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FAX TRANSMISSION
To: POCL
Atten\Ref Joe Ashton “Fes ‘¢
CO: Andrew Davies, Project Mentors (Copy by post,
George McCorkell, BA Fax No.:!
Dave Miller, Horizon
Ron Powell, DSS
Mena Rego, Horizon Fax No.
David Sibbick, DTI Fax No
From, Hamish Sandison
Client BAJPOCL
Matter: Counterspace Dispute
Account No: BPOCL/0001
Date: 1 September 1998
Time:
Number of pages (including this page) : ti
Note This fax is intended for the named addresses only. br conteins information which may be confidentiel and
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GRO!
Message:
Please see attached final version of Hamish’s Memorandum “A Recommended
Negotiation Strategy”.
EC Office 209 Avcne Louse, 1050 Grossi, Relea Teleyhone
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Our Ref: 90 Fetter Lane
MEMORANDUM tendon ECan UP
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TO: Pat Kelsey, BA/POCL Programme, Head of Contracts Wore.
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cc: Joe Ashton, PO Legal Services
Andrew Davies, Project Mentors
Sarah Graham, DSS
George McCorkell, BA
Dave Miller, Horizon panne
Marilynne Morgan, DSS DHaiss
Ron Powell, DSS Dmcapmose
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FROM: Hamish Sandison, Bird & Bird owanececk
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RE: The Horizon Project - A Recommended Negotiation Strategy — cwree
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1 I have been asked as the Joint Programme Lawyer to summarise my V$ACrok
recommendations for a negotiating strategy to place the DSS and POCL in the best possible Haein
position for the negotiations with ICL Pathway which will follow.an inter-ministerial c)resm
isi ‘ ‘ OCI Cook
decision on the way forward for the Horizon project. acerca
MR Hite
“2. My recommendations cover the following issues: . Chow
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. negotiation versus litigation; Wester
. outline of a two-stage negotiation strategy; one
. preparatory activities, FAReeve
. stage 1 of negotiations; 1S
* stage 2 of negotiations; an Fane arts
. the agreement stage; NSP Blundell
. the litigation stage; and comtints
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° the Government as plaintiff or defendant. KTC Amid
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1 RABBPOCLIOOIIMEMO-KELSEY LAS Sweet
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Negotiation or Litigation?
. there is no question of an immediate writ being issued by either of the public
sector parties; and
. a negotiated settlement which avoids litigation is the preferred route for
achieving whichever option is chosen; and
. we see litigation as a valuable means of achieving a negotiated settlement,
but not as an end in itself,
I hope it can be agreed at the outset that it would be misleading to refer to these activities
as part of a “litigation strategy” or a “litigation plan,” all of which would give an entirely
false impression that we were committed to litigation, Instead, I believe that it is much more
accurate to refer to these activities as preparatory steps in a negotiation strategy which S
includes litigation as a last resort in the event that a negotiated settlement cannot be agreed
on acceptable terms with ICL Pathway.
4 T also suggest, as a matter of principle, that litigation should not be threatened unless
the party making the threat is prepared to carry it out.
Outline of a Two-Stage Negotiation Strategy
5. With these important preliminaries out of the way, I have invited the public sector
parties to consider a two-stage negotiation strategy which might include the following main
phases of activity:
(1) Preparatory activitics, including establishing a standstill agreement, and
preparing for possible litigation as a last resort; and
(2) Stage 1 of negotiations: following a public sector decision in principle on
the way forward, communicating that decision to ICL Pathway for them to
accept or reject in principle; and
. (3) Stage 2 of negotiations: assuming that ICL Pathway accept the decision in
principle (if not, you could go straight to 4(b) below), conducting detailed
discussions with ICL Pathway to agree terms for implementing the decision
in principle; and .
