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The Caparo Illusion:

The Three-Stage Test Has Gone.

What Happens Next?

Mark Cannon QC

Josh Folkard

February 2019

This material was provided for 4 New Square’s Professional Liability & Regulatory Conference in February 2019. It was not intended for use and must not be relied upon in relation to any particular matter and does not

constitute legal advice. It has now been provided without responsibility by its authors.

Mark Cannon QC Call: 1985 Silk: 2008

Mark is a well-established commercial silk whose practice is mainly focused on professional liability in a commercial context, insurance and reinsurance, construction and commercial disputes.

He is described in the current directories as “very user-friendly”, “outstanding and super-clever”, “very approachable” with “an impressive ability to retain complex information and deploy it strategically in cross-examination”, having “a phenomenal brain, able to cut through the most complicated issues with ease” and as having “a fearsome intellect”. Earlier editions praised Mark’s advocacy:

“an excellent advocate”, “very attractive advocacy style”, “impressive in court and possessed of a very agile brain”, “highly intelligent, good on paper and on his feet”, “his manner of expression as an advocate is very impressive”, “a real trooper who holds his corner in court well”.

He has extensive experience as an advocate, in trials, arbitrations and on appeals. He has appeared in numerous reported cases.

Mark is the co-author of Cannon & McGurk on Professional Indemnity Insurance and a General Editor of Jackson & Powell on Professional Liability, a work of which he has been an editor since 1990. He is currently head of chambers at 4 New Square.

Josh Folkard Call: 2013

Josh has a commercial practice focussed on professional liability, civil fraud, insurance and sports. Josh has experience in many aspects of professional liability and is frequently instructed as junior counsel (led and as sole counsel) in claims against solicitors, immigration advisors, IFAs and construction professionals. Recent examples of Josh’s work include: advising in a potential claim against solicitors (led by Justin Fenwick QC) who acted for the wife in a divorce from a high net worth individual. He is also acting as sole counsel in a claim against solicitors relating to their

handing of a multi-million pound international commercial arbitration concerning the procedural requirements of Qatari law. Josh read Law at University College, Oxford. He was awarded the Wronker Law Prize for the joint best performance in the university, the paper prize for Torts and the Gibbs Prize for Contract, Torts, Trusts and Land Law. He subsequently completed the BCL at Merton College, where he won the paper prize for Principles of Civil Procedure. He was graded Outstanding on the BPTC, and is an Atkin Scholar of Gray’s Inn.

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THE CAPARO ILLUSION:

THE THREE-STAGE TEST HAS GONE. WHAT HAPPENS NEXT?

Mark Cannon QC and Josh Folkard

February 2019

Introduction

1. In Robinson v. Chief Constable of West Yorkshire Police [2014] EWCA Civ 15 the Court of Appeal held that

“the Caparo test applies to all claims in the modern law of negligence”. By the time the case reached the

Supreme Court that well-known three-stage test had been held to be of no practical application. How and

why did this volte-face occur? And where does that leave lawyers and judges when deciding whether a

duty of care is owed or not?

The Great Illusion

2. In Michael v. Chief Constable of South Wales Police [2015] UKSC 2; [2015] A.C. 1732 Lord Toulson explained

that:

(i) The quest for a universal formula or yardstick to decide whether a duty of care is owed has been

elusive.

(ii) The concepts of “proximity” and “fairness” (i.e. limbs 2 and 3 of the three-stage test) are not

susceptible of any definition which would make them useful as practical tests.

(iii) Lord Bridge had explained this in Caparo Industries plc v. Dickman [1990] 2 A.C. 605, but the three-

stage test had been treated as a blueprint for deciding cases when it was clear that it was not

intended to be any such thing.

The Attractions of the Three-Stage Test

3. It was easy to be misled by the earlier exposition of the three-stage test in Smith v. Eric S. Bush (A Firm)

[1990] 1 A.C. 831 as well as by references to it in Caparo.

4. The three-stage test provided a convenient structure for arguments and judgments.

Ramming the Message Home

5. Since Lord Toulson’s judgment in Michael v. Chief Constable of South Wales Police the Supreme Court has

repeated that the three-stage test is not to be applied: Robinson v. Chief Constable of West Yorkshire Police

[2018] UKSC 4; [2018] A.C. 736 and NRAM Ltd (formerly NRAM plc) v. Steel [2018] UKSC 13; [2018] 1 W.L.R.

1190.

