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access to The Modern Law Review
Kay Wheat*
Introduction
Whatever the eventual outcome of the various pieces of litigation spawned by the
collapse of the Bank of Credit and Commerce International (BCCI), there is n
doubt that it has been lucrative for lawyers.1 In BCCI v Ali and others2 we hav
now had a second airing in the House of Lords of the 'stigma claims' arising out o
the former bank employees' allegations that they have been unable to find wor
because of the tarnished reputation of their former employer.
A number of employees had been selected in this test case, although, in th
event, it only concerned one plaintiff, a Mr Naeem. He was employed by the ban
in the UK from June 1985 until June 1990, when he was made redundant. A
'redundancy package' was agreed in the sum of ?9,910.79, and a document, known
as a COT-3, was drawn up by the Advisory, Conciliation and Arbitration Service
(ACAS) and agreed by Mr Naeem and the bank's representative. The COT-3 is a
widely used form when actions are brought to claim statutory rights before
employment tribunals, but they are also used when there are settlements via the
mediation of an ACAS official, and are frequently drawn up to include settlements
of non-statutory claims. The COT-3 is essentially a release. In this case the
wording was:
The Applicant [Mr Naeem] agrees to accept the terms set out in the documents attached in
full and final settlement of all or any claims whether under statute, Common Law or in
Equity of whatsoever nature that exist or may exist (emphasis added) and, in particular, all or
any claims rights or applications of whatsoever nature that the Applicant has or may have or
has made or could make in or to the Industrial Tribunal, except the Applicant's rights under
the Respondent's [the bank's] pension scheme.
* BA, Solicitor, Senior Lecturer in Law, Nottingham Trent University. Thanks to an anonymous referee
for comments on the previous draft.
1 See Malik v BCCI SA (in liquidation) [1998] AC 20 (see below),and subsequent litigation, eg BCCI
SA (in liquidation) v (1)Ali (2) Khan & Ors (No 6) [2001] EWCA Civ 636 (the Court of Appeal gave
permission to appeal the decision of Lightman J who had dismissed claims against BCCI on the
ground that they had failed to prove actual rather than hypothetical loss. It was held that there was a
real prospect of establishing that this test was incorrect); Three Rivers District Council v Governor of
the Bank of England (No 3) [2000] 2 WLR 1220 (failed action alleging malfeasance in public office
against the Bank of England in its regulation of BCCI).
2 [2001] 1 All ER 961.
? The Modem Law Review Limited 2002 (MLR 65:3, May). Published by Blackwell Publishers,
108 Cowley Road, Oxford OX4 1JF and 350 Main Street, Maiden, MA 02148, USA. 425
Malik v Bank of Credit and Commerce International SA,3 the House of Lords
upheld the claim of Mr Naeem and others that, subject to proof of loss and
causation, if they were able to show that the bank's practices were a breach of the
implied term in their contracts of employment of mutual trust and confidence, they
could bring a claim for damages for the 'stigma' attached to them because they had
been employed by the bank (despite the fact that none of them were involved in, or
aware of, the corrupt practices). The issue for consideration in this latest foray into
the House of Lords was whether the release signed by Mr Naeem covered the claim
for stigma damages.
The case came before Lightman J at first instance4 who held that the terms of the
COT-3 were sufficiently comprehensive to cover the stigma damages claim;
indeed, counsel for the employees had conceded as much. The second argument on
the part of the plaintiffs was that if the agreement did cover the common law
claims, the employees were entitled to its rescission on the grounds of non-
disclosure, mistake and misrepresentation. Lightman J rejected these arguments. In
the Court of Appeals Chadwick LJ took the view that the release was sufficiently
wide to cover the stigma damages claim, but that BCCI should not be able to rely
on it because it would be unconscionable to do so; Buxton LJ agreed that, as far as
construction was concerned, the terms of the release covered the stigma damages
claim, but, basing his decision on the general principle of equity rather than the
specific principle of unconscionability, he held that the bank should not be able to
rely on it. Sir Richard Scott V-C found that the release did not cover the stigma
damages claim because of the ignorance of Mr Naeem of the illegal and dishonest
conduct on the part of BCCI, and, in any event, found that in all the circumstances
it would be unconscionable for the bank to rely on the release.
