Malik v. Bank of Credit; Mahmud v. Bank of Credit

The House of Lords held that contracts of employment contain an implied term of mutual trust and confidence which forbids an employer, without reasonable and proper cause, from conducting its business in a manner likely to destroy or seriously damage the employment relationship. That implied term can be breached by an employer operating a dishonest or corrupt business even if the conduct is not specifically directed at the employee.

Where such a breach causes continuing financial loss after employment ends (for example a stigma or handicap in the labour market), damages are in principle recoverable provided that the loss was a reasonably foreseeable type of loss and the usual rules of causation, remoteness and mitigation are satisfied. The House rejected an absolute bar derived from Addis v. Gramophone Co. Ltd. and the restrictive approach in Withers v. General Theatre Corporation Ltd. to deny recovery for all reputational or stigma-related financial loss.

This is an appeal by two former employees of Bank of Credit and Commerce International S.A. (B.C.C.I.), who, after being summarily dismissed on grounds of redundancy, sought to prove claims in the bank's liquidation for financial loss suffered because the bank had been operating a dishonest and corrupt business. The liquidators rejected the "stigma" head of loss in their proofs.

The procedural history: the registrar directed a preliminary issue whether the assumed facts disclosed a reasonable cause of action; Evans-Lombe J. answered negatively; the Court of Appeal dismissed the appeal (see Mahmud v. Bank of Credit and Commerce International S.A. [1996] I.C.R. 406); the House of Lords allowed the appeal.

The issues framed were:

• whether an implied term of mutual trust and confidence exists in employment contracts and its scope;
• whether operating a dishonest and corrupt business can breach that implied term even if the conduct is not directed at employees;
• whether an employee must know of the employer's misconduct while still employed for a breach to arise;
• whether damages for reputational or "stigma" losses are recoverable in contract in view of Addis v. Gramophone Co. Ltd. and Withers v. General Theatre Corporation Ltd.; and
• how ordinary principles of remoteness, causation and mitigation apply.

The House of Lords, applying the parties' assumed facts, held that the implied term exists and that operating a corrupt business can amount to a breach. An employee who discovers such conduct while employed may treat it as repudiatory and leave; alternatively, damages are available for continuing financial losses (such as impaired future employment prospects) if such losses were a reasonably foreseeable type of loss. The court limited the reach of Addis and rejected Withers as a rule preventing recovery for existing reputational loss; but emphasised that proof will often be difficult and that remoteness, causation and mitigation will constrain recoveries. The Lords gave cautionary remarks about potential practical difficulties in liquidation contexts and noted that the factual constellation (dishonest or corrupt business) would be rare.

Appeal allowed. The House of Lords held that an implied term of mutual trust and confidence exists in employment contracts and that operating a dishonest or corrupt business can breach that term even if not specifically targeted at employees. Where such a breach causes reasonably foreseeable continuing financial loss after employment ends (for example stigma affecting future employment prospects), damages are in principle recoverable subject to causation, remoteness and mitigation. The decisions in Addis and Withers do not preclude recovery in principle.

Registrar directed a preliminary issue; Evans-Lombe J. held the assumed facts did not disclose a sustainable claim; the Court of Appeal dismissed the appeals (Mahmud v. Bank of Credit and Commerce International S.A. [1996] I.C.R. 406); the House of Lords allowed the appeals ([1997] UKHL 23).