(4a) Agreement stage: if the negotiated terms are considered acceptable,
endorsing those terms in a jointly agreed settlement document; or
(4b) Litigation stage: if the negotiated terms are not considered acceptable, or
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3. In discussion with colleagues at the DSS and POCL, a number of “pre-litigation
activities” have been mentioned which might form part of a public sector negotiating
strategy. However, for a number of reasons, including the >
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if ICL Pathway rejects the decision in principle and further negotiation is not
considered worthwhile, commencing legal proceedings against ICL Pathway
as soon as the standstill agreement has expired.
These phases of activity are described in greater detail below.
6. As regards the timing for our recommended negotiation strategy, I believe that the
following target dates are achievable and should be in our sights:
v)
. standstill agreement in place before the end of August. -
. decision in principle on the way forward - early September.
. meeting with ICL Pathway to communicate that decision (Stage I of
negotiations) - mid September,
. complete detailed negotiations and report back (Stage 2 of negotiations) -
mid October.
. Public announcement of agreed settlement or commencement of litigation -
_ end of October.
(1) Preparatory Activities
7. A number of activities are required to prepare the DSS and POCL for substantive
negotiations with ICL Pathway. These include:
. issuing a letter to notify Tet Pathway of the expiry of the 13-week cure
period (already sent on August 14th);
. sending a holding letter from the Secretary of State (already sent on August
20th);
. establishing a standstill agreement (already drafted by Bird & Bird and
awaiting DSS/POCL approval);
. preparing more generally for possible litigation as a last resort, including
commissioning further fact-finding work by Project Mentors, appointing
counsel and gathering documents in support of a writ and statement of claim
- against ICL Pathway (already under way).
(a) The thirteen week cure letter (14 August 1998)
8. The purpose of this letter was:
. to note the expiry of the thirteen week cure period at the end which the DSS
is entitled to terminate its agreement with ICL Pathway;
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. to make clear that it is not the Department’s present intention to terminate
its agreement with ICL Pathway or to exercise any other remedy to which
it is entitled, such as liquidated damages for ICL Pathway’s delay; and
. to reserve all future rights and remedies in respect of ICL Pathway’s breach.
9. In line with previous practice, the letter was sent on 14 August 1998 by you, as joint
Head of Contracts for the BA/POCL Programme (althaugh making clear that you were
writing only on behalf of the DSS), to John Bennett; Managing Director of ICL Pathway.
As on previous occasions, you also telephoned Tony Oppenheim, John Bennett's number
two, to make clear that the letter was issued as a necessary legal formality, and not to signal
any imminent legal action. Thus, while I expect we shall receive a formal written rebuttal
in due course, there is no reason to believe that your letter will precipitate a more
aggressive response from ICL Pathway. Even viewed as a legal formality, however, the
thirteen week cure letter will still have served a useful purpose, namely, to place the DSS
ina position where - should the Secretary of State so decide - it would be able to terminate
its contract with ICL Pathway by notice with immediate effect, rather than by means of a
notice which could not under the contract take effect for a further thirteen weeks,
(b) The Secretary of State’s reply to Keith Todd (20 August 1998)
10. The purpose of this letter was to reply to Keith Todd’s previous letter requesting an
urgent government decision on the way forward for the Horizon project. As sent, the reply:
. restated the Department’s commitment to an early public sector decision;
. explained that, with the government reshuffle and holiday commitments
following immediately thereafter, it was not possible or sensible to arrive at
a public sector decision before the summer recess; and
. expressed the hope that the public sector parties would be in a position to
communicate their decision in principle to ICL Pathway by mid-September.
11, Inthis way, the Secretary of State’s letter advanced two important wider objectives.
First, it presented a reasoned defence against any potential claim by ICL Pathway that the
DSS and POCL have refused to negotiate in good faith (as required by the Related
Agreements) in response to the commercial proposals submitted by ICL Pathway late fast
year for renegotiating the contractual baseline between the parties. (Obviously, however,
as I have previously advised, this defence cannot be sustained indefinitely, and the public
sector's risk of exposure to liability for ICL Pathway’s additional costs for failure to
negotiate in good faith increases with each month, as do the costs themselves. I for one do
not feel confident trying to justify the government’s further delay much beyond the end of
the normal summer holiday period in early September.) .
