Malik v. Bank of Credit; Mahmud v. Bank of Credit [1997] UKHL 23; [1998] AC 20; [1997] 3 All ER 1; [1997] IRLR 462; [1997] 3 WLR 95; [1997] ICR 606 (12th June, 1997)

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	United Kingdom House of Lords Decisions
You are here: BAILII >> Databases >> United Kingdom House of Lords Decisions >> Malik v. Bank of Credit; Mahmud v. Bank of Credit [1997] UKHL 23; [1998] AC 20; [1997] 3 All ER 1; [1997] IRLR 462; [1997] 3 WLR 95; [1997] ICR 606 (12th June, 1997) URL: http://www.bailii.org/uk/cases/UKHL/1997/23.html Cite as: [1997] ICR 606, [1997] IRLR 462, [1997] 3 All ER 1, [1997] UKHL 23, [1997] 3 WLR 95, [1998] AC 20

For the reasons given in the speeches to be delivered by my noble and learned friends Lord Nicholls of Birkenhead and Lord Steyn, which I have read in draft and with which I agree, I would allow these appeals.

I have had the privilege of reading in draft the speeches prepared by my noble and learned friends Lord Nicholls of Birkenhead and Lord Steyn. I agree that this appeal should be allowed for the reasons that they give.

For the reasons given in the speech to be delivered by my noble and learned friend Lord Steyn, which I have read in draft and with which I agree, I would allow this appeal.

This is another case arising from the disastrous collapse of Bank of Credit and Commerce International SA in the summer of 1991. Thousands of people around the world suffered loss. Depositors lost their money, employees lost their jobs. Two employees who lost their jobs were Mr. Raihan Nasir Mahmud and Mr. Qaiser Mansoor Malik. They were employed by B.C.C.I. in London. They claim they lost more than their jobs. They claim that their association with B.C.C.I. placed them at a serious disadvantage in finding new jobs. So in March 1992 they sought to prove for damages in the winding up of B.C.C.I. The liquidators rejected this "stigma" head of loss in their proofs. Liability for notice money and statutory redundancy pay was not in dispute.

Mr. Mahmud had worked for the bank for 16 years. At the time of his dismissal he was manager of the bank's Brompton Road branch. Mr. Malik was employed by the bank for 12 years. His last post was as the head of deposit accounts and customer services at B.C.C.I's Leadenhall branch. On 3 October 1991 they were both dismissed by the provisional liquidators, on the ground of redundancy.

Mr. Mahmud and Mr. Malik appealed to the court against the liquidators' decision on their proofs. The registrar directed the trial of a preliminary issue: whether the applicants' evidence disclosed a reasonable cause of action or sustainable claim for damages. The Judge, Evans-Lombe J., gave a negative answer to this question. So did the Court of Appeal, comprising Glidewell, Morritt and Aldous L.JJ.

Before this House, as in the courts below, the issue is being decided on the basis of an agreed set of facts. The liquidators do not admit the accuracy of these facts, but for the purpose of this preliminary issue it is being assumed that the bank operated in a corrupt and dishonest manner, that Mr. Mahmud and Mr. Malik were innocent of any involvement, that following the collapse of B.C.C.I. its corruption and dishonesty became widely known, that in consequence Mr. Mahmud and Mr. Malik were at a handicap on the labour market because they were stigmatised by reason of their previous employment by B.C.C.I., and that they suffered loss in consequence.

In the Court of Appeal and in your Lordships' House the parties were agreed that the contracts of employment of these two former employees each contained an implied term to the effect that the bank would not, without reasonable and proper cause, conduct itself in a manner likely to destroy or seriously damage the relationship of confidence and trust between employer and employee. Argument proceeded on this footing, and ranged round the type of conduct and other circumstances which could or could not constitute a breach of this implied term. The submissions embraced questions such as the following: whether the trust-destroying conduct must be directed at the employee, either individually or as part of a group; whether an employee must know of the employer's trust-destroying conduct while still employed; and whether the employee's trust must actually be undermined. Furthermore, and at the heart of this case, the submissions raised an important question on the damages recoverable for breach of the implied term, with particular reference to the decisions in Addis v. Gramophone Co. Ltd. [1909] AC 488 and Withers v. General Theatre Corporation Ltd. [1933] 2 K.B. 536.

These questions are best approached by focusing first on the particular conduct of which complaint is made. The bank operated its business dishonestly and corruptly. On the assumed facts, this was not a case where one or two individuals, however senior, were behaving dishonestly. Matters had gone beyond this. They had reached the point where the bank itself could properly be identified with the dishonesty. This was a dishonest business, a corrupt business.

It is against this background that the position of an innocent employee has to be considered. In my view, when an innocent employee of the bank learned the true nature of the bank's business, from whatever source, he was entitled to say: "I wish to have nothing more to do with this organisation. I am not prepared to help this business, by working for it. I am leaving at once." This is my intuitive response in the case of all innocent employees of the business, from the most senior to the most junior, from the most long serving to the most recently joined. No one could be expected to have to continue to work with and for such a company against his wish.

This intuitive response is no more than a reflection of what goes without saying in any ordinary contract of employment, namely, that in agreeing to work for an employer the employee, whatever his status, cannot be taken to have agreed to work in furtherance of a dishonest business. This is as much true of a doorkeeper or cleaner as a senior executive or branch manager.

Two points can be noted here. First, as a matter of legal analysis, the innocent employee's entitlement to leave at once must derive from the bank being in breach of a term of the contract of employment which the employee is entitled to treat as a repudiation by the bank of its contractual obligations. That is the source of his right to step away from the contract forthwith.

In other words, and this is the necessary corollary of the employee's right to leave at once, the bank was under an implied obligation to its employees not to conduct a dishonest or corrupt business. This implied obligation is no more than one particular aspect of the portmanteau, general obligation not to engage in conduct likely to undermine the trust and confidence required if the employment relationship is to continue in the manner the employment contract implicitly envisages.