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Caparo Properly Understood: the Incremental Approach

6. In Caparo Lord Bridge, Lord Roskill and Lord Oliver preferred the incremental approach as explained by

Brennan J in Sutherland Shire Council v. Heyman (1985) 60 A.L.R. 1, 43-44, where he said:

'It is preferable, in my view, that the law should develop novel categories of negligence

incrementally and by analogy with established categories, rather than by a massive

extension of a prima facie duty of care restrained only by indefinable 'considerations which

ought to negative, or to reduce or limit the scope of the duty or the class of person to whom

it is owed.'”

7. The recent decisions of the Supreme Court also endorse this approach.

How Does the Incremental Approach Work in Practice?

8. Logically there are two questions:

(i) Has the existence or non-existence of a duty of care on the facts of the present case been

established by reference to existing case law?

(ii) If not, should a duty of care be recognised?

9. There is nothing new in the incremental approach or in looking first at existing authority. Support for both

can be found in Hedley Byrne & Co Ltd v. Heller & Partners Ltd [1964] 465 and Dorset Yacht Co Ltd v. Home

Office [1970] A.C. 1004.

Existing Authority

10. Lord Reed has now restated the approach in his judgment in Robinson v. Chief Constable of West Yorkshire

Police [2018] UKSC 4; [2018] A.C. 736 at [26]. And analysis of existing case law, rather than resort to the

three-stage test or any other formula provided the answer in that case and in NRAM Ltd (formerly NRAM

plc) v. Steel [2018] UKSC 13; [2018] 1 W.L.R. 1190.

Truly Novel Cases

11. Lord Reed addressed this in paragraph [27] of his judgment in Robinson:

“Following the Caparo case, the characteristic approach of the common law in such

situations is to develop incrementally and by analogy with established authority. The

drawing of an analogy depends on identifying the legally significant features of the

situations with which the earlier authorities were concerned. The courts also have to

exercise judgement when deciding whether a duty of care should be recognised in a novel

type of case.”

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12. Identification of the “legally significant features” involves analysis of existing authority as a source of the

answer to the question whether to impose a duty of care. There is an overlap between this exercise and

the first stage where the question is “Does existing authority answer the question?”. This overlap was

described by Lord Devlin in Hedley Byrne:

“What Donoghue v. Stevenson did may be described either as the widening of an old

category or as the creation of a new and similar one.”

13. There is a distinct shortage of cases in which the incremental approach has been applied, rather than

referred to. It was not applied in Caparo and in Australia the focus has been first on proximity and then

vulnerability as the touchstone, with increasing recognition that neither concept provides the answer in all

cases and occasional references to the incremental approach of the Common Law.

14. There are two ways in which the incremental approach can be adopted. The first looks at fairly high level,

policy reasons why a duty of care has or has not been found in other cases in order to decide whether to

impose a duty on the particular, novel facts. The other looks for more detailed guidance – the “legally

significant factors”.

15. But on any view the incremental approach will require the Court to consider policy issues which brings in

the question whether it is fair, just and reasonable to impose a duty of care: the third limb of the three-

stage test.

The Survival of Policy: Fair, Just and Reasonable

16. In Robinson v. Chief Constable of West Yorkshire Police [2018] UKSC 4; [2018] A.C. 736 at [84] Lord Mance,

while recognising that it was not necessary to resort to the three-stage test where the facts of a case fall

within an established category, observed that it would be “unrealistic to suggest that, when recognising

and developing an established category, the courts are not influenced by policy considerations” and that

when recognising the existence of a duty of care in particular circumstances courts “are making policy

choices, in which considerations such as proximity and fairness, justice and reasonableness must inhere”.

17. Fairness, justice and reasonableness were the express basis of the decision of the Supreme Court in James-

Bowen v. Commissioner of Police of the Metropolis [2018] UKSC 40; [2018] 1 W.L.R. 4021, a decision reached

after the earlier decisions in Michael, Robinson and NRAM.

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18. That recourse had to be had to policy in truly novel situations is also shown by the decision of the House of

Lords in Marc Rich & Co A.G. v. Bishop Rock Marine Co Ltd [1996] A.C. 211, where “none of the cases cited

provided any realistic analogy to be used as a springboard for a decision one way or the other in this case”.

19. When the Courts decide questions of policy they look to established principles or “the cumulative

experience of the judiciary” rather than to the subjective views of particular judges. This ties policy

considerations back to existing authority and so to the incremental approach.

20. But there is a conundrum. The Supreme Court has held that the third limb of the three-stage test is of no

practical value. But in truly novel cases the Courts do ask whether it is fair, just and reasonable to impose

a duty of care. Is the Supreme Court suggesting that a different approach be adopted (and, if it is, what is

that approach?) or are the Courts to make do with the unsatisfactory test of fairness, justice and

reasonableness and muddle through as best they can?

What Does This Mean In Practice?

