When work is a slur on character

Josie Amador-Bedford and Robin Jeffcott explain how various rulings help workers survive the whiff of scandal

The decision of the Court of Appeal in the latest case involving stigma claims - Hussain & Zafar v Bank of Credit & Commerce International SA (In Liquidation) 2002 (unreported) - makes it easier for employees to establish that the stigma of being associated with a corrupt employer has caused them loss of future employment prospects, thus increasing the potential risks for employers.

Before the House of Lords decision of Malik v BCCI SA [1997] IRLR 462, damages for breach of a contract of employment were limited by the principles laid down by authorities, including Addis v Gramophone Co Ltd [1909] AC 488 HL.

This held that damages were not available for the manner in which the dismissal took place, for injury to feelings, or for any loss sustained from the fact that the dismissal of itself made it more difficult to obtain another job.

This prevented an employee recovering damages for losses suffered as a result of injury to their previously existing reputation.

In Malik v BCCI SA, former employees of BCCI brought claims in the High Court seeking damages for breach of their employment contracts, on the basis that BCCI's business had been conducted so corruptly that future potential employers in the financial sector - in which the standing of an employee as an honest and trustworthy person is essential - would not now wish to employ them since they had been tainted by their association with a corrupt employer.

The requirement to find a contractual term that had been breached by BCCI was satisfied in the unanimous opinion of the House of Lords, by founding the claim on breach of the duty of trust and confidence, which is implicit in every contract of employment.

It was held that one aspect of that duty was the employer's obligation not to run its business corruptly and dishonestly.

Accordingly, on the premise that BCCI had operated its business in that manner, BCCI was in breach of that implied term, and the employees could, in principle, recover damages for their losses caused by the stigma resulting from their association with BCCI.

Addis, well-established law for nearly a century, was distinguished on the basis that the implied term of trust and confidence had not been developed by the courts at the time Addis was decided.

This was a momentous decision, triggering considerable interest on the part of commentators, some of whom speculated as to how these principles would be applied and whether they could be extended.

However, the initial furore abated following the next BCCI decision in 1999 where it soon became clear that it would be difficult proving that stigma caused any loss to be suffered.

In Bank of Credit & Commerce International SA (In Compulsory Liquidation) v Ali & Others [1999] IRLR 508, the High Court had to decide whether the tests set out by the House of Lords in Malik had in fact been satisfied.

Following the collapse of BCCI, more than 350 former employees claimed damages for stigma.

Five such claims proceeded as a test case.

Mr Justice Lightman held that there had been a breach of the term of trust and confidence by BCCI by carrying on a business in a corrupt and dishonest manner.

He addressed the test for breach of the implied term in the following way: to amount to a breach, the employer's conduct must be such that the employee, upon discovering it, could not reasonably be expected to tolerate it a moment longer and could leave immediately without giving prior notice.

It was not essential that the conduct should be directed at the employee in question but this may be a significant factor.

Where it is not, a high threshold is required to establish a breach and the 'trust-destroying' conduct may be required to be serious.

The cumulative actions of an employer could be taken into account and could together constitute a breach of trust and confidence.

Whether the employer's conduct had been such as to destroy trust and confidence would depend on the level of dishonesty, the size and number of the dishonest transactions, the status of employees affected and the importance and prevalence of the wrongdoing in the context of the employer's business as a whole.

On the facts, Mr Justice Lightman held that BCCI had unfairly and improperly exploited all its employees by carrying on corrupt and dishonest operations on a vast scale.

This amounted to a breach of trust and confidence.

Despite the employees' success in establishing a breach of contract, the employees failed to make out their case on the issues of proof of loss, causation and remoteness.

Mr Justice Lightman ruled that the employees had failed to establish that the publicity surrounding BCCI had impaired their employment prospects.

Few prospective employers would be willing to state outright that an applicant had been rejected because the employee's CV included a period of employment with a notorious previous employer.

In practical terms, the effect of this decision was to close the door to stigma-based claims.

The employees appealed the High Court's ruling and the Court of Appeal held that the judge had erred in adopting an over-elaborate approach to the legal issues.

In every case it was necessary to ask: in relation to finding re-employment, had stigma from the former employee's previous employment with BCCI had a real or substantial effect - and if so, how great an effect?

In answering this question, it was appropriate to have regard to the history of the former employee's search for new employment, including the number of jobs applied for, how well-targeted and presented the applications had been, the number of interviews obtained, how the applications had fared and any reason for rejection given to the employee.

While each individual job application was relevant, it was necessary to ask the question with regard to the job search in its entirety.

It was suggested by Lord Justice Walker that where a former employee could show that a job search which was successful after 12 months would, but for stigma, have been successful after six months, that former employee could have a claim for six months' loss of employment, even if it were impossible to identify which particular job application which would, but for the stigma, have been successful.

In the event, the employees did not succeed.

The Court of Appeal held that the court at first instance had been entitled to make the findings it had.

Nevertheless, former employees are subject to a less stringent evidential burden as a result of this decision, and now it need only be shown that they have suffered an increased risk of unemployment, and consequent loss of opportunity in the job market generally.

The effect of the Court of Appeal's decision is to allow a wider and a more realistic inquiry into the question of whether stigma caused the employee loss.

However, employees considering bringing stigma-based claims should always bear in mind that despite this decision, the evidential burden is still substantial and litigation is likely to be protracted and costly.

Many such claims will be brought in the context of corporate collapse and insolvency.

Accordingly, whether the employee will be able to enforce any judgment is a matter to be considered at the outset of any litigation.

Josie Amador-Bedford is an assistant solicitor in the employment department of City firm Richards Butler and partner Robin Jeffcott is head of the department