Second, I do not accept the liquidators' submission that the conduct of which complaint is made must be targeted in some way at the employee or a group of employees. No doubt that will often be the position, perhaps usually so. But there is no reason in principle why this must always be so. The trust and confidence required in the employment relationship can be undermined by an employer, or indeed an employee, in many different ways. I can see no justification for the law giving the employee a remedy if the unjustified trust-destroying conduct occurs in some ways but refusing a remedy if it occurs in others. The conduct must, of course, impinge on the relationship in the sense that, looked at objectively, it is likely to destroy or seriously damage the degree of trust and confidence the employee is reasonably entitled to have in his employer. That requires one to look at all the circumstances.

The objective standard just mentioned provides the answer to the liquidators' submission that unless the employee's confidence is actually undermined there is no breach. A breach occurs when the proscribed conduct takes place: here, operating a dishonest and corrupt business. Proof of a subjective loss of confidence in the employer is not an essential element of the breach, although the time when the employee learns of the misconduct and his response to it may affect his remedy.

The next step is to consider the consequences which flow from the bank being in breach of its obligation to its innocent employees by operating a corrupt banking business. The first remedy of an employee has already been noted. The employee may treat the bank's conduct as a repudiatory breach, entitling him to leave. He is not compelled to leave. He may choose to stay. The extent to which staying would be more than an election to remain, and would be a waiver of the breach for all purposes, depends on the circumstances.

I need say no more about waiver in the present case. The assumed facts do not state whether the appellants first learned of the corrupt nature of B.C.C.I. after their dismissal on 3 October 1991, or whether they acquired this knowledge earlier, in the interval of three months between the appointment of the provisional liquidators on 5 July 1991 and 3 October 1991. If anything should turn on this, the matter can be investigated further in due course.

In the nature of things, the remedy of treating the conduct as a repudiatory breach, entitling the employee to leave, can only avail an employee who learns of the facts while still employed. If he does not discover the facts while his employment is still continuing, perforce this remedy is not open to him. But this does not mean he has no remedy. In the ordinary course breach of a contractual term entitles the innocent party to damages.

Can an employee recover damages for breach of the trust and confidence term when he first learns of the breach after he has left the employment? The answer to this question is inextricably bound up with the further question of what damages are recoverable for a breach of this term. In turn, the answer to this further question is inextricably linked with one aspect of the decision in Addis v. Gramophone Co. Ltd. [1909] AC 488.

At first sight it seems almost a contradiction in terms that an employee can suffer recoverable loss if he first learns of the trust-destroying conduct after the employment contract has already ended for other reasons. But of the many forms which trust-destroying conduct may take, some may have continuing adverse financial effects on an employee even after his employment has ceased. In such a case the fact that the employee only learned of the employer's conduct after the employment had ended ought not, in principle, to be a bar to recovery. If it were otherwise, an employer who conceals a breach would be better placed than an employer who does not.

This proposition calls for elaboration. The starting point is to note that the purpose of the trust and confidence implied term is to facilitate the proper functioning of the contract. If the employer commits a breach of the term, and in consequence the contract comes to an end prematurely, the employee loses the benefits he should have received had the contract run its course until it expired or was duly terminated. In addition to financial benefits such as salary and commission and pension rights, the losses caused by the premature termination of the contract ("the premature termination losses") may include other promised benefits, for instance, a course of training, or publicity for an actor or pop star. Prima facie, and subject always to established principles of mitigation and so forth, the dismissed employee can recover damages to compensate him for these promised benefits lost to him in consequence of the premature termination of the contract.

It follows that premature termination losses cannot be attributable to a breach of the trust and confidence term if the contract is terminated for other reasons, for instance, for redundancy or if the employee leaves of his own volition. Since the trust destroying conduct did not bring about the premature termination of the contract, ex hypothesi the employee did not sustain any loss of pay and so forth by reason of the breach of the trust and confidence term. That is the position in the present case.

Exceptionally, however, the losses suffered by an employee as a result of a breach of the trust and confidence term may not consist of, or be confined to, loss of pay and other premature termination losses. Leaving aside injured feelings and anxiety, which are not the basis of the claim in the present case, an employee may find himself worse off financially than when he entered into the contract. The most obvious example is conduct, in breach of the trust and confidence term, which prejudicially affects an employee's future employment prospects. The conduct may diminish the employee's attractiveness to future employers.

The loss in the present case is of this character. B.C.C.I. promised, in an implied term, not to conduct a dishonest or corrupt business. The promised benefit was employment by an honest employer. This benefit did not materialise. Proof that Mr. Mahmud and Mr. Malik were handicapped in the labour market in consequence of B.C.C.I's. corruption may not be easy, but that is an assumed fact for the purpose of this preliminary issue.

There is here an important point of principle. Are financial losses of this character, which I shall call "continuing financial losses", recoverable for breach of the trust and confidence term? This is the crucial point in the present appeals. In my view, if it was reasonably foreseeable that a particular type of loss of this character was a serious possibility, and loss of this type is sustained in consequence of a breach, then in principle damages in respect of the loss should be recoverable.

In the present case the agreed facts make no assumption, either way, about whether the appellants' handicap in the labour market was reasonably foreseeable by the bank. On this there must be scope for argument. I would not regard the absence of this necessary ingredient from the assumed facts as a sufficient reason for refusing to permit the former employees' claims to proceed further.

The contrary argument of principle is that since the purpose of the trust and confidence term is to preserve the employment relationship and to enable that relationship to prosper and continue, the losses recoverable for breach should be confined to those flowing from the premature termination of the relationship. Thus, a breach of the term should not be regarded as giving rise to recoverable losses beyond those I have described as premature termination losses. In this way, the measure of damages would be commensurate with, and not go beyond, the scope of the protection the trust and confidence term is intended to provide for the employee.