The Structure of Legal Arguments and Judgments

21. These will no longer be based on the three-fold test. Rather the focus should be on existing authority. So,

while the Court of Appeal in Robinson v. Chief Constable of West Yorkshire Police decided the issue on policy

grounds, the Supreme Court found the answer in existing authority.

High Level Analysis

22. At a high level authority shows that:

(i) Where it is reasonably foreseeable that lack of care could cause personal injury, death or damage

to property, a duty of care will usually be owed.

(ii) A duty of care is a recognised incident of various relationships.

(iii) A duty of care is less likely to be imposed where the defendant has simply failed to act, even though

damage to the claimant is reasonably foreseeable.

(iv) The law is more cautious in imposing a duty of care in cases of “pure economic loss”.

(v) Where there has been a (deemed) assumption of responsibility a duty of care will be found,

including in claims for failure to act and for “pure economic loss”.

Professional Liability

23. The focus should usually be on existing authority. It is now clear that a professional person or firm owes a

concurrent duty of care in tort to their clients. Other decisions apply both to their specific facts and apply

in analogous circumstances: e.g. White v. Jones [1995] 2 A.C. 207. Analysis of groups of decisions can reveal

5

principles which indicate the answer in cases with similar, but different facts. And high level concepts such

as “assumption of responsibility” can be decisive in cases where a professional person has actually assumed

responsibility to a non-client in some way. They can also provide guidance in less clear cases, but the

answer there may lie in lower-level principles, for example those to be found in judgments such as the

dissenting judgment of Denning LJ in Candler v. Crane Christmas & Co [1951] 2 K.B. 164 (roundly endorsed

in Caparo) and the judgment of Neill LJ in James McNaughton Paper Group Ltd v. Hicks Anderson & Co

[1991] 2 Q.B. 113.

Conclusion

24. The recent decisions of the Supreme Court are a welcome reminder that the right starting point in most

cases is existing authority, not by seeking to apply criteria which are of limited, if any, practical value. That

said, those same decisions show that in some cases the answer will only be found by considering issues of

policy, albeit policy rooted in “the cumulative experience of the judiciary”.

Mark Cannon QC and Josh Folkard

4 New Square Chambers

Disclaimer: this handout is not to be relied upon as legal advice. The circumstances of each case differ and legal advice specific to the individual case should always be sought. © 2019 Mark Cannon QC and Josh Folkard.

February 2019

1

The Caparo Illusion:

The Three-Stage Test Has Gone. What Happens Next?

Mark Cannon QC & Joshua Folkard

Introduction

I. The Great Illusion

II. Attractions of the Three Stage Test

III. The Incremental Approach: how does it work in practice?

IV. The Survival of Policy

V. Structure of Legal Arguments / Judgments

VI. Conclusion

February 2019

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Michael v. Chief Constable of South Wales Police [2015] UKSC 2

“From time to time the courts have looked for some universal formula or yardstick, but the quest has been elusive. And from time to time a court has used an expression in explaining its reasons for reaching a particular decision which has then been squashed and squeezed in other cases where it does not fit so aptly” (at [103]).

Lord Toulson

Referring to Lord Bridge in Caparo v Dickman [1990] 2 AC 605: “… the concepts both of ‘proximity’ and ‘fairness’ were not susceptible of any definition which would make them useful as practical tests, but were little more than labels to attach to features of situations which the law recognised as giving rise to a duty of care. Paradoxically, this passage in Lord Bridge's speech has sometimes come to be treated as a blueprint for deciding cases, despite the pains which the author took to make clear that it was not intended to be any such thing”.

Michael v Chief Constable of South Wales Police [2015] UKSC 2

Comments in Caparo

Lord Bridge cited Brennan J in Sutherland Shire Council v Heyman [1985] 60 ALR 1 (at 43-44):

“It is preferable, in my view, that the law should develop novel categories of negligence incrementally and by analogy with established categories, rather than by a massive extension of a prima facie duty of care restrained only by indefinable considerations which ought to negative, or to reduce or limit the scope of the duty or the class of person to whom it is owed”.

Lord Oliver (at 633): “… to search for any single formula which will serve as a general test of liability is to pursue a will-o'-the wisp … [O]nce one discards … the concept of foreseeability of harm as the single exclusive test - even a prima facie test - of the existence of the duty of care, the attempt to state some general principle which will determine liability in an infinite variety of circumstances serves not to clarify the law but merely to bedevil its development in a way which corresponds with practicality and common sense”.