The House of Lords by a majority (Lords Bingham, Browne-Wilkinson, Nicholls
and Clyde) held that stigma damages claims were not covered by the terms of the
release and they could, therefore, proceed. Lord Hoffmann dissented. Lord
Bingham quoted the summary of Lightman J. of the factual circumstances
surrounding the case:
[The] issues arise in a factual context in which (i) BCCI must be treated as having
knowledge at the relevant time that it was engaged in a dishonest and corrupt business - that
is accepted for the purposes of the ACAS COT-3 issue; (ii) Mr Naeem must be treated as not
having that knowledge at the relevant time - that, also, is accepted for the purposes of the
issue; (iii) it was a necessary incident of the way in which BCCI was carrying on its business
that the dishonest and corrupt nature of that business should be concealed from the general
body of employees, including Mr Naeem; (iv) ... it was BCCI's intention to conceal the
dishonest and corrupt nature of its business from the general body of its employees and there
is no reason to think that it had not achieved that objective; (v) without that knowledge Mr
Naeem could not have appreciated that there had been a breach of the implied term on which
the stigma claim is founded; and (vi) the possibility that BCCI - a bank authorised by the
Bank of England under the Banking Act 1987 to carry on banking business in London -
would be carrying on a dishonest and corrupt business was so remote that Mr Naeem could
not have been expected to appreciate that it might exist, or that BCCI might be in breach of
its obligation not to abuse the trust and confidence which he was entitled to place in it as his
employer.
3 n 2 above.
4 BCCI (in liquidation) v Ali and others [1999] 2 All ER 1005.
5 [2000] 1 All ER 51.
426CThMdenIwReiwImed20
426 (C The Moderm Law Review LTimited 2002
There were two principal issues before the court. First was the construction of t
release and secondly, whether it would be unconscionable to allow BCCI to rely
upon it if the claim for stigma damages was found to come within its terms. In
but Lord Hoffmann's dissenting judgment, there was no discussion of the secon
issue because the majority found that the respondents were not precluded by t
terms of the release from bringing their claims (Lord Hoffmann held that BCC
should be able to rely on it). Lords Bingham, Browne-Wilkinson, Nicholls a
Clyde all found that neither party to the negotiations had knowledge of the corru
practices, and even if it were possible to argue that those who negotiated t
settlements on behalf of the bank were fixed with such knowledge, it was clear th
the bank would have been unaware in 1990 of the possibility of there being any
right in law for former employees to recover damages for the 'stigma' resultin
from such corruption.
A document is constructed on the basis of the intentions of the parties at the time it
was entered into.6 The release specifically referred to unknown claims, i.e. that may
exist in the future. It might be asked, therefore, why should it not include some
'novel' claim that none of them were aware of? Lord Bingham stated that since the
terms of the release might not include a personal injury claim, the clause could not
be read literally.7 He stated: 'Neither the bank, even when fixed with such
knowledge, or Mr Naeem could realistically have supposed that such a claim lay
within the realm of practical possibility'8 and therefore the parties did not intend to
exclude such a claim. Lord Browne-Wilkinson agreed with Lord Bingham.
