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LONDON-A recent ruling by Britain's House of Lords allowing employees to sue a former employer for their inability to get a job because of its poor reputation could spark litigation against other British companies, including insolvent insurers.
The ruling from Britain's highest court, reversing lower court opinions, came in a suit filed by two former employees of scandal-ridden Bank of Credit & Commerce International S.A. They allege they were unable to find new jobs because of their association with BCCI, which collapsed in 1991 after what is allegedly one of the biggest frauds in banking history.
"Employers must take care not to damage their employees' future employment prospects by harsh and oppressive behavior or by any other form of conduct which is unacceptable today," the unanimous ruling also stated.
Clearing the way for such lawsuits, the ruling could mean additional creditors for insolvent companies.
"I am conscious that the outcome of (this case) may be seen by some as opening the door to speculative claims, to the detriment of admitted creditors," said Lord Nicholls of Birkenhead in the ruling. There may be lengthy and costly investigations and litigation now between former employees and employers that would have to be paid for by the employers' funds, even if the employees lose their cases, he added.
In suits against insolvent insurers, the cost of defending such an action and any damages awarded could reduce the amount of assets an insurer's liquidators would have to pay policyholders' claims.
However, managers and provisional liquidators of insolvent insurers do not foresee much exposure to such lawsuits.
"It's fairly unlikely we would see a claim" from a former employee seeking damages for the loss of future jobs, said Ian Bond, provisional liquidator for the five insolvent insurers that wrote casualty coverage on the H.S. Weavers (Underwriting) Agencies Ltd. line slip. The so-called KWELM companies together owe policyholders a little more than $9 billion.
"I've been dealing with liquidations since 1969, and I've never known anyone to sue" for damages because they couldn't find future employment, said Mr. Bond.
The KWELM provisional liquidators actually employ 130 former Weavers employees as part of KWELM Management Services Ltd., said Mr. Bond. Some of the former directors of Weavers also have worked on a consulting basis since the line slip shut down, he added.
Run-off reinsurer Equitas Ltd. also is unlikely to be affected by this decision, because there was no employment relationship between Equitas and the employees of defunct Lloyd's of London underwriting agencies. Equitas assumed the liabilities of the syndicates, not the liabilities of the underwriting agencies that managed the syndicates.
The two BCCI plaintiffs, who lost their jobs when the bank collapsed in late 1991, are Raihan Nasir Mahmud, who had worked for the bank for 16 years and was a manager of one of BCCI's London branches, and Qaiser Mansoor Malik, who had been with the bank for 11 years and was head of deposit accounts and customer services at BCCI's London headquarters.
In March 1992, two months after the bank entered liquidation, the plaintiffs submitted claims for what the Law Lords called "stigma compensation."
Both employees claimed their association with BCCI "placed them at a serious disadvantage in finding new jobs," according to the Law Lords' opinion.
Their claim was for financial loss caused by the bank's "breach of implied contractual obligation of mutual trust and confidence," Lord Steyn noted. The foundation of their claim was that the bank had been operating in a "corrupt and dishonest manner," which meant that, in spite of their own innocence, they were denied other jobs in the financial services industry, according to the ruling.
The first stage of their suit focused on whether, under the law, employers can be held liable to pay damages to former employees who can't find other work.
Both the High Court and the Court of Appeal had ruled against the former BCCI employees. However, in a unanimous decision, the five Law Lords overturned both lower courts.
The Law Lords ruled that BCCI had breached the "trust and confidence" in its employment contracts with the workers by acting in a dishonest and corrupt fashion. As a result, they ruled, BCCI's conduct diminished its employees' attractiveness to future employers.
But to recover damages, the employees will first have to prove BCCI was a dishonest and corrupt business and that such conduct prevented them from obtaining other jobs.
There are many circumstances in which an employee's reputation may suffer from having been associated with an unsuccessful business, the Law Lords noted.
However, "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," ruled Lord Nicholls. Even if the business is found to be corrupt, he added, "proof of consequential handicap in the labor market may well be much more difficult for some classes of employees than others."
The plaintiffs will now go to trial in an attempt to prove BCCI's dishonesty and their loss as a consequence, said Lorinda Peasland, a solicitor at Manches & Co. who represented the employees. She would not say how much the employees are seeking in damages.
If the plaintiffs' action succeeds, any damages would be offset by outstanding loans they owe BCCI, according to a spokesman for BCCI's liquidator. Between 200 and 300 ex-BCCI employees have outstanding loans from the bank totaling about 40 million pounds ($65.9 million).
BCCI's liquidators are hoping to pay creditors a 10% dividend in 1998, but any damages that have to be paid to former employees "could upset this payment," said the BCCI spokesman.