Mahmud v Bank of Credit and Commerce International SA (Malik v Bank of Credit and Commerce International SA)

An employer is subject to an implied contractual obligation not, without reasonable and proper cause, to conduct itself in a manner likely to destroy or seriously damage the relationship of trust and confidence with its employees. Breach is assessed objectively. The misconduct need not target the employee, nor need the employee know of it during employment.

An employee may recover financial loss caused by such a breach, including reasonably foreseeable damage to future employment prospects, subject to causation, remoteness and mitigation. Recovery is not confined to loss caused by premature termination. Damages compensate pecuniary loss rather than injured feelings or loss of reputation as such. The fact that reputational harm contributes to the financial loss does not exclude an otherwise valid contractual claim.

Two innocent former employees of the Bank of Credit and Commerce International SA submitted proofs in its winding up for financial loss allegedly caused by the stigma of association with its dishonest and corrupt business. For the preliminary issue, it was assumed that the bank's misconduct became widely known, handicapped them in the labour market and caused actual financial loss.

Evans-Lombe J held that the evidence disclosed no sustainable claim. The Court of Appeal, in Mahmud v Bank of Credit and Commerce International SA [1996] ICR 406, accepted that breach of the implied obligation of trust and confidence was arguable but held that damages for injury to existing reputation were unavailable.

The central issue was whether the assumed facts disclosed a claim for pecuniary loss caused by breach of the implied obligation, notwithstanding that the employees were dismissed for redundancy and may have learned of the misconduct only after employment ended.

1. Appeals allowed. Lord Nicholls and Lord Steyn delivered the substantive speeches. Lord Goff and Lord Mackay agreed with both; Lord Mustill agreed with Lord Steyn. The assumed facts disclosed sustainable causes of action, so the claims could proceed.
2. Per Lord Steyn, the standardised term implied by law in contracts of employment is a sound and established development. An employer must not, without reasonable and proper cause, conduct itself in a manner calculated or likely to destroy or seriously damage the relationship of trust and confidence. Per Lord Nicholls, an obligation not to conduct a dishonest or corrupt business is one aspect of that general obligation.
3. Per Lord Nicholls and Lord Steyn, breach is assessed objectively and occurs when the proscribed conduct takes place. The conduct need not target the employee or a class of employees. Subjective loss of confidence and awareness of the misconduct during employment are not essential to breach. Ignorance affects the employee's choice of remedies, since an employee cannot accept as repudiatory a breach of which he is unaware.
4. Per Lord Nicholls, a serious breach may be accepted as repudiation, permitting the employee to leave. Premature termination losses are recoverable only where the breach caused the contract to end prematurely. If employment ended for another reason, those losses are not attributable to the breach.
5. Per Lord Nicholls and Lord Steyn, breach may nevertheless cause continuing pecuniary loss by damaging future employment prospects. Such loss is recoverable under ordinary contractual principles if breach and causation are proved and the loss satisfies remoteness and mitigation. The employee may first learn of the breach after employment ends. Concealment cannot place a dishonest employer in a better position.
6. The claim was for financial loss, not compensation for injured feelings or reputation as such. Per Lord Nicholls, pecuniary loss does not become irrecoverable merely because reputational harm helped cause it or because defamation might offer another remedy. Per Lord Steyn, Addis v Gramophone Co Ltd [1909] AC 488 does not bar loss caused by a separate contractual breach; its rule excluding exemplary or aggravated damages for wrongful dismissal remains sound. The contrary distinction in Withers v General Theatre Corporation Ltd [1933] 2 K.B. 536 was wrong, while the approach in Marbe v George Edwardes (Daly's Theatre) Ltd [1928] 1 K.B. 269 accorded with principle.
7. The claims remained difficult to prove. The employees had to establish breach, causation, reasonably foreseeable loss and mitigation. The preliminary issue did not determine those factual matters.

1. House of Lords: allowed the employees' appeals unanimously and held that the assumed facts disclosed sustainable causes of action.
2. Court of Appeal: Glidewell, Morritt and Aldous LJJ dismissed the appeals in Mahmud v Bank of Credit and Commerce International SA [1996] ICR 406. The court regarded breach of the implied term as arguable but held the claimed damages irrecoverable as compensation for injury to existing reputation.
3. Companies Court: Evans-Lombe J answered the preliminary issue against the employees, holding that the evidence disclosed no sustainable claim for damages.
4. Registrar: directed trial of the preliminary issue after the employees appealed against the liquidators' rejection of the stigma elements of their proofs.