Lord Nicholls acknowledged that releases are often drawn up to deal with
unknown claims: 'The parties wanted to achieve finality'.9 He then proceeded to
give an example of a release upon the ending of a partnership which might well
preclude a claim if it subsequently came to light that inadvertently a partner's
share of the profits had been understated in the agreed accounts, but where '[I]t
could not reasonably be taken to preclude a claim if it later came to light that
encroaching tree roots from one partner's property had undermined the
foundations of his neighbouring partner's house'.10 Lord Nicholls acknowledged
that this was not a case of the bank knowing about the claim and concealing or
failing to disclose that there were practices going on which they knew would be
actionable by the respondents, as the case of Malik was decided some seven years
after the signing of the release, so that there was no question of sharp practice. He
then considered the interpretation of the release and found that the release should
be construed as restricted, not just to claims arising out of the employment
relationship, but to claims 'arising out of the ending (original emphasis) of the
employment relationship.'1' However, whether that be the case or not, the real
issue for Lord Nicholls was that the unknown factor at the time of the signing of
the release was a future change in the law, which the parties could not have
intended to exclude.12
Lord Clyde considered whether the claims released could be restricted to those
subject to the jurisdiction of the employment tribunal, but concluded that the
reference to the common law and equity must mean that the release related to
matters beyond the scope of the jurisdiction of the tribunal. 13 He wanted to confine
the release to those matters relating to the termination of the contract of
employment, including, say wrongful dismissal.14 It should not, however, include
damages for stigma 'when the idea of such a claim at the time when the parties
made the agreement at the termination of the employment seems to me
correspondingly remote from what the parties might reasonably be taken in the
circumstances to have contemplated'.15
Lord Hoffmann, dissenting, acknowledged that it was debatable whether a
personal injury claim would be covered by the terms of the release, emphasising
the fact that the parties were making an agreement for the termination of Mr
Naeem's employment, and, further, that in this context, it was necessary to give
some business sense to the agreement.16 In the case of Mr Naeem, over ?2,700 was
paid specifically for the release and the total sum specifically for the release was
?2.5 million. What, asked Lord Hoffmann, was BCCI paying for? To exclude
unknown claims makes the release nonsensical. To include inconceivable claims or
conceivable but not conceived of is not wrong: 'On the contrary, the more
improbable the claim the more likely it is that the reasonable employee would be
willing to part with it for ready money'.17 Lord Hoffmann, citing nineteenth
century cases such as London & SouthWestern Rly Co v Blackmore18 and Lyall v
Edwards,19 where releases had been considered in the context of a particular
dispute or a compromise of disputed claims, and where the background gave some
context to the dispute, stated: 'The fact is that BCCI is not contending for a literal
meaning. It is contending for a contextual meaning'.20 In other words, once it is
admitted that the release cannot be interpreted literally (e.g. it would be
acknowledged by most lawyers that it might exclude personal injury claims), it
is irrational to go on and say that it excludes everything. Counsel had contended for
a rule of construction on grounds of fairness. Lord Hoffmann considered this in the
light of 'the rise and fall of the rule of construction of exemption clauses'.21 This
had resulted in the deployment of verbal gymnastics to find a true construction of
the contract simply to avoid a powerful organisation relying on a clear exemption
clause against a 'little man'. Further, in the case of exemption clauses, they were
rejected/interpreted reasonably because there, 'a contracting party undertook
various obligations and then provided that he was not liable if he failed to perform
them'.22 Here, there was a specific sum of money paid for the release.
12 ibid 974
13 ibid 988.
14 ibid 989.
15 ibid 990.
16 ibid 975.
17 ibid.
18 (1870) LR 4 HL 610.
19 (1861) 6H & N 337, 158 ER 139.
20 n 2 above, 975.
21 ibid 980.
22 ibid 983.
Commentary
Construction
First, it must surely be a general principle of law that contracts are entered into on
the basis of the law as it stands at the time the contract is made. A contract is
enforceable when it is made.26 Further, a release will be interpreted 'in the light of
the circumstances existing at the time of its execution'.27 Secondly, as Atiyah
states, one of the fundamental objectives of contract law is the protection of
reasonable expectations or reasonable reliance, and if parties are being asked to,
say, assume a very different risk from the one they thought they were assuming,
then there must be greater injustice resulting from the protection of reasonable
expectations.28 In the context of a release a parallel can be drawn. In this case
BCCI, as Lord Hoffmann said29 'paid to be free' of such claims as the stigma
claim. If the reasonable expectations of the company that Mr Naeem and his
colleagues had 'gone away' are to be disappointed, then there must be some
stronger countervailing interest to protect. Precisely what this is, in the context of
construction, is not clear.