12. Secondly, the Secretary of State’s reply to Keith Todd set the scene for the
substantive negotiations with ICL Pathway which are to follow the public sector's decision
in principle. It is important to note, however, that - quite rightly - the Secretary of State’s
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. letter gave no specifics about the negotiating process. Thus, if and when the negotiation
strategy outlined below - or anything like it - is agreed, it will be important in my view to
give ICL Pathway some advance warning of what is proposed. For convenience, I suggest
that the negotiating process could best be outlined in a letter from you to ICL Pathway to
accompany the proposed standstill agreement.
(c) —_ Standstill Agreement
13. Legitimate concems have been expressed that, fearing an unfavourable public sector
decision, ICL Pathway might see it in their interests to launch pre-emptive litigation against
the DSS or POCL or both of them. I regard these concerns as premature: as fong as a
favourable decision is still on the cards, I consider it highly improbable - not to say irrational VA
~ for ICL Pathway to sue the decision-makers. Nevertheless, the possibility of pre-emptive
litigation by ICL Pathway cannot be ruled out; rational behaviour is not guaranteed; and I
would not be prepared to advise the DSS or POCL that defensive action was unnecessary.
14, In principle, two forms of defensive action are available against a pre-emptive strike
by ICL Pathway. The first form of defence is, of course, attack: to sue ICL Pathway first.
As far as I am aware, there is no support for this option. In the first place, it is not practical:
neither the DSS nor POCL is ready to mount a properly prepared and fully evidenced
statement of claim, although a short form writ without statement of claim could be issued
within a matter of days. Second, and more important, it would seem to be wrong in
principle, as well as difficult to defend publicly, for the public sector parties to bring legal
proceedings against a major contractor without first using all reasonable endeavours to reach
a negotiated settlement of the underlying dispute. For these reasons, I cannot recommend
immediate litigation by the DSS or POCL to avoid pre-emptive litigation by ICL Pathway.
15. The second form of defence is what I have called a “standstill agreement,” also
known as a “moratorium agreement”. The essence of this approach is that all the parties to
a standstill or moratorium agreement commit not to sue one another for a specified period
of time while they are attempting to negotiate an agreed settlement of any differences
between them. In addition, among other things, the parties usually agree to continue
performing their contractual obligations and to keep their discussions confidential. At the
end of the specified period, if agreement has not been reached, they are free to sue each
other; but in the meantime, litigation over the dispute is prohibited, and indeed any attempt
by one party to sue the other party during this period can be stayed by the courts. However,
it is perfectly possible for the parties to agree that a separate dispute (such as POCL’s
current counterspace dispute with ICL Pathway about who is responsible for modifying post
office counters to make them fit for installing the necessary computer equipment) should be
dealt with separately, whether by means of arbitration or otherwise: the proposed standstill
agreement has been drafted accordingly so as to ensure it does not interfere in any way with
POCL’s counterspace arbitration procedure,
16. We have used a standstill agreement of this sort with considerable success on
numerous occasions, not only to achieve a negotiated termination of a contract without
litigation, but also to facilitate a contested renegotiation of an ongoing contract. What it
does is to create a less pressured breathing space within which the parties, without fear of
pre-emptive litigation, can seek to resolve their differences, For these reasons, we cannot
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recommend it too highly in the circumstances facing us here, where there are legitimate
concerns about pre-emptive litigation by ICL Pathway, and the public sector parties are
neither ready nor willing to launch pre-emptive litigation themselves. Indeed, I would have
to say that we consider a standstill agreement of some sort to be a necessary pre-condition
of the two stage negotiating strategy recommended in this Memorandum, especially since
the risk of pre-emptive action by ICL Pathway rises significantly after'a decision in principle
has been communicated to ICL Pathway (Stage 1) and before detailed negotiations have
been completed (Stage 2).
