for the loss. So court has decided a good amount of
money which is reasonable.
M3.
(1)Post communication :
In this side it happens by post. It means if the communication happens by post than its call
postal rule. If offer wants to offered someone and if that answer comes by post than it
happens. There have some postal rule as like
Offers should have terms and condition
Demeanor
Postal rule
(2)Immediate mode:
For a valid contract there needs to have all the necessary things what it needs to have. To
say, offer and acceptance, consideration etc. in that situation postal rules can be made if the
offer and offeree send it by post.
(3)Click icon :
If it granted by the last part and if the offer is created than it will come with the prove of
contract and it attached two of the parties in a union. And buyer will supply to the trader.
All of though we can say that, it can fulfill a full valid contract.
It can’t be difficult, if every agreements go by legal relation even though many of
relations and the similarity to get difficult for the proper fairness. Law where it attached
the all parties in its own way for the proper concord and it is a major stuffs.
D1.
Here anyone can take decision by his/her own and they have the authority to take it.
Some features judging the law from it side and that is :
•
Minors: who are under 18 its make it pointed of that situation.
•
Incapacity of mental: its fully involved with those who are mentally disappointed or disable you
can say.
When a person got that authority to do whatever he wants he can do but there is also a rules and
regulation. They can’t go out of the border of law.
If there any party are not succeed to make their agreement properly then the breach can be happened as
its only happens as because of go down of any contract.
D2.
Effect of exclusion and limiting clauses in ODA contract :
Though we know this words come from two different things however it means the same as exclusion
means to eliminate something and limiting means the different as it says to preventing of something.
After that if it attached with two of it will means the same thing and it sounds exclusion and limiting
clause. It is very cooperative to avoid something wrong in business field. But it has some demerits too.
Which is, if there any contract is named by breach than this term can not be appropriate. There have
something necessary which is given below.
For avoiding the risk of finance it should be done by this exclusion and limiting clause. And its
specially happens for the business holder as they wants to steer clear of this responsibility.
As example, a passenger going through by bus. And on the way, he was sleeping and he lost his bag on
that case. But there was a notice by bus company that keep all your belongings with you. In that case,
bus owner are not responsible for that. That notice has also given in this case. With it, bus owner are
clearly not responsible for it.
In a conclusion, we can see that this clause is much important for the ODA contract to avoid the risk. In
this case, if there any thing perceive like “keep all your belongings with you” than they won’t be
responsible for it.
D3.
Caparo Industries plc v Dickman [1990] 2 AC 605 is currently one of the leading cases on the test for a
duty of care in English tort law. The most recent detailed House of Lords consideration of this vexed
question was in Customs and Excise Commissioners v Barclays Bank plc [2007] 1 AC 181, in light of
which judgment Caparo must now be viewed. The House of Lords established what is known as the
"three-fold test" (a series of three factors), which is that for one party to owe a duty of care to another,
the following must be established:
Harm must be a "reasonably foreseeable" result of the defendant's conduct;
A relationship of "proximity" between the defendant and the claimant;
It must be "fair, just and reasonable" to impose liability.
A company called Fidelity plc was the target of a takeover by Caparo Industries plc. Fidelity was not
doing well. In March 1984 Fidelity had issued a profit warning, which had halved its share price. In
May 1984 Fidelity's directors made a preliminary announcement in its annual profits for the year up to
March. This confirmed the position was bad. The share price fell again. At this point Caparo had begun
buying up shares in large numbers. In June 1984 the annual accounts, which were done with the help of
the accountant Dickman, were issued to the shareholders, which now included Caparo. Caparo reached
a shareholding of 29.9% of the company, at which point it made a general offer for the remaining
shares, as the City Code's rules on takeovers required. But once it had control, Caparo found that
Fidelity's accounts were in an even worse state than had been revealed by the directors or the auditors.
It sued Dickman for negligence in preparing the accounts and sought to recover its losses. This was the
difference in value between the company as it had and what it would have had if the accounts had been
accurate.
On a preliminary issue as to whether a duty of care existed in the circumstances as alleged by the
plaintiff, the plaintiff was unsuccessful at first instance but was successful in the Court of Appeal in
establishing a duty of care might exist in the circumstances. Sir Thomas Bingham MR held that as a
small shareholder, Caparo was entitled to rely on the accounts. Had Caparo been a simple outside
investor, with no stake in the company, it would have had no claim. But because the auditors' work is
primarily intended to be for the benefit of the shareholders, and Caparo did in fact have a small stake
when it saw the company accounts, its claim was good. This was overturned by the House of Lords,
which unanimously held there was no duty of care.
The majority of the Court of Appeal (Bingham LJ and Taylor LJ, O'Connor LJ dissenting) held that a
duty was owed by the auditor to shareholders individually, and although it was not necessary to decide
that in this case and the judgment was obiter, that a duty would not be owed to an outside investor who
had no shareholding. Bingham LJ held that, for a duty owed to shareholders directly, the very purpose
of publishing accounts was to inform investors so that they could make choices within a company
about how to use their shares. But for outside investors, a relationship of proximity would be "tenuous"
at best, and that it would certainly not be "fair, just and reasonable". O'Connor LJ, in dissent, would
have held that no duty was owed at all to either group. He used the example of a shareholder and his
friend both looking at an account report. He thought that if both went and invested, the friend who had
no previous shareholding would certainly not have a sufficiently proximate relationship to the negligent
auditor. So it would not be sensible or fair to say that the shareholder did either. Leave was given to
appeal. Lord Bridge of Harwich who delivered the leading judgment restated the so called "Caparo
test" which Bingham LJ had formulated below. His decision was, following O'Connor LJ's dissent in
the Court of Appeal, that no duty was owed at all, either to existing shareholders or to future investors
by a negligent auditor. The purpose of the statutory requirement for an audit of public companies under
the Companies Act 1985 was the making of a report to enable shareholders to exercise their class rights
in general meeting. It did not extend to the provision of information to assist shareholders in the
making of decisions as to future investment in the company.
He said that the principles have developed since Anns v Merton London Borough Council. Indeed,
even Lord Wilberforce had subsequently recognised that foreseeability alone was not a sufficient test of
proximity. It is necessary to consider the particular circumstances and relationships which exist.
Lord Bridge then proceeded to analyse the particular facts of the case based upon principles of
proximity and relationship. He referred approvingly to the dissenting judgment of Lord Justice Denning
(as he then was) in Candler v Crane, Christmas & Co [1951] 2 KB 164 where Denning LJ held that the
relationship must be one where the accountant or auditor preparing the accounts was aware of the
particular person and purpose for which the accounts being prepared would be used.
There could not be a duty owed in respect of "liability in an indeterminate amount for an indeterminate
time to an indeterminate class" (Ultramares Corp v Touche, per Cardozo C.J New York Court of
Appeals). Applying those principles, the defendants owed no duty of care to potential investors in the
company who might acquire shares in the company on the basis of the audited accounts.
Although it was not necessary to decide the matter, it would seem unlikely that shareholders
independently would have any right of action against the auditors for negligently prepared accounts
even if they chose to dispose of their shares on the basis of those accounts. The company itself would
have a right of action for any loss it suffered as a result of those accounts being negligently prepared.
Lord Oliver and Lord Jauncey, Lord Roskill and Lord Ackner agreed.