Lord Clyde accepted that the claims released would include wrongful dismissal
claims.30 However, wrongful dismissal claims are but a species of breach of
contract claims, and the stigma damages claim was a claim for damages for breach
of the implied term of trust and confidence, i.e. they are eiusdem generis (in
contrast with damages for personal injury which can be recovered in tort and which
are also frequently, and in the case of employer's liability, almost always, covered
23 [1931] All ER 1.
24 n 2 above, 984.
25 ibid 985.
26 P. S. Atiyah, An Introduction to the Law of Contract (Oxford: Clarendon Press 5th ed.
27 Chitty on Contracts (London: Sweet & Maxwell, 1999) para 23-005.
28 n 26 above, 226.
29 n 2 above, 986.
30 ibid 988.
31 n 4 above, 1014.
32 ibid.
33 n 23 above.
34 See Sybron Corp v Rochem Ltd [1984] Ch 112 CA, at 129 for example, where it was
was no general duty to report a fellow-servant's misconduct, although a duty may a
specific terms of the contract of employment as in the case of Swain v West (Butcher
All ER 261 CA.
35 n 2 above, 975.
36 ibid 976.
37 ibid 977.
do with the partnership relationship and its termination, and, indeed, such a claim
in tort could be brought if the partnership relationship had never existed in the first
place.
Although precisely what the decision in Bell v Lever Bros stands for is not
clear38 it is helpful to consider Lord Atkin's rejection in that case of the argument
that there was a mistake by the parties. It might be recalled that the facts of the case
concerned the termination package that was agreed by the employer and employee
when unbeknown to the employer the employee had breached his contract of
employment at an earlier date. Lord Atkin pointed out that there had been no
representation or warranty by the employees as to the earlier breach and the
employer took the risk.39 In the present case, the company paid the sum of ?2.5
million to buy off the risk of unknown claims arising. The employees accepted the
additional payments and took the risk that, if an unknown claim subsequently
became possible they would not be able to pursue it. Whatever is wrong with that?
Much of the case hinges on the question of the knowledge of the parties
involved. Clearly the employees did not know about the corrupt practices. It was
probably also the case that those negotiating the settlement on the part of the bank
did not know either. Arguably, they could be 'fixed' with that knowledge, but this
is a peripheral point. Crucially, however, neither of the parties knew that, even if
there were corrupt practices, they could give rise to claims by the ex-employees. In
the Court of Appeal, Sir Richard Scott V-C, who accepted that, as a matter of
construction, the claim fell within the scope of the release, but as there were
matters that were known only to one party (i.e. BCCI knew of the fraud), the
construction point was irrelevant. To include the stigma claim within in the terms
of the release would be to reward the dishonest at the expense of the innocent.40 He
went on to say that if he was wrong about this, then he would still find against the
bank on the basis of unconscionability. Buxton LJ came to the same sort of
conclusion, although not by appealing to unconscionability. Chadwick LJ, quite
rightly, acknowledged that the release was not concerned with identified claims
(these had been dealt with), but unidentified claims, and therefore the question of
knowledge could not affect the construction of the document. However, he went on
to say that because the bank had concealed its wrongdoing, it would be
unconscionable for it to rely on the release. It fell to Lord Hoffmann in the House
of Lords to point out that Sir Richard Scott's argument simply went to
unconscionability and that (following Chadwick and Buxton LLJ), a proper
construction of the release would include the claim for stigma damages. On the
question of knowledge of the facts, however, the most pertinent point in this case
had been made by Lightman J at first instance: 'I am quite satisfied ... that [the
employees] would have signed the agreement even if they had known of the bank's
insolvency and dishonest trading. The risk of the collapse of the bank in the near
future would have been an incentive ... to taking the additional sum in return for
the extinguishment of rights of no obvious value'.41 The real issue in this case is
the fact that neither party knew about the possibility of such a claim in law, and, it
is suggested, the remote possibility that the law would change in relation to this
factual situation is precisely the sort of claim that would be covered by a release.