17. By the same token, I consider it vitally important that POCL agrees to join in any
standstill agreement established with ICL Pathway. Of course, a standstill agreement
between the DSS and ICL Pathway alone would not be without some value. Nevertheless,
if POCL did not join in, then ICL Pathway would be free to sue POCL. Moreover, recent
communications from Keith Todd indicate that they believe they have identified weaknesses
in POCL’s performance which would justify a claim for damages against POCL on its own.
Thus, without a tripartite standstill agreement, I believe that POCL would be very much at
risk,
18. A draft standstill agreement is now ready, and has been circulated to the DSS and
POCL for review and comments. Once approved by both the public sector parties, we would
aim to send it to ICL Pathway with a cover letter from you which (as suggested above)
would set out the proposed negotiating process. We would, of course, seek approval of such
a letter by the DSS and POCL before it was sent out. As detailed below, we consider it
essential that the standstill agreement is in place before substantive negotiations with Ic
Pathway (Le. Stage 1) are commenced.
(d) Preparing for litigation as a last resort
19. In order to sustain a credible negotiating strategy of any kind, our strong advice is
that the public sector parties must be prepared to sue JCL Pathway in the event that a
negotiated settlement cannot be agreed on acceptable terms. This advice applies whichever
option is chosen for the Horizon project.
20. While reserving the Secretary of State’s position to decide whether a threat of
litigation should be made or indeed carried out, the DSS has agreed that preparations for
litigation as a last resort should be started immediately and has instructed us to carry out the
necessary preparations. POCL has also been invited to participate in these preparations.
Even if (as we all hope) litigation is never required, I am sure that the costs of preparing for
litigation will not be wasted, since the stronger the case we preparé for litigation, the
stronger our position will be in negotiations with ICL Pathway, who are likely to settle on
acceptable terms (or at all) only if they believe that they cannot achieve more favourable
terms through litigation.
21. Inorder to prepare for possible litigation, at least three parallel streams of work are
required. These include:
. commissioning further fact-finding work by Project Mentors, focusing
particularly on the accusations levelled over recent months by ICL Pathway
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against the public sector parties;
. appointing counsel, including a QC and a junior barrister acceptable to both
public sector parties;
. collecting the documents necessary to support a writ and statement of claim
against ICL Pathway.
22. Each of these streams of work is described in greater detail below in separate
sections of this Memorandum.
(2) Stage 1 of Negotiations
23. As we see it, the first stage of substantive negotiations with ICL Pathway must
involve at a minimum a decision in principle on the way forward for the Horizon project,
and a communication of that decision to ICL Pathway for them to accept or reject in
principle. Because further time would be available for detailed negotiations at Stage 2, ICL
Pathway would only need to be given a few days to accept or reject the decision in principle.
And because there is a real risk that any rejection by ICL Pathway might be followed by
litigation against the DSS or POCL or both of them, we consider it essential that the
standstill agreement described above is agreed by all the parties before ICL Pathway is told
of the decision in principle.
24, — Toffer no comment here on the choice of a way forward for the Horizon project: I
have advised previously on the legal implications of the various options under discussion.
As for communicating any decision to ICL Pathway, I envisage that this will be done at the
highest level, both at a face-to-face meeting and also in writing. This communication should
also define the parameters for the Stage 2 negotiion, including a fixed timetable and any
financial or other limitations on the public sector’s willingness to negotiate terms. In
addition, if authorised, ICL Pathway should be left in no doubt that the public sector parties
are prepared to litigate if acceptable terms are not agreed at the end of Stage 2 or if the
decision in principle is rejected outright before the beginning of Stage 2.