This is an unacceptably narrow evaluation of the trust and confidence term. Employers may be under no common law obligation, through the medium of an implied contractual term of general application, to take steps to improve their employees' future job prospects. But failure to improve is one thing, positively to damage is another. Employment, and job prospects, are matters of vital concern to most people. Jobs of all descriptions are less secure than formerly, people change jobs more frequently, and the job market is not always buoyant. Everyone knows this. An employment contract creates a close personal relationship, where there is often a disparity of power between the parties. Frequently the employee is vulnerable. Although the underlying purpose of the trust and confidence term is to protect the employment relationship, there can be nothing unfairly onerous or unreasonable in requiring an employer who breaches the trust and confidence term to be liable if he thereby causes continuing financial loss of a nature that was reasonably foreseeable. Employers must take care not to damage their employees' future employment prospects, by harsh and oppressive behaviour or by any other form of conduct which is unacceptable today as falling below the standards set by the implied trust and confidence term.

This approach brings one face to face with the decision in the wrongful dismissal case of Addis v. Gramophone Co. Ltd. [1909] AC 488. It does so, because the measure of damages recoverable for breach of the trust and confidence term cannot be decided without having some regard to a comparable question which arises regarding the measure of damages recoverable for wrongful dismissal. An employee may elect to treat a sufficiently serious breach of the trust and confidence term as discharging him from the contract and, hence, as a constructive dismissal. The damages in such a case ought, in principle, to be the same as they would be if the employer had expressly dismissed the employee. The employee should be no better off, or worse off, in the two situations. In principle, so far as the recoverability of continuing financial losses are concerned, there is no basis for distinguishing (a) wrongful dismissal following a breach of the trust and confidence term, (b) constructive dismissal following a breach of the trust and confidence term, and (c) a breach of the trust and confidence term which only becomes known after the contract has ended for other reasons. The present case is in the last category, but a principled answer cannot be given for cases in this category without considering the other two categories from which it is indistinguishable.

Against this background I turn to the much discussed case of Addis v. Gramophone Co. Ltd. [1909] AC 488. Mr. Addis, it will be recalled, was wrongfully and contumeliously dismissed from his post as the defendant's manager in Calcutta. At trial he was awarded damages exceeding the amount of his salary for the period of notice to which he was entitled. The case is generally regarded as having decided, echoing the words of Lord Loreburn L.C., at p. 491, that an employee cannot recover damages for the manner in which the wrongful dismissal took place, for injured feelings or for any loss he may sustain from the fact that his having been dismissed of itself makes it more difficult for him to obtain fresh employment. In particular, Addis is generally understood to have decided that any loss suffered by the adverse impact on the employee's chances of obtaining alternative employment is to be excluded from an assessment of damages for wrongful dismissal: see, for instance, O'Laoire v. Jackel International Ltd. (No. 2) [1991] I.C.R. 718, 730-731, following earlier authorities; in Canada, the decision of the Supreme Court in Vorvis v. Insurance Corporation of British Columbia (1989) 58 D.L.R. (4th) 193, 205; and, in New Zealand, Vivian v. Coca-Cola Export Corporation [1984] 2 N.Z.L.R. 289, 292; Whelan v. Waitaki Meats Ltd. [1991] 2 N.Z.L.R. 74, where Gallen J. disagreed with the decision in Addis, and Brandt v. Nixdorf Computer Ltd. [1991] 3 N.Z.L.R. 750.

For present purposes I am not concerned with the exclusion of damages for injured feelings. The present case is concerned only with financial loss. The report of the facts in Addis is sketchy. Whether Mr. Addis sought to prove that the manner of his dismissal caused him financial loss over and above his premature termination losses is not clear beyond a peradventure. If he did, it is surprising that their Lordships did not address this important feature more specifically. Instead there are references to injured feelings, the fact of dismissal of itself, aggravated damages, exemplary damages amounting to damages for defamation, damages being compensatory and not punitive, and the irrelevance of motive. The dissenting speech of Lord Collins was based on competence to award exemplary or vindictive damages.

However, Lord Loreburn's observations were framed in quite general terms, and he expressly disagreed with the suggestion of Lord Coleridge C.J. in Maw v. Jones 25 QBD 107, 108, to the effect that an assessment of damages might take into account the greater difficulty which an apprentice dismissed with a slur on his character might have in obtaining other employment. Similarly general observations were made by Lord James of Hereford, Lord Atkinson, Lord Gorell and Lord Shaw of Dunfermline.

In my view these observations cannot be read as precluding the recovery of damages where the manner of dismissal involved a breach of the trust and confidence term and this caused financial loss. Addis v. Gramophone Co. Ltd. was decided in the days before this implied term was adumbrated. Now that this term exists and is normally implied in every contract of employment, damages for its breach should be assessed in accordance with ordinary contractual principles. This is as much true if the breach occurs before or in connection with dismissal as at any other time.

This approach would accord, in its result, with the approach adopted by courts and tribunals in unfair dismissal cases when exercising the statutory jurisdiction, currently limited to a maximum of �11,300, to award an amount of compensation which the court or tribunal considers "just and reasonable" in all the circumstances. Writing on a clean slate, the courts have interpreted this as enabling awards to include compensation in respect of the manner and circumstances of dismissal if these would give rise to a risk of financial loss by, for instance, making the employee less acceptable to potential employers: see sections 123 and 124 of the Employment Rights Act 1996 and Norton Tool Co. Ltd. v. Tewson [1973] 1 WLR 45.

I do not believe this approach gives rise to artificiality. On the contrary, the trust and confidence term is a useful tool, well established now in employment law. At common law damages are awarded to compensate for wrongful dismissal. Thus, loss which an employee would have suffered even if the dismissal had been after due notice is irrecoverable, because such loss does not derive from the wrongful element in the dismissal. Further, it is difficult to see how the mere fact of wrongful dismissal, rather than dismissal after due notice, could of itself handicap an employee in the labour market. All this is in line with Addis. But the manner and circumstances of the dismissal, as measured by the standards of conduct now identified in the implied trust and confidence term, may give rise to such a handicap. The law would be blemished if this were not recognised today. There now exists the separate cause of action whose absence Lord Shaw of Dunfermline noted with "a certain regret": see Addis v. Gramphone Co. Ltd. [1909] AC 488, 504. The trust and confidence term has removed the cause for his regret.