Clearly, this accords with the view of Lord Hoffmann that the more unlikely the
38 For example, see Chitty on Contracts (London: Sweet & Maxwell, 1999), para 5-006.
39 n 23 above, 30. Lord Thankerton made a similar point when he referred to the absence of fraud, at 33.
40 n 5 above, 60.
41 n 4 above, 1020.
claim the more likely an employee would be willing to sell the opportunity to bri
it. In the light of this, the most alarming aspect of this decision is to be found
several of the judgments, notably in that of Lord Nicholls:
To my mind there is something inherently unattractive in treating these parties as having
intended to include within the release a claim which, as a matter of law, (original emphasi
did not then exist and whose existence could not then have been foreseen. ... Mr Naeem
cannot reasonably be regarded as having taken upon himself the risk of a subsequen
retrospective change in the law.42
Similarly, Lord Clyde had found that stigma damages were not covered because
the 'idea' of such damages was remote,43 and this could also be an explanation o
Lord Bingham's assertion that to exclude a claim which might come about throu
a change in the law was 'extravagant'.44 It is notable that the case of Kleinwor
Benson Ltd v Lincoln City Council45 was not mentioned in any of the judgments
In that case it was held (again by a majority of the House of Lords) that it
possible to recover monies paid under a mistake of law, in cases of fully-execute
contracts, and even if outside the statutory limitation period (subject to the defen
of change of position). This decision in itself might well give rise to disqu
among practising lawyers,47 but the decision, combined with the decision in BC
v Ali creates a potential nightmare for practitioners. Since Kleinwort Bens
agreements can now be reopened if the law changes, it might have been thought,
least in many cases, that it would be possible to avoid this by drafting
documentation that prevented agreements from being reopened by incorporatin
something akin to a release. However, that particular rug may have been pulled
from under the parties' feet by the present decision, whereby an agreement whic
on any sensible interpretation, clearly disposed of matters arising from t
contractual relationship (at the least) is found not to include something which h
come about through a change in the law.
The majority of the Law Lords, perhaps or perhaps not, mindful of th
implications of this, hinted that this had come about by some sort of drafting failure
If a change in the law is anticipated with sufficient precision so as to be explicit
covered by the terms of the release (after the decision in this case there is little scope
for arguing for anything implicit), then it is likely that the parties would have taken
this into account in the terms of the settlement i.e. it would have been in their
contemplation. It is when no such change is anticipated that, of its very (unknown)
nature, it cannot be taken into account either in terms of the quantum of payment48 or
the wording of the release. So what is the draftsman to do? What form of words can
be concocted to make it 'language which left no room for doubt'?49 Would it have
been sufficient to add, after 'claims ... that exist or may exist', 'whether brought
about by a change of the law or otherwise'? If this would resolve the situation all to
the good, but this is surely contained within the reference to claims that 'may exist'
42 n 2 above, 974.
43 See above, text at n 15.
44 See below, text at n 51.
45 [1999] 2 AC 349.
46 It had been cited or referred to in skeleton arguments at first instance.
47 Note the judgment of Lord Hoffmann, above n 45, at 401, where he points out the decision will g
cause for concern as far as the security of transactions is concerned, but that the balance must b
redressed by legislation.
48 There is, of course, a strong argument that if there had been no consideration then the situation wou
be different, see the judgment of Lane LJ in the case of Arrale v Costain Civil Engineering Ltd [ 197
I Lloyd's Rep 98.