February 2019

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Attractions of the Three Stage Test

Speeches in Caparo itself (following Smith v Eric Bush [1990] 1 AC 831) referred to the Three Stage Test. Smith v Eric Bush had not contained the same warnings as to the test’s practical utility

Three Stage Test provides a structure for advocates’ arguments and Judges’ judgments

Robinson v Chief of West Yorkshire Police [2018] UKSC 4

Lord Reed (with whom Lady Hale and Lord Hodge agreed)

“The proposition that there is a Caparo test which applies to all claims in the modern law of negligence, and that in consequence the court will only impose a duty of care where it considers it fair, just and reasonable to do so on the particular facts, is mistaken … that understanding of the case mistakes the whole point of the Caparo case, which was to repudiate the idea that there is a single test which can be applied in all cases in order to determine whether a duty of care exists ”.

February 2019

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Robinson v Chief of West Yorkshire Police [2018] UKSC 4

Comments in Caparo

Lord Oliver, citing Lord Devlin in Hedley Byrne v Heller Partners

[1964] AC 465 (whilst considering Donoghue v Stevenson [1932] AC

562)

“[It]is not … a sensible application of what Lord Atkin was saying for a judge to be invited on the facts of any

particular case to say whether or not there was 'proximity' between the plaintiff and the defendant.

That would be a misuse of a general conception and it is not the way in which English law develops … Donoghue v Stevenson … shows how the law can be developed to solve particular problems. Is the relationship between

the parties in this case such that it can be brought within a category giving rise to a special duty? As

always in English law, the first step in such an inquiry is to see how far the authorities have gone, for new categories in the law do not spring into existence

overnight”.

Michael v. Chief Constable of South Wales Police [2015] UKSC 2

Lord Toulson in Michael v Chief Constable of South Wales Police [2015] UKSC 2, at [102]:

“The development of the law of negligence has been by an incremental

process rather than giant steps. The established method of the court

involves examining the decided cases to see how far the law has gone and where it has refrained from going. From that analysis it looks to see whether there is an argument by

analogy for extending liability to a new situation, or whether an earlier limitation is no longer logically or

socially justifiable”.

February 2019

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How does the Incremental Approach work in practice?

Has the existence or non-existence of a duty of care on the facts of the present case been established?

If not, should a duty of care be recognised?

Nothing New in Incremental Approach / looking to authority

Previous applications of Incremental Approach / looking to authority

Lord Devlin in Hedley Byrne v Heller Partners [1964] AC 465, considering Lord Atkin’s speech in Donoghue v Stevenson [1932] AC 562:

“What Lord Atkin did was to use his general conception to open up a category of cases giving rise to a special duty. It was already clear that the law recognised the existence of such a duty in the category of articles that were dangerous in themselves. What Donoghue v Stevenson did may be described either as the widening of an old category or as the creation of a new and similar one. The general conception can be used to produce other categories in the same way. An existing category grows as instances of its application multiply until the time comes when the cell divides …”

Lord Diplock in Dorset Yacht v Home Office [1970] AC 1004

“... the judicial development of the law of negligence rightly proceeds by seeking first to identify the relevant characteristics that are common to the kinds of conduct and relationship between the parties which are involved in the case for decision and the kinds of conduct and relationships which have been held in previous decisions of the courts to give rise to a duty of care”.

February 2019

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Role of Existing Authority

Lord Reed in Robinson v Chief Constable of West Yorkshire Police [2018] UKSC 4 (at [26])

“Applying the approach adopted in the Caparo case, there are many situations in which it has been clearly established that a duty of care is or is not owed: for example, by motorists to other road users, by manufacturers to consumers, by employers to their employees, and by doctors to their patients. As Lord Browne-Wilkinson explained in Barrett v Enfield London Borough Council [2001] 2 AC 550, 559–560:

‘Once the decision is taken that, say, company auditors though liable to shareholders for negligent auditing are not liable to those proposing to invest in the company … that decision will apply to all future cases of the same kind.’

Where the existence or non-existence of a duty of care has been established, a consideration of justice and reasonableness forms part of the basis on which the law has arrived at the relevant principles … Nor … can justice and reasonableness constitute a basis for discarding established principles and deciding each case according to what the court may regard as its broader merits …”

Truly Novel Cases?

Lord Reed in Robinson v Chief Constable of West Yorkshire Police [2018] UKSC 4 (at [27])

“Following the Caparo case, the characteristic approach of the common law in such situations is to develop incrementally and by analogy with established authority. The drawing of an analogy depends on identifying the legally significant features of the situations with which the earlier authorities were concerned”

“The courts also have to exercise judgement when deciding whether a duty of care should be recognised in a novel type of case. It is the exercise of judgment in those circumstances that involves consideration of what is ‘fair, just and reasonable’”.