I must now turn to two submissions made concerning injury to reputation. The liquidators submitted that injury to reputation is protected by the law of defamation. The boundaries set by the tort of defamation are not to be side-stepped by allowing a claim in contract that would not succeed in defamation: see Lonrho Plc v. Fayed (No. 5) [1993] 1 W.L.R. 1489, 1496, per Dillon L.J. Here, it was submitted, a claim in defamation would not succeed: the bank made no defamatory statements, either referring to the appellants or at all. This submission is misconceived.

I agree that the cause of action known to the law in respect of injury to reputation is the tort of defamation. With certain exceptions this tort provides a remedy, where the necessary ingredients are present, whether or not the injury to a person's reputation causes financial loss. No proof of actual damage is necessary, and damages are at large. If, as a result of the injury to his reputation the plaintiff does in fact suffer financial loss, this may be recoverable in a defamation action as "special damage".

All this is commonplace. It by no means follows, however, that financial loss which may be recoverable as special damage in a defamation action is irrecoverable as damages for breach of contract. If a breach of contract gives rise to financial loss which on ordinary principles would be recoverable as damages for breach of contract, those damages do not cease to be recoverable because they might also be recoverable in a defamation action. There can be no justification for artificially excising from the damages recoverable for breach of contract that part of the financial loss which might or might not be the subject of a successful claim in defamation. Hallett J. summarised the position in Foaminol Laboratories Ltd. v. British Artid Plastics Ltd. [1941] 2 All E.R. 393, 399-400:

Furthermore, the fact that the breach of contract injures the plaintiff's
reputation in circumstances where no claim for defamation would lie is not, by itself, a reason for excluding from the damages recoverable for breach of contract compensation for financial loss which on ordinary principles would be recoverable. An award of damages for breach of contract has a different objective: compensation for financial loss suffered by a breach of contract, not compensation for injury to reputation.

Sometimes, in practice, the distinction between damage to reputation and financial loss can become blurred. Damage to the reputation of professional persons, or persons carrying on a business, frequently causes financial loss. Nonetheless, the distinction is fundamentally sound, and when awarding damages for breach of contract courts take care to confine the damages to their proper ambit: making good financial loss. In Herbert Clayton and Jack Waller Ltd. v. Oliver [1930] A.C. 209, 220, when considering an award of damages to an actor who should have been billed to appear at the London Hippodrome, Lord Buckmaster regarded loss of publicity rather than loss of reputation as the preferable expression. In Aerial Advertising Co. v. Batchelors Peas Ltd. (Manchester) [1938] 2 All E.R. 788, 796-797, where aerial advertising ("Eat Bachelors Peas") took place during Armistice Day services, Atkinson J. was careful to confine damages to the financial loss flowing from public boycotting of the defendant's goods and to exclude damages for loss of reputation. Lord Denning M.R. drew the same distinction in GKN Centrax Gears Ltd. v. Matbro Ltd. [1976] 2 Lloyd's Rep. 555, 573.

The second submission concerning reputation was that the appellants' claims for damages to their existing reputations is barred by the decision of the Court of Appeal in Withers v. General Theatre Corporation Ltd. [1933] 2 K.B. 536.

There is an acute conflict between this decision and the earlier decision, also of the Court of Appeal, in Marbe v. George Edwardes (Daly's Theatre) Ltd. [1928] 1 K.B. 269. In Marbe clear views were expressed that when assessing damages for loss flowing from a failure to provide promised publicity, the loss may include loss to existing reputation: see Bankes L.J., at p. 281, and Atkin L.J., at p. 288. In Withers equally clear views were firmly stated to the contrary by all three members of the court: see Scrutton L.J., at p. 547, Greer L.J., at p. 554, and Romer L.J., at p. 556. I have to say that, faced with the embarrassing necessity to choose, I prefer the views expressed in Marbe. They accord better with principle. Loss of promised publicity might cause an actor financial loss, for two reasons: first, through loss of opportunity to enhance his professional reputation and, secondly, his absence from the theatre scene might actually damage his existing professional reputation. If as a matter of fact an actor does suffer financial loss under both heads, and that is a question of evidence, I can see no reason why the law should deny recovery of damages in respect of the second head of loss.

For these reasons I would allow these appeals. The agreed set of assumed facts discloses a good cause of action. Unlike the courts below, this House is not bound by the observations in Addis v. Gramophone Co. Ltd. [1909] AC 488 regarding irrecoverability of loss flowing from the manner of dismissal, or by the decision in Withers v. General Theatre Corporation Ltd. [1933] 2 K.B. 536.

I add some cautionary footnotes, having in mind the assumed facts in the present case. First, when considering these appeals I have been particularly conscious of the potential difficulties which claims of this sort may present for liquidators. I am conscious that the outcome of the present appeals may be seen by some as opening the door to speculative claims, to the detriment of admitted creditors. Claims of handicap in the labour market, and the other ingredients of the cause of action now under consideration, may give rise to lengthy and costly investigations and, ultimately, litigation. If the claims eventually fail, liquidators may well be unable to recover their costs from the former employees. The expense of liquidations, and the time they often take, are matters already giving rise to concern. I am aware of the dangers here, but it could not be right to allow "floodgates" arguments of this nature to stand in the way of claims which, as a matter of ordinary legal principle, are well founded. After all, if the former employee's claim is well founded in fact as well as in law, he himself is a creditor and ought to be admitted as such.

Secondly, one of the assumed facts in the present case is that the employer was conducting a dishonest and corrupt business. I would like to think this will rarely happen in practice. Thirdly, there are many circumstances in which an employee's reputation may suffer from his having been associated with an unsuccessful business, or an unsuccessful department within a business. In the ordinary way this will not found a claim of the nature made in the present case, even if the business or department was run with gross incompetence. A key feature in the present case is the assumed fact that the business was dishonest or corrupt. Finally, although the implied term that the business will not be conducted dishonestly is a term which avails all employees, proof of consequential handicap in the labour market may well be much more difficult for some classes of employees than others. An employer seeking to employ a messenger, for instance, might be wholly unconcerned by an applicant's former employment in a dishonest business, whereas he might take a different view if he were seeking a senior executive.