49 n 2 above, at 970, per Lord Bingham.
and, more significantly, it is, in any event, still an expression of generalities. What is
the draftsman to make of Lord Clyde's statement that: 'Even without formulating
any definition of the precise scope of the agreement, it seems to me that if the parties
had intended to cut out a claim of whose existence they could have no knowledge
they would have expressed that intention in words more precise than the generalities
which they in fact used' (emphasis added)?50 Lord Bingham suggested that: 'If the
parties had sought to achieve so extravagant result they should have used language
which ... might at least have alerted Mr Naeem to the true effect (on that hypothesis)
of what he was agreeing'.51 Far from covering remote possibilities so as to make
them 'extravagant', documents such as these are widely used by lawyers who need to
advise their clients that matters have been concluded once and for all.52 Releases of
this nature are drawn in such wide terms to cover anything that the parties might not
have anticipated. That is their purpose. Moreover, Lord Clyde is a distinguished
judge but even he might find it difficult to write with precision about something he
does not know about. The implication of the majority decision is that a release can
never apply to a claim that the parties do not know about. It is simply disingenuous
to imply that the document could have been drafted to cover this.53
Further, as Lord Hoffmann suggested, the decision is plain wrong in the context
of business efficacy. Why should not parties be able to enter into these sorts of
arrangements? Suppose that Mr Naeem had been paid ?20,000 for the release? Or
?50,000? The amount paid cannot possibly alter the basis of the majority
judgments. However, if one considers the case in terms of a more substantial
consideration, the flaws in the decision are thrown into sharp relief. Furthermore,
if, as it appears, BCCI paid ?2.5 million for nothing, if Mr Naeem successfully
pursues his stigma damages claim, would there by any set-off? Almost certainly
not, because, it would be argued that BCCI had still, at least in theory, paid to be
free of other unidentified claims, although since these were clearly not in the
contemplation of the parties and hence not described in precise language, in
practice they would not be covered by the terms of the release.
Arguably, the only sensible interpretation of Lord Bingham's view that the
parties should 'have used language which left no room for doubt' results in the
oxymoron whereby the parties should have made a particular reference to
something that no one knew about. Lord Nicholls seems to acknowledge this,54 but
seems to have been influenced, albeit unconsciously by the Kleinwort Benson
decision, so that when 'a retrospective change in the law' comes about, the normal
approaches to the construction of a document are suspended, or, perhaps,
irrelevant.
Unconscionability
The majority decision did not address this point. In consequence, the judgments of
Sir Richard Scott V-C and Chadwick LJ, in the Court of Appeal, are the only
50 ibid 989.
51 ibid 970.
52 The need for 'certainty' in the interpretation of contracts has been stressed by the courts e
Excavating (ECC) Ltd v Sharp [1978] QB 761.
53 Of course, if such a release embellished with the words 'whether brought about by a change
or otherwise' were to become the subject of litigation, it is highly likely that, in a move to m
effects of this decision, a court would declare it to be 'sufficiently precise', but that would
accordance with the arguments deployed by the majority of the House of Lords.
54 n 2 above, 971.
55 In the Court of Appeal, n 5 above, 58; in the House of Lords, n 2 above, 969.
56 n 2, above, 985.
57 n 5, above, 76.
58 ibid 78.
that
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fraudulent villains but of the public and the unfortunate creditors of BCCI.59
Rick Bigwood*
* The University of Auckland. I am grateful to an anonymous referee for helpful comments on this note in
draft.
1 ASB Bank Ltd v Harlick [1996] 1 NZLR 655 (CA) at 658 per Gault J.
2 D. L. McDonnell and J. G. Monroe (eds), Kerr on the Law of Fraud and Mistake (London: Sweet &
Maxwell, 7th ed, 1952) 224.
3 Jenyns v Public Curator (Qld) (1953) 90 CLR 113 (HCA) at 119 per Dixon CJ and McTieman and
Kitto JJ.
4 National Westminster Bank plc v Morgan [1985] AC 686 (HL) at 709 per Lord Scarman.
5 cf D. Tiplady, 'The Limits of Undue Influence' (1985) 48 MLR 579 at 580.