(3) Stage 2 of Negotiations
25. — IFICL Pathway accept the decision in principle at Stage 1, or at least do not reject
it outright, we can see no alternative to a further stage of detailed discussions to agree terms
for implementing the decision in principle, We think this is unavoidable even if the decision
in principle is to terminate the entire project (Option 3 in the Report of the Treasury-led
Working Group): even under a termination scenario, it will still be necessary to negotiate
who pays what to whom (will ICL Pathway compensate the public sector parties? if so, how
much? will the public sector parties compensate ICL Pathway?) as well as all the other
details for an orderly run down of this massive project, e.g,, the return of data to the public
sector parties, the exercise of options to buy back assets used by ICL Pathway to provide
the services, etc.
26, _In the case of Option 1 (continuing the project as is) and Option 2 (continuing the
project but withaut the benefit payment card elements), the need for a further stage of
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detailed discussions after Stage 1 is self-evident. Quite apart from negotiating the shape of
each option in detail, there is a list of 10 to 20 outstanding commerciaV/technical issues
between the parties which have been on hold pending the outcome of the Treasury-led
Review: it will be necessary - as well as very much in the interests of the public sector
Parties - to resolve these outstanding issues before a final decision to proceed or not is made
at the end of Stage 2. .
27, If ICL Pathway rejected the decision in principle at Stage 1, and if litigation was
authorised, the public sector parties could proceed to suc as soon as the standstill agreement
expired, Alternatively, and this might be more attractive in the case of Options 1 and 2, you
could first attempt to negotiate an agreed termination of the project (i.e. Option 3) before
proceeding to terminate and sue if those negotiations did not produce acceptable terms for
an agreed termination at the end of Stage 2. In the case of Option 3, if ICL Pathway rejected
the decision in principle at Stage 1, it may be that there would not be any point in
proceeding to Stage 2 of negotiations; the alternative would be to proceed immediately to
terminate and sue.
28. Asnoted above, any negotiations under Stage 2 would be conducted within a fixed
timetable and within strictly defined financial and other limitations, some or all of which
could be communicated to ICL Pathway at Stage 1. We do not envisage an open-ended
negotiation, and we recommend that the degree of discretion to be given to the negotiating
team is clearly defined in advance by the public sector parties.
(42) The Agreement Stage
29. At the end of Stage 2, we envisage that the negotiating team will report back to the
public sector parties on the outcome of its negotiations with ICL Pathway. This will give
everyone concemed an opportunity to decide whether the terms on which the decision in
Principle can be implemented are acceptable or not. If these erms were considered
acceptable, they would be embodied in agreed amendments to the Related Agreements (in
the case of Options 1 and 2) or in an agreed termination agreement (in the case of Option
3). In both cases, the standstill agreement would then expire upon execution of the agreed
settlement documentation,
30, If the negotiated terms were not considered acceptable, and if litigation was
authorised, the public sector parties would then proceed to the litigation stage described
below. Alternatively, in the case of Options I and 2, if the negotiated terms were not
considered acceptable at the end of Stage 2, you could first proceed if you wished to a
further stage of negotiation to attempt to negotiate an agreed termination of the project
before proceeding to the litigation stage. In the case of Option 3, if the negotiated terms
were not considered acceptable at the end of Stage 2, there would seem to be little point in
holding a further stage of negotiation, and we assume that you would proceed immediately
to terminate and sue.
(4b) The Litigation Stage
31. __ Ifthe terms negotiated at Stage 2 or any subsequent stage of negotiations were not
considered acceptable, or if ICL Pathway rejected the decision in principle at Stage 1 and
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a further stage of negotiations was not considered worthwhile, the public sector parties
‘would then terminate the Related Agreements and commence legal proceedings against ICL
Pathway as soon as the standstill agreement expired. The mechanics of termination are
described in my separate Memorandum of today’s date on the "Contracts with ICL
Pathway" (see paragraphs 13-14).