Two employees of a bank were summarily dismissed on grounds of redundancy. Subsequently it became public knowledge that the bank had been operating in a dishonest manner. Relying on an alleged breach of an implied obligation of mutual trust and confidence, the employees submitted claims to the liquidators of the bank for so-called stigma compensation. The claims were rejected. The issue at first instance, in the Court of Appeal and before your Lordships House was whether on assumed facts the claims were in principle sustainable.

It is necessary to explain the context in which the questions arise. On 5 July 1991 provisional liquidators were appointed in respect of Bank of Credit & Commerce International S.A. On 3 October 1991 the provisional liquidators summarily dismissed Mr. Mahmud and Mr. Malik on the grounds of redundancy. Mr. Mahmud had been with the bank for 16 years. At the time of his dismissal Mr. Mahmud was the manager of the bank's Brompton Road Branch. Mr. Malik had been with the bank for 11 years. At the time of his dismissal Mr. Malik was the Head of Deposit Accounts at the bank's Leadenhall Branch.

On 14 January 1992 the Companies Court made a winding up order in respect of the bank and appointed liquidators. On 30 March 1992 the liquidators called for the submission of proof of debt forms. Mr. Mahmud and Mr. Malik duly submitted proof of debt forms which included the claim which is the subject matter of this appeal. The claim was for damages for pecuniary loss allegedly caused by the bank's breach of an implied contractual obligation of mutual trust and confidence. The foundation of the claim was the assertion that the bank had been operated in a corrupt and dishonest manner and that, despite the personal innocence of the employees, they have subsequently been unable to obtain employment in the financial services industry. The employees described their claims as being for "stigma compensation". The liquidators rejected the claims for such financial losses. The ground of rejection was that a former employee is not legally entitled to claim damages for loss of reputation caused by a breach of contract by his employer.

The employees appealed to the Companies Court. The registrar directed that an issue be tried as to whether the evidence of the employees disclosed sustainable claims for damages. The matter came before Evans-Lombe J. for hearing. The employees alleged that a term was to be implied into their contracts of employment that:

The contracts of employment of the appellants contained no provisions inconsistent with the alleged implied term. In unremarkable terms the contracts made provision for the payment of wages and for the giving of associated benefits by the employers to the employees as well as for termination of the contract by employer and employees alike by one month's notice. At the invitation of the judge the parties agreed a statement of assumed facts. That statement made it unnecessary to examine the evidence. That was also the position in the Court of Appeal and before your Lordships' House. The statement reads as follows:

It is only necessary to add that the "loss" referred to in paragraph (f) was meant and understood to refer to actual financial loss.

Evans-Lombe J. confessed to having considerable sympathy with the case for the employees. He concluded however, that the implied term was not capable of covering the claim. After some debate with counsel the judge recast the implied term as follows:

This was a far more specific term. The judge thought that such a term was more apt to cover the situation that had arisen. But ultimately the judge concluded that:

The Court of Appeal dismissed the appeal for reasons which differed materially from those given by the judge. The judgments in the Court of Appeal have been reported: Mahmud v. Bank of Credit and Commerce International S.A. [1996] I.C.R. 406. The principal judgment was given by Morritt L.J. He held that the case ought to be decided on the bases of the implied term put forward by the plaintiffs and not on the basis of the term drafted by the judge. Approaching the matter in this way, Morritt L.J. was prepared to accept that the employees had an arguable case that there had been a breach of the implied mutual obligation of trust and confidence. But he held that the employees had no remedy. He said, at p. 424D-H]:

Aldous L.J. agreed. Glidewill L.J. gave a short separate judgment on one point but he agreed with the analysis of Morritt L.J.

It will be convenient first to examine the legal position regarding the implied term relied on by the employees. Then I will consider the question of breach, the limiting principles of causation, remoteness and mitigation as well as the question of the availability of a remedy of damages in this case, particularly in the light of Addis v. Gramophone Co. Ltd. [1909] AC 488.

The employees do not rely on a term implied in fact. They do not therefore rely on an individualised term to be implied from the particular provisions of their employment contracts considered against their specific contextual setting. Instead they rely on a standardised term implied by law, that is, on a term which is said to be an incident of all contracts of employment: Scally v. Southern Health and Social Services Board [1992] 1 A.C. 294, 307B. Such implied terms operate as default rules. The parties are free to exclude or modify them. But it is common ground that in the present case the particular terms of the contracts of employment of the two employees could not affect an implied obligation of mutual trust and confidence.

The employer's primary case is based on a formulation of the implied term that has been applied at first instance and in the Court of Appeal. It imposes reciprocal duties on the employer and employee. Given that this case is concerned with alleged obligations of an employer I will concentrate on its effect on the position of employers. For convenience I will set out the term again. It is expressed to impose an obligation that the employer shall not:

See Woods v. W.M. Car Services (Peterborough) Ltd. [1981] I.C.R. 666, 670 (Browne-Wilkinson J), approved in Lewis v. Motorworld Garages Ltd. [1986] I.C.R. 157 and Imperial Group Pension Trust Ltd. v. Imperial Tobacco Ltd. [1991] 1 W.L.R. 589. A useful anthology of the cases applying this term, or something like it, is given in Sweet and Maxwell's Encyclopedia of Employment Law, (Loose Leaf ed.) Vol. 1, para. 1.507, pp 1467--1470. The evolution of the term is a comparatively recent development. The obligation probably has its origin in the general duty of co-operation between contracting parties: B.A. Hepple, Employment Law, 4th ed. (1981), paras. 291-292, pp. 134-135. The reason for this development is part of the history of the development of employment law in this century. The notion of a "master and servant" relationship became obsolete. Lord Slynn of Hadley recently noted "the changes which have taken place in the employment and employee relationship, with far greater duties imposed on the employer in the past, whether by statute or judicial decision, to care for the physical, financial and even psychological welfare of the employee": Spring v. Guardian Assurance Plc. [1995] 2 AC 296, at 325B. A striking illustration of this change is Scally to which I have already referred where the House of Lords implied a term that all employees in a certain category had to be notified by an employer of their entitlement to certain benefits. It was the change in legal culture which made possible the evolution of the implied term of trust and confidence.

