House of Lords
Session 1997-98
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Judgments - Malik v. Bank of Credit and Mahmud v. Bank of Credit

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      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 W.L.R. 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] A.C. 488, 504. The trust and confidence term has removed the cause for his regret.

Breach of contract and reputation

      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:

    ". . . a claim for mere loss of reputation is the proper subject of an action for defamation, and cannot ordinarily be sustained by means of any other form of action . . . However . . . if pecuniary loss can be established, the mere fact that the pecuniary loss is brought about by the loss of reputation caused by a breach of contract is not sufficient to preclude the plaintiffs from recovering in respect of that pecuniary loss."

      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.

Breach of contract and existing reputation

      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] A.C. 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.


My Lords,

      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.

The claims for stigma compensation

      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 decision of Evans-Lombe J.

      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 employer will not, without reasonable and proper cause, conduct itself in a manner calculated or likely to destroy or seriously damage the relationship of confidence and trust between employer and employee."

      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:

    "The facts and matters upon which the applicants [the employees] rely are as follows: (a) the applicants were employees of BCCI [the bank]; (b) BCCI operated in a corrupt and/or dishonest manner; (c) the applicants were innocent of any involvement in BCCI's corruption and/or dishonesty; (d) following the collapse of BCCI, its corruption and/or dishonesty has become widely known; (e) in consequence, the applicants are now at a handicap on the labour market because they are stigmatized by reason of their previous employment by BCCI; (f) the applicants have suffered a loss in consequence of (e) above."

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:

    ". . . the employer will not, without reasonable and proper cause, so conduct his business with his customers that employees employed in that business will be or will be likely to be, by reason of that conduct, put at a disadvantage in the employment market in the event that their employment by the employer is terminated."

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:

    ". . . such a term cannot be implied because it is no part of an employment contract to prepare an employee for service with future employers and so the parties cannot be assumed to have been agreeable to the inclusion of such a term when the contract was originally made."

The judge therefore ruled that the claims were unsustainable.

The decision of the Court of Appeal

      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]:

    ". . . damages are not recoverable in contract for damage to or loss of an existing reputation. This principle does not apply to cases where the damage is recoverable in accordance with other normal principles notwithstanding that it could be described as compensation for damage to an existing reputation. Such cases include those where the nature of the contract is one to provide for a status, for example apprenticeships, or the promotion or preservation of a reputation, for example advertising or the opportunity to appear in a prestigious place or part. Similarly damage to goodwill, as legally recognised is a recoverable head of loss as damage to property.

          "The applicants cannot and do not complain that their employment with BCCI was terminated in October 1991; they accept that they have been fully recompensed for any recoverable loss in that regard. They cannot complain of the manner of their dismissal and do not in terms do so. But, it seems to me and notwithstanding their protestations to the contrary, they do claim damages for injury to their previously existing reputations. They suggest that such damages are not claimed as such and are justified on general principles as the pecuniary loss flowing from a breach of the implied term. I do not accept that analysis. They do not claim damages to goodwill as recognised by law and the object of the contract was to employ not to promote or preserve existing reputations or to prepare for future employment. In these circumstances in my judgment the damages they claim are not legally recoverable for they would be compensation for damage to reputation alone."

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] A.C. 488.

The implied term of mutual trust and confidence

      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:

     ". . . without reasonable and proper cause, conduct itself in a manner calculated and likely to destroy or seriously damage the relationship of confidence and trust between employer and employee."

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 A.C. 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.