Malik v. Bank of Credit; Mahmud v.

Bank of Credit [1997] UKHL 23; [1998] AC 20;

[1997] 3 All ER 1; [1997] IRLR 462; [1997] 3 WLR 95; [1997] ICR 606 (12th June, 1997)

HOUSE OF LORDS

LORD NICHOLLS OF BIRKENHEAD

My Lords, 

This is another case arising from the disastrous collapse of Bank of Credit and Commerce
International SA in the summer of 1991. Thousands of people around the world suffered loss.
Depositors lost their money, employees lost their jobs. Two employees who lost their jobs were
Mr. Raihan Nasir Mahmud and Mr. Qaiser Mansoor Malik. They were employed by B.C.C.I. in
London. They claim they lost more than their jobs. They claim that their association with
B.C.C.I. placed them at a serious disadvantage in finding new jobs. So in March 1992 they
sought to prove for damages in the winding up of B.C.C.I. The liquidators rejected this "stigma"
head of loss in their proofs. Liability for notice money and statutory redundancy pay was not in
dispute. 

Before this House, as in the courts below, the issue is being decided on the basis of an agreed set
of facts. The liquidators do not admit the accuracy of these facts, but for the purpose of this
preliminary issue it is being assumed that the bank operated in a corrupt and dishonest manner,
that Mr. Mahmud and Mr. Malik were innocent of any involvement, that following the collapse
of B.C.C.I. its corruption and dishonesty became widely known, that in consequence Mr.
Mahmud and Mr. Malik were at a handicap on the labour market because they were stigmatised
by reason of their previous employment by B.C.C.I., and that they suffered loss in consequence. 

In the Court of Appeal and in your Lordships' House the parties were agreed that the contracts of
employment of these two former employees each contained an implied term to the effect that the
bank would not, without reasonable and proper cause, conduct itself in a manner likely to destroy
or seriously damage the relationship of confidence and trust between employer and employee.
Argument proceeded on this footing, and ranged round the type of conduct and other
circumstances which could or could not constitute a breach of this implied term. The
submissions embraced questions such as the following: whether the trust-destroying conduct
must be directed at the employee, either individually or as part of a group; whether an employee
must know of the employer's trust-destroying conduct while still employed; and whether the
employee's trust must actually be undermined. Furthermore, and at the heart of this case, the
submissions raised an important question on the damages recoverable for breach of the implied
term, with particular reference to the decisions in Addis v. Gramophone Co. Ltd. [1909] AC
488 and Withers v. General Theatre Corporation Ltd. [1933] 2 K.B. 536…

An implied obligation 

Two points can be noted here. First, as a matter of legal analysis, the innocent employee's
entitlement to leave at once must derive from the bank being in breach of a term of the contract
of employment which the employee is entitled to treat as a repudiation by the bank of its
contractual obligations. That is the source of his right to step away from the contract forthwith. 

In other words, and this is the necessary corollary of the employee's right to leave at once, the
bank was under an implied obligation to its employees not to conduct a dishonest or corrupt
business. This implied obligation is no more than one particular aspect of the portmanteau,
general obligation not to engage in conduct likely to undermine the trust and confidence required
if the employment relationship is to continue in the manner the employment contract implicitly
envisages.

Second, I do not accept the liquidators' submission that the conduct of which complaint is made
must be targeted in some way at the employee or a group of employees. No doubt that will often
be the position, perhaps usually so. But there is no reason in principle why this must always be
so. The trust and confidence required in the employment relationship can be undermined by an
employer, or indeed an employee, in many different ways. I can see no justification for the law
giving the employee a remedy if the unjustified trust-destroying conduct occurs in some ways
but refusing a remedy if it occurs in others. The conduct must, of course, impinge on the
relationship in the sense that, looked at objectively, it is likely to destroy or seriously damage the
degree of trust and confidence the employee is reasonably entitled to have in his employer. That
requires one to look at all the circumstances. 

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 and before your Lordships House was
whether on assumed facts the claims were in principle sustainable….

It will be convenient first to examine the legal position regarding the implied term relied on by
the employees. Then I will consider the question of breach, the limiting principles of causation,
remoteness and mitigation as well as the question of the availability of a remedy of damages in
this case, particularly in the light of Addis v. Gramophone Co. Ltd. [1909] AC 488. 

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 [1992] 1 A.C. 294, 307B.
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."

A useful anthology of the cases applying this term, or something like it, is given in Sweet and
Maxwell's Encyclopedia of Employment Law, (Loose Leaf ed.) Vol. 1, para. 1.507, pp 1467--
1470. The evolution of the term is a comparatively recent development. The obligation probably
has its origin in the general duty of co-operation between contracting parties: B.A.
Hepple, Employment Law, 4th ed. (1981), paras. 291-292, pp. 134-135. The reason for this
development is part of the history of the development of employment law in this century. The
notion of a "master and servant" relationship became obsolete. Lord Slynn of Hadley recently
noted "the changes which have taken place in the employment and employee relationship, with
far greater duties imposed on the employer in the past, whether by statute or judicial decision, to
care for the physical, financial and even psychological welfare of the employee": Spring v.
Guardian Assurance Plc. [1995] 2 AC 296, at 325B. A striking illustration of this change
is Scally to which I have already referred where the House of Lords implied a term that all
employees in a certain category had to be notified by an employer of their entitlement to certain
benefits. It was the change in legal culture which made possible the evolution of the implied term
of trust and confidence.

There was some debate at the hearing about the possible interaction of the implied obligation of
confidence and trust with other more specific terms implied by law. It is true that the implied
term adds little to the employee's implied obligations to serve his employer loyally and not to act
contrary to his employer's interests. The major importance of the implied duty of trust and
confidence lies in its impact on the obligations of the employer: Douglas Brodie, "Recent cases,
Commentary, The Heart of the Matter: Mutual Trust and Confidence" (1996) 25 I.L.J. 121. And
the implied obligation as formulated is apt to cover the great diversity of situations in which a
balance has to be struck between an employer's interest in managing his business as he sees fit
and the employee's interest in not being unfairly and improperly exploited.

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. 

Conclusion 

I would therefore allow the appeal.