There was some debate at the hearing about the possible interaction of the implied obligation of confidence and trust with other more specific terms implied by law. It is true that the implied term adds little to the employee's implied obligations to serve his employer loyally and not to act contrary to his employer's interests. The major importance of the implied duty of trust and confidence lies in its impact on the obligations of the employer: Douglas Brodie, "Recent cases, Commentary, The Heart of the Matter: Mutual Trust and Confidence" (1996) 25 I.L.J. 121. And the implied obligation as formulated is apt to cover the great diversity of situations in which a balance has to be struck between an employer's interest in managing his business as he sees fit and the employee's interest in not being unfairly and improperly exploited.

The evolution of the implied term of trust and confidence is a fact. It has not yet been endorsed by your Lordships' House. It has proved a workable principle in practice. It has not been the subject of adverse criticism in any decided cases and it has been welcomed in academic writings. I regard the emergence of the implied obligation of mutual trust and confidence as a sound development.

Given the shape of the appeal my preceding observations may appear unnecessary. But I have felt it necessary to deal briefly with the existence of the implied term for two reasons. First, the implied obligation involves a question of pure law and your Lordships' House is not bound by any agreement of the parties on it or by the acceptance of the obligation by the judge or the Court of Appeal. Secondly, in response to a question from counsel for the bank said that his acceptance of the implied obligation is subject to three limitations:
(1) That the conduct complained of must be conduct involving the treatment of the employee in question; (2) That the employee must be aware of such conduct while he is an employee; (3) That such conduct must be calculated to destroy or seriously damage the trust between the employer and employee.

In order to place these suggested limitations in context it seemed necessary to explain briefly the origin, nature and scope of the implied obligation. But subject to examining the merits of the suggested limitations, I am content to accept the implied obligation of trust and confidences as established.

Two preliminary observations must be made. First, the sustainability of the employees, claims must be approached as if an application to strike out was under consideration. That is how the judge and the Court of Appeal approached the matter. And the same approach must now govern. Secondly, given the existence of an obligation of trust and confidence, it is important to approach the question of a breach of that obligation correctly. Mr. Douglas Brodie, of Edinburgh University, in his helpful article to which I have already referred put the matter succinctly (pp. 121-122):

Both limbs of Mr. Brodie's observations seems to me to reflect classic contract law principles and I would gratefully adopt his statement.

It is arguable that these relatively senior bank employees may be able to establish as a matter of fact that the corruption associated in the public mind, and in the minds of prospective employers, with the bank may have undermined their employment prospects. They may conceivably be able to prove that in the financial services industry they were regarded as potentially tarnished and therefore undesirable employees to recruit. In that way these particular employees may be able to sustain their assertions of fact that they have suffered financial loss. But that is not the end of the matter. Account must now be taken of the bank's counter-arguments. The bank's arguments closely mirror the three limitations on the implied obligation suggested by counsel. First, counsel for the bank submitted that the dishonest behaviour of the bank was directed at the defrauding of third parties and that therefore there could be no breach of the implied obligation. The conclusion is not warranted by the premise. The implied obligation extends to any conduct by the employer likely to destroy or seriously damage the relationship of trust and confidence between employer and employee. It may well be, as the Court of Appeal observes, that the decided cases involved instances of conduct which might be described "as conduct involving rather more direct treatment of employees": [1996] I.C.R. 406, 412. So be it. But Morritt L.J. held that the obligation (p. 411B-C):

That is the correct approach. The motives of the employer cannot be determinative, or even relevant, in judging the employees' claims for damages for breach of the implied obligation. If conduct objectively considered is likely to cause serious damage to the relationship between employer and employee a breach of the implied obligation may arise. I would therefore reject the first limitation as misconceived.

That brings me to the second suggested limitation on the implied obligation namely, that the employee must have been aware of such conduct whilst he was an employee. The argument is that the implied obligation serves to protect the contract of employment. Accordingly, it is said, conduct of which an employee is not aware can never amount to a breach of the implied obligation. That is so because the reach of the implied obligation must be dictated by its purpose. At first glance this argument seemed plausible. But there is a fallacy in it. The example was put to counsel for the bank of a senior employee, who does discover that the bank has been carrying on corrupt and dishonest operations on a vast scale. The employee wishes to terminate the contract forthwith for breach of the implied obligation of trust and confidence. May he do so? Counsel for the bank says No. Counsel says he will have to give notice and continue to serve his corrupt employer during the notice period or, alternatively, he must abandon his post in breach of contract. If a train of reasoning leads to an unbelievable consequence, it is in need of re-examination. Counsel's answer must be wrong: it is a classic case of a breach of the implied obligation. And the breach is of a gravity which entitles the employee to terminate his employment contract. Having arrived at this conclusion, it follows that termination is not necessarily the employee's only remedy. Subject to proof of causation and satisfying the principles of remoteness and mitigation, the employee ought on ordinary principles of contract law to be able to sue in contract for damages for financial loss caused by any damage to his employment prospects. But counsel for the bank insists that if the employer left the bank in ignorance of the dishonest and corrupt operations of the bank, and his employment prospects are then subsequently damaged, he can have no claim in law. This argument gains some support from observations of Morritt L.J. While not deciding the case on this basis he said [412D-G]:

This reasoning treats the decisive issue as being whether the relationship of trust and confidence has as a matter of fact survived until the moment of termination of the employment. It gives inadequate weight to the existence of an obligation in law. And there is nothing heterodox about allowing a claim for damages for a breach occurring during the contractual relationship where damage resulting from the breach only becomes manifest after the termination of the relationship. In truth the ignorance of an employee of a breach of the implied obligation is only relevant to the choice of remedies: obviously the employee cannot decide to terminate on a ground of which he is unaware. Moreover, if counsel's submission were right it would mean that an employer who successfully concealed dishonest and corrupt practices before termination of the relationship cannot in law commit a breach of the implied obligation whereas the dishonest and corrupt employer who is exposed during the relationship can be held liable in damages. That cannot be right. For these reasons I would therefore differ from the Court of Appeal on this point and reject counsel's second suggested limitation.

