(Malik v Bank of Credit and Commerce International SA (in liquidation))
[1997] 3 All ER 1
House of Lords
This case establishes that in limited circumstances it may be possible for an employee to claim damages for loss of reputation.
Lord Steyn
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 ([1995] 3 All ER 545, [1996] ICR 406) and before your Lordships' House was whether on assumed facts the claims were in principle sustainable.
THE CLAIMS FOR STIGMA COMPENSATION
... 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 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 (British Medical Association, third party) [1991] 4 All ER 563 at 572, [1992] 1 AC 294 at 307. 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.'...
The evolution of the implied term of trust and confidence is a fact. It has not yet been indorsed 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.
BREACH OF THE IMPLIED OBLIGATION
Two preliminary observations must be made... 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 Brodie of Edinburgh University, in his helpful article 'The heart of the matter: mutual trust and confidence' (1996) 25 ILJ 121 to which I have already referred, put the matter succinctly (pp 121-122):
'In assessing whether there has been a breach, it seems clear that what is significant is the impact of the employer's behaviour on the employee rather than what the employer intended. Moreover, the impact will be assessed objectively.'
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...
THE AVAILABILITY OF THE REMEDY OF DAMAGES
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, [1908-10] All ER Rep 1, Withers v General Theatre Corp Ltd [1933] 2 KB 536, [1933] All ER Rep 385 and O'Laoire v Jackel International Ltd (No 2) [1991] ICR 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's case 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: see Treitel An Outline of the Law of Contract (9th edn, 1995) p 893 and Burrows Remedies for Torts and Breach of Contract (2nd edn, 1994) pp 221-225. Moreover, it has been pointed out that Addis's case 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's case 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 headnote 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 ([1909] AC 488 at 496, [1908-10] All ER Rep 1 at 5):
'I can conceive nothing more objectionable and embarrassing in litigation than trying in effect an action of libel or slander as a matter of aggravation in an action for illegal dismissal, the defendant being permitted, as he must in justice be permitted, to traverse the defamatory sense, rely on privilege, or raise every point which he could raise in an independent action brought for the alleged libel or slander itself.'
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 (see [1909] AC 488 at 501, [1908-10] All ER Rep 1 at 9). 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 Lord Loreburn LC 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's case 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's case 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's case 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: see Nelson Enonchong 'Contract Damages for Injury to Reputation' (1996) 59 MLR 592 at 596. So analysed Addis's case does not bar the claims put forward in the present case...
O'Laoire v Jackel International Ltd (No 2) [1991] ICR 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's case. 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 LJ 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 LJ discussed: Aerial Advertising Co v Batchelors Peas Ltd (Manchester) [1938] 2 All ER 788, Foaminol Laboratories Ltd v British Artid Plastics Ltd [1941] 2 All ER 393 and Anglo-Continental Holidays Ltd v Typaldos Lines (London) Ltd [1967] 2 Lloyd's Rep 61. But, unlike Morritt LJ, 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 and GKN Centrax Gears Ltd v Matbro Ltd [1976] 2 Lloyd's 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 [1994] 3 All ER 129, [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 v Guardian Assurance 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 s 123(1) of the Employment Rights Act 1996 and Norton Tool Co Ltd v Tewson [1973] 1 All ER 183 at 188, [1973] 1 WLR 45 at 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 University Press. 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.
THE EFFECT OF MY CONCLUSIONS
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 employer's 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: Aggravated, Exemplary and Restitutionary Damages (Law Com Consultation Paper No 132) 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.
CONCLUSION
I would therefore allow the appeal.