February 2019

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Truly Novel Cases?

McHugh J in Perre v Apand Pte Ltd [1999] HCA 36 (at [93])

“We have the established categories, a considerable body of case law and the useful concept of

reasonable foreseeability. If a case falls outside an established category, but the defendant should

reasonably have foreseen that its conduct would cause harm to the plaintiff, we have only to ask

whether the reasons that called for or denied a duty in other (usually similar) cases require the

imposition of a duty in the instant case. No doubt that may sometimes mean that, whether or not a

duty is imposed at a particular time, will depend on the extent to which the case law has progressed to that time. But that is the way of the common law, the judges preferring to go ‘from case to case, like the ancient Mediterranean mariners, hugging the

coast from point to point, and avoiding the dangers of the open sea of system or science’”.

Truly Novel Cases?

Two Incremental Approaches?

Close analysis of existing authority to identify the legally significant factors

Reasons which resulted in a finding for or against imposing a duty of care in other (usually similar) cases

February 2019

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Survival of Policy

(i) The imposition of a duty of care might give rise to a conflict of interests: authority showed that would often weigh heavily against imposing a duty of care.

(iii) Practical difficulties with legal professional privilege which would arise on the existing law as to common interest privilege.

(ii) Wider considerations of public policy that parties to litigation should be able to conduct it without fear of incurring liability to third parties, to settle claims if they wished, that litigation should be conducted without undue delay and the risk of satellite litigation (all factors recognised in existing authority, albeit not all in the context of deciding whether to impose a duty of care in tort).

Lord Lloyd-Jones in James-Bowen v Commissioner of Police of the Metropolis [2018] UKSC 40

Survival of Policy

Lord Steyn in Marc Rich v Bishop Rock Marine [1996] 2 AC 211 (at 236)

“In the course of their submissions counsel took your Lordships on a tour of many of the landmark cases on negligence … In this area the common law develops incrementally on the basis of a consideration of analogous cases where a duty has been recognised or desired. But none of the cases cited provided any realistic analogy to be used as a springboard for a decision one way or the other in this case. The present case can only be decided on the basis of an intense and particular focus on all its distinctive features, and then applying established legal principles to it …”.

February 2019

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Survival of Policy

Correct Approach to Policy Issues

High Court of Australia in Sullivan v Moody [2001] HCA 59

“The question as to what is fair, and just and reasonable is capable of being misunderstood as an invitation to formulate policy rather than to search for principle. The concept of policy, in this context, is often ill-defined. There are policies at work in the law which can be identified and applied to novel problems, but the law of tort develops by reference to principles, which must be capable of general application, not discretionary decision-making in individual cases …”

Lord Diplock in Dorset Yacht v Home Office [1970] AC 1004, at 1059:

“The justification of the courts' role in giving the effect of law to the judges' conception of the public interest in the field of negligence is based upon the cumulative experience of the judiciary of the actual consequences of lack of care in particular instances and the judicial development of the law of negligence rightly proceeds by seeking first to identify the relevant characteristics that are common to the kinds of conduct and relationship between the parties which are involved in the case for decision and the kinds of conduct and relationships which have been held in previous decisions of the courts to give rise to a duty of care”.

Survival of Policy

Incremental Approach in Truly Novel Cases?

February 2019

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Structure of Legal Arguments and Judgments

The Court of Appeal / Supreme Court in Robinson v Chief Constable of West Yorkshire Police

Focus on whether it was fair, just and reasonable to impose a duty of care on police officers who were carrying out their duties in a public place. It was held that the public interest in the arrest of criminals outweighed the interests of particular individuals and to impose a duty would risk deterring the police from removing a drug dealer from the streets

Once it was established that the police owed a duty of care when, for example, driving along a road in the course of their duties, the answer was clear as a matter of principle: they had the same duty to take reasonable care to avoid causing personal injury or death to others as did ordinary members of the public

CA

SC

High-Level Analysis

(i) Where it is reasonably foreseeable that a positive course of action or conduct could cause personal injury, death or damage to the property of a third party, a duty of care will usually be owed.

(v) Where there has been a (deemed) assumption of responsibility a duty of care will be found, including in claims for negligent failures to act and for “pure economic loss”.

(ii) A duty of care is recognised as an incident of various relationships: e.g. employer and employee and professional person or firm and client.

At a high-level, existing case law shows that:

(iii) Liability for failing to act is unlikely to give rise to a duty of care in tort unless the defendant has come under a duty to act.

(iv) The law is also more cautious when the relevant damage is “pure economic loss”.

February 2019

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Conclusion

• Look to authority, rather than any universal

touchstone• … But there’s still plenty

of policy.

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