It is now necessary to examine counsel's third suggested limitation, namely that such conduct destroys or seriously damages the relationship of trust and confidence between the employer and the employer. It will be noted that this supposed "limitation" is already part and parcel of the implied obligation of trust and confidence. This limitation raises no separate legal issue. But I understood counsel for the bank to emphasise that the agreed statement of facts which was produced at the invitation of the judge simply describes the appellants as "employees" of the bank. He submits that, cleaning or even clerical staff of the bank could not credibly assert that their employment prospects have been damaged by their association with the bank, which carried on dishonest and corrupt operations. He said that no reasonable person would regard any stigma arising from the bank's corrupt and dishonest dealings as attaching to such employees. That may or may not be right, It is, however, a question of fact unsuitable for determination in these proceedings. In any event, the judge and the Court of Appeal were asked to decide the case on the basis that the plaintiffs were relatively senior employees. The statement of facts and issues lodged in this case described their positions as being respectively a manager of a branch and the Head of Deposit Accounts and Customer Services at a branch. It is quite unrealistic now to ignore these facts. And it is arguable that as a matter of fact such relatively senior employees of the bank may be able to prove that there has been a breach of the implied obligation and that their employment prospects were damaged. It follows that I would also reject counsel's submissions under this heading.

In oral argument counsel for the employees put forward an alternative and more specific implied term. He did so without prejudice to his principal submissions. The alternative term was formulated as follows:

Given my conclusions on the implied obligation of trust and confidence, there is no need or scope for the implication of the alternative implied term.

In order to succeed at trial the employees will have to establish not only a breach of the obligation, which caused them financial loss, but also that such loss is not too remote. It was not argued that remoteness on the test posed in Hadley v. Baxendale (1854) 9 Exch 341 is an answer to the claims. That is not surprising: it is a matter of fact whether the claims in this case are too remote. It is at least arguable that they are not too remote. Mitigation is, of course, another potential limiting principle to the employees' claims. But that issue also does not arise on the appeal.

In considering the availability of the remedy of damages it is important to bear in mind that the employees claim damages for financial loss. That is the issue. It will be recalled that the Court of Appeal decided the case against the employees on the basis that there is a positive rule debarring the recovery of damages in contract for injury to an existing reputation, and that in truth the two employees were claiming damages for injury to their previously existing reputations. For this conclusion the Court of Appeal relied on three decided cases, namely Addis v. Gramophone Co. Ltd. [1909] AC 488; Withers v. General Theatre Corporation Ltd. [1933] 2 K.B. 536; and O'Laoire v. Jackel International Ltd. (No.2) [1991] 1 C.R. 718. It will be necessary to examine each of these authorities.

The true ratio decidendi of the House of Lords' decision in Addis v. Gramophone Co. Ltd. has long been debated. Some have understood it as authority for the proposition that an employee may not recover damages even for pecuniary loss caused by a breach of contract of the employer which damages the employment prospects of an employee. If Addis establishes such a rule it is an inroad on traditional principles of contract law. And any such restrictive rule has been criticised by distinguished writers: Treitel, The Law of Contract, 9th ed. (1995) 893; Burrows, Remedies for Torts and Breach of Contract, 2nd ed. 221-225. Moreover, it has been pointed out that Addis was decided in 1909 before the development of modern employment law, and long before the evolution of the implied mutual obligation of trust and confidence. Nevertheless, it is necessary to take a closer look at Addis so far as it affects the issues in this case. A company had dismissed an overseas manager in a harsh and oppressive manner. The House of Lords held that the employer was entitled to recover his direct pecuniary loss, such as loss of salary and commission. But the jury had been allowed to take into account the manner in which the employee had been dismissed and to reflect this in their award. The House of Lords, with Lord Collins dissenting, held that this was wrong. The head note of the case states that in a case of wrongful dismissal the award of damages may not include compensation for the manner of his dismissal, for his injured feelings, or for the loss he may suffer from the fact that the dismissal of itself makes it more difficult to obtain fresh employment. Lord Collins was apparently alone in wanting time to consider the matter. The majority would apparently have dealt with the matter summarily. And the majority did not find it necessary to analyse the matter in any depth. The speeches are not always easy to follow. Thus Lord Atkinson observed, at p. 496:

That is a misconception: ex hypothesi liability has been established and only the assessment of damages is at stake. Moreover, Lord Gorrell apparently arrived at his conclusion on the basis of ordinary principles of remoteness: (p. 501). Depending on the facts those principles would not necessarily in all cases debar an award of damages for loss of employment prospects. I would accept, however, that the Lord Loreburn L.C. and the other Law Lords in the majority apparently thought they were applying a special rule applicable to awards of damages for wrongful dismissal. It is, however, far from clear how far the ratio of Addis extends. It certainly enunciated the principle that an employee cannot recover exemplary or aggravated damages for wrongful dismissal. That is still sound law. The actual decision is only concerned with wrongful dismissal. It is therefore arguable that as a matter of precedent the ratio is so restricted. But it seems to me unrealistic not to acknowledge that Addis is authority for a wider principle. There is a common proposition in the speeches of the majority. That proposition is that damages for breach of contract may only be awarded for breach of contract, and not for loss caused by the manner of the breach. No Law Lord said that an employee may not recover financial loss for damage to his employment prospects caused by a breach of contract. And no Law Lord said that in breach of contract cases compensation for loss of reputation can never be awarded, or that it can only be awarded in cases falling in certain defined categories. Addis simply decided that the loss of reputation in that particular case could not be compensated because it was not caused by a breach of contract: Nelson Enonchong, "Contract Damages for Injury to Reputation" (1996), 59 M.L.R. 592, p. 596. So analysed Addis does not bar the claims put forward in the present case.