32. For the reasons given in paragraphs 41-42 below, we recommend that the public
sector parties should seek to position themselves as the plaintiffs in any litigation against
ICL Pathway. This means that all the necessary activities (described elsewhere in this
Memorandum) to prepare for litigation must be taken before the standstill agreement
expires, It will also be necessary to ensure that the public sector’s writ is issued before ICL
Pathway is able to issue its own,
33. ‘In suing ICL Pathway, the public sector parties could claim damages up to the
financial limit of £200m in the Related Agreements,
Project Mentors/Expert Assistance
34. Project Mentors - acting as our subcontractors - were jointly commissioned by the
DSS and POCL earlier this year to consider who was responsible for ICL Pathway’s failure
to complete Operational Trial by the contractual due date of 21 November 1997. They
found that ICL Pathway were largely responsible for project delays leading up to the
November 21st deadline, and that the public sector parties had neither caused nor
significantly contributed to them. However, this review was limited to delays occurring
after the replan agreed by all parties in February 1997. Since then, Project Mentors has
been jointly commissioned to do some further work to assess the accusations by Keith Todd
in a paper entitled “Examples of Problems Facing Pathway” which was sent to Peter
Mathison on 1 June 1998.
35. I We now propose and the DSS have agreed that Project Mentors’ remit should be
broadened to provide expert assistance generally in relation to any possible litigation by or
against ICL Pathway. In the first place, their new remit would include an assessment of
delays accurring prior fo the February 1997 replan, focusing in particular on those areas
where ICL Pathway allege culpability by the public sector parties. In addition, Project
Mentors would be expected to assess the strengths and weaknesses of the public sector’s
case in general..This work is alreay under way.
36, [believe that Project Mentors’ assistance is vital, not just in preparing for possible
litigation, but also in strengthening the public sector's hand in advance of negotiations with
ICL Pathway. I also believe - and the DSS agrees - that POCL should be invited to
participate in their work. POCL has already replied favourably to Peter Crahan’s invitation
to support Project Mentors’ pre-February 1997 replan work, and POCL has been invited to
support their wider remit in relation to possible litigation generally.
Appointment of Counsel
37. It is necessary that counsel - including one QC and one junior barrister - should be
appointed as soon as possible to assist us in preparing for possible litigation. The DSS has
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agreed, and we have discussed some names with them, since the junior barvister should be
on their approved list of panel counsel, while the senior barrister needs to be nominated by
the Attomey General (who could also approve a junior if none of the panel were available).
In addition, I would wish to canvass POCL’s views and, if at all possible, select junior and
senior counsel who were acceptable to POCL as well as to the DSS, We are taking this
forward over the next few days with a view to appointing counsel with the approval of both
public sector parties at the earliest possible time.
38, — Inaddition, the DSS has requested and we agree that as soon as counsel have been
appointed, they should be invited to give an opinion on the strength of the public sector's
case, including the quantum of damages recoverable by the public sector parties. This work
needs to be built into the overall timetable.
Collection of Documents
39. In view of the vast amount of documentation relating to this project, we have
proposed and the DSS has agreed that we should start work immediately to gather the
documentation needed to support a writ and statement of claim in any possible litigation
against ICL Pathway. It was agreed that we should work closely on this task with Project
Mentors (who have a good knowledge of the project documentation as a result of their
previous investigations) and with the BA/POCL Contracts Office (who have probably the
best collection of documents relating to the contract procurement and management process).
This work is already under way.
40. Again, in the hope that our recommended negotiation strategy meets with POCL's
approval, I have invited POCL to assist us with our document collection work.
Plaintiff or Defendant?
41, Ihave reviewed the question of whether it is important to position the public sector
Parties as the plaintiffs in any litigation against ICL Pathway, and I accept that it makes no
difference from a strictly legal point of view: the DSS and POCL would enjoy precisely the
same rights - substantive and procedural - as plaintiff or defendant.
42. Froma presentational point of view, however, I would argue - as I have consistently
advised the BA/POCL programme - that it is vitally important for the public sector parties
to position themselves as the plaintiffs; if they were to be publicly identified as the
defendants in a “wrongful termination" action, I suggest that this would be a public relations
victory for ICL Pathway which even a subsequent legal victory for the DSS and POCL
could not completely reverse,
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