Malik and Mahmud v Bank of Credit and Commerce International SA [1997] UKHL 23

Two innocent BCCI employees, dismissed on redundancy after the bank's corrupt collapse, claimed stigma damages for impaired job prospects. The House of Lords held the bank breached the implied term of mutual trust and confidence, allowing recovery of foreseeable financial loss.

Facts

Mr Mahmud and Mr Malik were long-serving employees of Bank of Credit and Commerce International SA (BCCI), holding senior positions as branch manager and head of deposit accounts respectively. Following BCCI’s collapse in 1991, provisional liquidators dismissed them on grounds of redundancy. It subsequently became widely known that BCCI had been operated in a corrupt and dishonest manner. The appellants, who were innocent of any involvement in the wrongdoing, alleged that their association with BCCI placed them at a serious disadvantage in the labour market and submitted proofs of debt to the liquidators claiming ‘stigma compensation’ for financial losses arising from impaired employment prospects.

The liquidators rejected the claims. On a preliminary issue tried on assumed facts, Evans-Lombe J and the Court of Appeal held that the claims disclosed no sustainable cause of action. The appellants appealed to the House of Lords.

Issues

The principal issues were:

• Whether the implied term of mutual trust and confidence in the employment contract was breached by the bank’s conduct of a dishonest and corrupt business, even though that conduct was not directed at the employees and they were unaware of it during their employment.
• Whether damages for financial loss caused by handicap on the labour market (loss of reputation by association) were recoverable for breach of that implied term, having regard to Addis v Gramophone Co Ltd [1909] AC 488 and Withers v General Theatre Corporation Ltd [1933] 2 KB 536.

Arguments

Appellants

The appellants contended that the bank’s operation of a dishonest and corrupt business constituted a breach of the implied term of mutual trust and confidence and that, on ordinary contractual principles, they were entitled to recover foreseeable financial losses, including damage to their employment prospects.

Respondents (Liquidators)

The liquidators advanced three limitations on the implied term: (i) the conduct complained of must be directed at the employee; (ii) the employee must be aware of the conduct during employment; and (iii) the conduct must actually destroy or seriously damage trust and confidence. They further argued that damages for loss of reputation are the province of defamation, that Addis barred recovery of loss arising from the manner of dismissal or difficulty in obtaining fresh employment, and that Withers precluded recovery for damage to existing reputation.

Judgment

The House of Lords unanimously allowed the appeals. Lord Nicholls and Lord Steyn delivered the leading speeches.

The implied term

The House confirmed the existence of the implied term, formulated as an obligation 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. Lord Steyn described its emergence as ‘a sound development’. The obligation operates as a default rule implied by law into all contracts of employment.

Breach

Lord Nicholls held that operating a dishonest and corrupt business was itself a breach: 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. The breach need not be targeted at the employee; what matters is whether, viewed objectively, the conduct is likely to destroy or seriously damage trust and confidence. Nor is it necessary for the employee’s confidence to have been subjectively undermined; breach occurs when the proscribed conduct takes place. The employee’s lack of contemporaneous knowledge does not preclude a breach; it goes only to the choice of remedy.

Damages and Addis

The Court distinguished ‘premature termination losses’ (recoverable where the breach causes the contract to end prematurely) from ‘continuing financial losses’ such as handicap on the labour market. Lord Nicholls held that where it was reasonably foreseeable that financial loss of this character was a serious possibility, and such loss was sustained, damages should in principle be recoverable.

The House reinterpreted Addis v Gramophone Co Ltd. Lord Nicholls observed that Addis was decided before the implied trust and confidence term was developed and that observations in Addis could not be read as precluding recovery of damages where the manner of dismissal involved a breach of the trust and confidence term causing financial loss. Lord Steyn concluded that 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.’

Withers and reputation

The House preferred Marbe v George Edwardes (Daly’s Theatre) Ltd [1928] 1 KB 269 over Withers v General Theatre Corporation Ltd, holding the latter to have been wrongly decided on the recoverability of damages for damage to existing reputation. On the defamation argument, Lord Nicholls cited Hallett J in Foaminol Laboratories Ltd v British Artid Plastics Ltd [1941] 2 All ER 393:

… 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.

Accordingly, the assumed facts disclosed a good cause of action and the matter could proceed.

Implications

The decision authoritatively recognised the implied term of mutual trust and confidence as a term implied by law in all contracts of employment. It established that an employer who operates a dishonest or corrupt business breaches that term, even where the misconduct is not directed at, or known to, the particular employee.

Significantly, the House confirmed that damages for breach of the implied term are assessed on ordinary contractual principles, allowing recovery of reasonably foreseeable financial losses, including ‘stigma’ losses representing handicap on the labour market caused by association with the discredited employer. Addis was confined and Withers overruled to the extent inconsistent with this principle.

Both Lord Nicholls and Lord Steyn entered cautionary notes. Recovery requires proof of breach, causation, foreseeability under Hadley v Baxendale, and proper mitigation. Loss of reputation is inherently difficult to prove, and ‘floodgates’ concerns do not justify denying a well-founded claim. Lord Nicholls emphasised that mere association with an unsuccessful or incompetent business will not generally found such a claim; the key feature was the assumed dishonesty and corruption of the business. He also noted that proof of marketplace handicap may be more difficult for junior employees than senior ones.

The case is of fundamental importance to employment law: it cemented the trust and confidence term as a workable engine for protecting employees against improper employer conduct and opened the door, within careful limits, to recovery of financial loss flowing from damage to reputation caused by breach of contract. It also illustrates the willingness of the House of Lords to reinterpret older authorities such as Addis in light of the modern legal culture of employment relations.

Verdict: Appeals allowed. The agreed assumed facts disclosed a good cause of action for breach of the implied term of mutual trust and confidence, and damages for consequential financial loss (stigma compensation) were in principle recoverable.

Source: Malik and Mahmud v Bank of Credit and Commerce International SA [1997] UKHL 23