Working for a corrupt employer - stigma damages awarded

Cases

Working for a corrupt employer - stigma damages awarded

In an interesting legal development which has no immediate consequence in Australia, the English House of Lords has held that two employees were entitled to pursue a claim for damages against their former dishonest and corrupt employer owing to the stigma attached to them from that association.

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In an interesting legal development which has no immediate consequence in Australia, the English House of Lords has held that two employees were entitled to pursue a claim for damages against their former dishonest and corrupt employer owing to the stigma attached to them from that association.

Background

"My Lords, this is another case arising from the disastrous collapse of Bank of Credit and Commerce International SA (BCCI) 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 [the appellants/employees]. They were employed by BCCI in London. They claim they lost more than their jobs. They claim that their association with BCCI 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 BCCI. The liquidators rejected this ‘stigma’ head of loss in their proofs. Liability for notice money and redundancy pay was not in dispute...

"[The employees] appealed to the court against the liquidators’ decision on their proofs. The registrar directed the trial of a preliminary issue: whether the [employees’] evidence disclosed a reasonable cause of action or a sustainable claim for damages. ...

"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 [the employees] were innocent of any involvement, that following the collapse of BCCI its corruption and dishonesty became widely known, that in consequence [the employees] were at a handicap on the labour market because they were stigmatised by reason of their previous employment by BCCI and that they suffered loss in consequence." (Lord Nicholls).

Central Legal Issue - Duty Not to Damage the Relationship of Trust and Confidence

At the heart of this matter was a contractual term which both the English and New Zealand Courts imply into contracts of employment - an obligation on the employer in relation to the employee not to ‘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’.

It is important to note that this term has not been accepted as part of Australian law by the High Court. A number of decisions of the former Industrial Relations Court of Australia referred to the term, and even at some points indicated a belief that that term may apply in Australia. But the issue has not been authoritatively determined by the High Court.

In the matter at hand, the parties having accepted that the above contractual term applied to the employees’ contracts of employment (ie the parties had not expressly excluded that term), the House stated that the parties were in dispute over:

"... the type of conduct and other circumstances which could or could not constitute a breach of this implied term. ... 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 KB 536."

The House rejected the submission that damages can only be recoverable to the extent that the contract has been prematurely terminated as a consequence of the trust-destroying conduct. The full text of the House of Lords decision is at: Malik & Anor v Bank of Credit and Commerce International SA (in compulsory liquidation) [1997] 3 WLR 95.

Lord Nicholls of Birkenhead stated:

"This is an unacceptably narrow evaluation of the trust and confidence term. Employers may be under no common law obligation, through the medium of an implied contractual term of general application, to take steps to improve their employees’ future job prospects. But failure to improve is one thing, positively to damage is another. Employment, and job prospects, are matters of vital concern to most people. Jobs of all descriptions are less secure than formerly, people change jobs more frequently, and the job market is not always buoyant. Everyone knows this. An employment contract creates a close personal relationship, where there is often a disparity of power between the parties. Frequently the employee is vulnerable. Although the underlying purpose of the trust and confidence term is to protect the employment relationship, there can be nothing unfairly onerous or unreasonable in requiring an employer who breaches the trust and confidence term to be liable if he thereby causes continuing financial loss of a nature that was reasonably foreseeable. Employers must take care not to damage their employees’ future employment prospects, by harsh and oppressive behaviour or by any other form of conduct which is unacceptable today as falling below the standards set by the implied trust and confidence term.

"This approach brings one face to face with the decision in the wrongful dismissal case of Addis v Gramophone Co Ltd [1909] AC 488."

Lord Steyn, in the other substantive judgment, held:

"The dicta in Spring v Guardian Assurance Plc [1995] 2 AC 296 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."

Clearly mindful of the potential problems which the decision could create, Lord Nicholls offered the following ‘cautionary footnotes, having in mind the assumed facts in the present case’:

"... one of the assumed facts in the present case is that the employer was conducting a dishonest and corrupt business. I would like to think this will rarely happen in practice. [Also], there are many circumstances in which an employee’s reputation may suffer from his having been associated with an unsuccessful business, or an unsuccessful department within a business. In the ordinary way this will not found a claim of the nature made in the present case, even if the business or department was run with gross incompetence. A key feature in the present case is the assumed fact that the business was dishonest or corrupt.

"Finally, although the implied term that the business will not be conducted dishonestly is a term which avails all employees, proof of consequential handicap in the labour market may well be much more difficult for some classes of employees than others. An employer seeking to employ a messenger, for instance, might be wholly unconcerned by an applicant’s former employment in a dishonest business, whereas he might take a different view if he were seeking a senior executive."

In this case both appellants were senior managers.

Legal Footnote

Importantly, for the legally minded, both judgments distinguished the 1909 House of Lord decision of Addis v Gramophone, which is however still authority in Australia (see Byrne & Frew v Australian Airlines Ltd (1995) 61 IR 32).

Addis’ case has been understood to mean that damages are not recoverable for wrongful dismissal for injured feelings etc, but are only available for the notice of termination which the contract provides (where not written in the contract, what is the appropriate (‘reasonable’) notice is determined by such factors as the age of the employee, the length of employment, the status of the employee’s position etc).

Lord Nicholls stated: "Addis v Gramophone Co Ltd was decided in the days before this implied term was adumbrated. Now that this term exists and is normally implied in every contract of employment, damages for its breach should be assessed in accordance with ordinary contractual principles."

 
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