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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      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.

Breach of the implied obligation

      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):

    "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. 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):

     ". . . may be broken not only by an act directed at a particular employee but also by conduct which when viewed objectively, is likely seriously to damage the relationship of employer and employee."

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]:

    "But it is inherent in conduct of the kind which we are required to assume in this case that, if it is to be successful, it is secret and hidden from most of the employees as well as the rest of the world. So long as it remains secret it can have no effect on the trust and confidence of the employee from whom it is concealed. Moreover, not only could there be no breach without knowledge, there could be no stigma damage either until the fraud was revealed. Once the employee has left his employment the subsequent revelation of the fraud can have no effect on the trust and confidence for, by definition, it has ceased anyway."

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.

The alternative implied term

      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:

     "The employer will not, without reasonable and proper cause, so conduct itself in its dealings with third parties as to destroy or seriously damage the relationship of trust and confidence between employer and employee, and thereby affect the employee's future employment prospects."

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.

Remoteness and mitigation

      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.

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] A.C. 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:

    "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: (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 K.B. 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 A.C. 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 W.L.R. 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.

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 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.


      I would therefore allow the appeal.


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