Reputation Costs

Although he is best known as a TV and radio presenter – and as a close associate of Mr Blobby – Noel Edmonds has also enjoyed a lengthy career as a successful businessman. However, between 2002 and 2007 his media business, ‘Unique’, was one of the multiple victims of a fraud perpetrated by employees of HBOS Reading branch and Quayside Corporate Services, a corporate turnaround company.

Lloyds Banking Group – which acquitted HBOS in 2008 – assured the victims of the fraud that they would be compensated by the end of June and have set aside £100m for that purpose. At first blush, that might settle it. But, Noel Edmonds, being only one of 64 victims in total, values his claim for significant economic losses and damages to his reputation as a result of the fraud at £73 million.  Not a lot left for the remaining 63 victims.

Before making any specific offers of compensation, Lloyds has stated that it is conducting a customer review prior to making offers of compensation. For victims of an earlier interest rate swap misselling scandal, the term “customer review” will not provoke happy memories.  This process allowed Lloyds (and other banks) to assess the amount of compensation due to the victims of that scandal, which was overseen by an independent reviewer.  Many customers were left extremely disappointed.  The offers of compensation were often low and generally less than the customers believed they had lost.  However, faced with the choice between accepting a disappointing compensation offer, or litigating against a major bank, many decided that they preferred the former.

Noel Edmonds will no doubt be well represented and able to advance his claim for economic losses: a bigger question is the extent to which Lloyds will be willing to compensate his loss of reputation and thereafter the extent to which he could recover damages for that loss before a court.  Given the figures put forward by Lloyds, and the relative rarity of claims for loss of reputation (“stigma damages”), it seems unlikely that Lloyds has any intention of paying significant compensation for the loss of Edmonds’ business reputation. The key question to consider is whether a claim for loss of reputation will actually result in a payment of damages before the courts.

The protection of damage to reputation is normally considered to be the role of defamation, but as no HBOS employee appears to have said anything which directly defamed or tarnished Edmonds’ reputation, such an action would be unsustainable. Nevertheless, it is clearly arguable that being snared in this fraud might well damage the business reputation of any of its victims.  The good news (for Edmonds) is that the application of normal contractual principles may afford a route to recovery of losses sustained in circumstances where he can prove and quantify the loss of reputation claimed.

While defamation may be the established remedy for damage to reputation, authorities in contractual cases show that, in certain circumstances, the courts have been willing to compensate claimants where their reputation has been damaged as a consequence of the actions of a contractual counterparty.

In Wilson v. United Counties Bank,[1] a bankrupt customer brought a successful action for breach of contract against a bank and the House of Lords unanimously upheld recovery of damages for consequential loss of personal reputation, Viscount Finlay stating at p.120, that:

“It is difficult to see on what principle such damages might not be given if there has been an actual bankruptcy as the result of breach of contract on the part of the defendant to take steps to prevent it.  If the imputation of bankruptcy would give right to such damages in an action for libel, why should not the fact of the bankruptcy owing to the defendant’s breach of duty confer a similar right upon the plaintiff [in an action for breach of contract].”

This is an early case, however, the comparison of the right to damages in defamation and contract is illuminating.  It appears that where damage to reputation, of a sort that would not give a right to recovery in defamation, has been caused by a breach of contract, such damages should be recoverable.

The leading modern case in this area is the House of Lords decision in Malik v. BCCI[2]. The Bank, BCCI, was found to have been involved with a large-scale fraud and other criminal acts, as a result of which the claimants, both employees of the bank, lost their jobs. The employees brought successful actions against the bank for breach of their employment contracts. In the course of judgment, the House of Lords unanimously upheld the pleaded head of loss for “stigma damages”, under which the claimants claimed that their future employability had been handicapped by reason of the stigma attaching to the bank’s activities and their innocent association with them.

Mr Malik, the lead claimant, recovered damages because of a breach of the implied, mutual duty of trust and confidence.  However, put another way, it could be said that the damage was caused by Mr Malik’s association with what Lord Nicholls described as, a “dishonest and corrupt business”. 

In defence of the claim in Malik, counsel for BCCI submitted that injury to reputation is protected by the law of defamation (relying on Lonrho plc v Fayed (No.5)[3]) the boundaries of which could not be side-stepped by allowing a claim in contract. Lord Nicholls described this submission as misconceived.

Lord Nicholls observed that, with certain exceptions, defamation provides a remedy whether or not the injury to a person’s reputation causes financial loss. However, Lord Nicholls went on to note that if, as a result of the injury to his reputation a claimant does in fact suffer financial loss, this may also be recoverable in a defamation action as ‘special damage’. It was this element of ‘special damage’ that Lord Nicholls considered may also be recoverable for breach of contract.

There was no good reason, in his Lordship’s opinion, why, provided damage to reputation could be brought within the ambit of the breach of an express or an implied term of a contract, and that that breach could be proved to have caused financial loss, such loss would not be recoverable simply because the subject matter of such a breach (being harm to reputation) would more ordinarily be dealt with by the tort of defamation.

Consequently, there is authority for the proposition that “stigma damage” is a head of loss recoverable for breach of contract where there has been:

  • A breach of some term of the contract between the claimant and the defendant;
  • Actual pecuniary loss suffered by the claimant;
  • That the loss was caused by the breach; and
  • That the loss claimed is not too remote.

Malik was based on a breach of the duty of trust and confidence: a duty that does not exist in commercial relationships between banks and their customers.  However, it can be argued that in a commercial banking relationship there is an implied obligation that the bank will not engage in “dishonest and corrupt business”.  A detailed review of HBOS terms of business with commercial customers may reveal further breaches. However, it appears reasonably clear that as a consequence of the fraudulent activities of HBOS staff, there was a breach of contract.  Beyond establishing a breach, the only remaining task would be to prove actual financial loss suffered as a consequence of the damage to reputation and establishing that such loss is not too remote.

The other major task is establishing pecuniary loss: as a starting point, a claimant could produce its accounts to demonstrate a drop in sales following discovery of the breach of contract.  However, to establish that the loss was caused by that breach may be a more difficult task. An analysis as to whether other factors have influenced the financial data may also be necessary and it is likely that it would need to be established by expert evidence.

Contractual claims for loss of reputation may be rare but – as a matter of principle  –  Edmonds might have grounds to bring a claim.  Whilst establishing a breach in the face of egregious fraud might not be a great hurdle, proving actual financial loss may be a bigger obstacle to a successful claim.  In the first instance, the difficulties with a claim of this nature may make it less likely that Lloyds will be willing to provide compensation for damage to reputation so the question is whether Edmonds will risk litigating against one of the UK’s most powerful financial institutions.

By Stuart Benzie, Barrister, 2 Temple Gardens

[1] [1920] 1 AC 102

[2] [1998] 1 AC 20

[3] [1993] 1 WLR 1489, 1496

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