Withers v. General Theatre Corporation Ltd. [1933] 2 K.B. 536 may rule out a claim such as is under consideration in the present case. The case concerned an artist engaged to appear and perform at the London Palladium. The defendant refused to allow him to perform at the London Palladium. It was held to be a breach of contract. The Court of Appeal drew a distinction. It was held that the plaintiff was entitled to damages for the loss of reputation which the plaintiff would have acquired if the defendant had not committed the breach of contract. But the Court of Appeal held that the plaintiff was not entitled as a matter of law to damages to his existing reputation. Nothing in Addis supported this distinction. It is difficult as a matter of principle to justify it. A rule that damages can never be recovered in respect of loss of reputation caused by a breach of contract is also out of line with ordinary principles of contract law. Moreover, Withers is in conflict with Marbe v. George Edwardes (Daly's Theatre) Ltd. [1928] 1 K.B. 269. In Marbe on similar facts the Court of Appeal came to the opposite conclusion: damages in respect of loss of an existing reputation was expressly held to be recoverable: see Bankes L.J. (p. 281), Atkin L.J. (p. 288) and Lawrence L.J. (p. 290). But in Withers Scrutton L.J. erroneously considered that Marbe was inconsistent with the House of Lords decision in Herbert Clayton and Jack Waller Ltd. v. Oliver [1930] A.C. 209. The latter case did not involve a claim for loss of existing reputation: (p. 214). Moreover, as the head note states, in Herbert Clayton v. Oliver the House of Lords approved Marbe. The House of Lords did so expressly. The Withers decision was based on a misunderstanding. In any event, I am persuaded that the distinction drawn in Withers, and the rule applied, is contrary to principle and unsound. In my judgment the decision in Withers was wrong on this point. Ordinary contract law principles govern.

O'Laoire v. Jackel International Ltd. (No.2) [1991] I.C.R. 718, involved a claim by a dismissed employee for loss "due to the manner and nature of his dismissal". It was held that such a claim is excluded by Addis. But that does not affect the present case which is based not on the manner of a wrongful dismissal but on a breach of contract which is separate from and independent of the termination of the contract of employment.

In my judgment therefore the authorities relied on by Morritt. L.J. do not on analysis support his conclusion. Moreover, the fact that in appropriate cases damages may in principle be awarded for loss of reputation caused by breach of contract is illustrated by a number of cases which Morritt L.J. discussed: Aerial Advertising Co. v. Batchelors Peas Ltd. (Manchester) [1938] 2 All.E.R. 788; Foaminol Laboratories Ltd. v. British Artid Plastics Ltd. [1941] 2 All.E.R. 393; Anglo-Continental Holdings Ltd. v. Typaldos Lines (London) Ltd. [1967] 2 Lloyd's Rep. 61. But, unlike Morritt L.J., I regard these cases not as exceptions but as the application of ordinary principles of contract law. Moreover, it is clear that a supplier who delivers contaminated meat to a trader can be sued for loss of commercial reputation involving loss of trade: see Cointax v. Myham & Son [1913] 2 KB 220; G.K.N. Centrax Gears Ltd. v. Matbro Ltd. [1976] 2 Lloyds Rep. 555. Rhetorically, one may ask, why may a bank manager not sue for loss of professional reputation, if it causes financial loss flowing from a breach of the contract of employment? The speeches of the majority of the House of Lords in Spring v. Guardian Assurance Plc. [1995] 2 AC 296 are also instructive. In that case the majority held that a former employee could recover damages for financial loss which he suffered as a result of his employer's negligent preparation of a reference. The reference affected his reputation. The majority considered that, if the reference had been given while the plaintiff was still employed, his claim could have been brought in contract. On that hypothesis he could have sued in contract for damage to his reputation. The dicta in Spring show that there is no rule preventing the recovery of damages for injury to reputation where that injury is caused by a breach of contract. The principled position is as follows. Provided that a relevant breach of contract can be established, and the requirements of causation, remoteness and mitigation can be satisfied, there is no good reason why in the field of employment law recovery of financial loss in respect of damage to reputation caused by breach of contract is necessarily excluded. I am reinforced in this view by the consideration that such losses are in principle recoverable in respect of unfair dismissal: see section 123(1) Employment Rights Act 1996; Norton Tool Co. Ltd. v. Tewson [1973] 1 WLR 45, 50-51. It is true that the relevant statute does not govern the appeals under consideration. But in the search for the correct common law principle one is not compelled to ignore the analogical force of the statutory dispensation: see Professor Jack Beatson, Has the Common Law a Future inaugural lecture delivered on 29 April 1996, Cambridge U.P. pamphlet, 23-43. Not only does legal principle not support the restrictive principle, which prevailed in the Court of Appeal, but there are no sound policy reasons for it.

Earlier, I drew attention to the fact that the implied mutual obligation of trust and confidence applies only where there is "no reasonable and proper cause" for the employers conduct, and then only if the conduct is calculated to destroy or seriously damage the relationship of trust and confidence. That circumscribes the potential reach and scope of the implied obligation. Moreover, even if the employee can establish a breach of this obligation, it does not follow that he will be able to recover damages for injury to his employment prospects. The Law Commission has pointed out that loss of reputation is inherently difficult to prove: Law Commission, Consulation Paper No. 132 on Aggravated, Exemplary and Restitutionary Damages, p. 22, para 2.15. It is, therefore, improbable that many employees would be able to prove "stigma compensation". The limiting principles of causation, remoteness and mitigation present formidable practical obstacles to such claims succeeding. But difficulties of proof cannot alter the legal principles which permit, in appropriate cases, such claims for financial loss caused by breach of contract being put forward for consideration.

United Kingdom House of Lords Decisions

Malik v. Bank of Credit; Mahmud v. Bank of Credit [1997] UKHL 23; [1998] AC 20; [1997] 3 All ER 1; [1997] IRLR 462; [1997] 3 WLR 95; [1997] ICR 606 (12th June, 1997)