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Department for
UK Government Business, Energy
OFFICIAL — SENSITIVE & Industrial Strategy
Date: 15 November 2019
Director General: Justin Manson
Lead Official: Joshua Scott / Tom Aldred
Lead Official Telephone:
Recipient To Note / Comment To Approve / Decide
Andrea Leadsom x
Kelly Tolhurst x
Permanent Secretary xX
OFFICIAL SENSITIVE AND SUBJECT TO LEGAL PRIVILEGE — DO NOT FORWARD OR
SHARE WITHOUT SEEKING LEGAL ADVICE
APPROVAL FOR SETTLEMENT OFFER IN POST OFFICE LTD. (POL) LITIGATION
Summary
1. POL is preparing for a mediation meeting with the Claimants in the Group Litigation Order
(‘Project Sparrow’), which is due to begin on 27 November. In order to enter mediation
POL must have agreed how much it is prepared to offer to settle the case, and this figure
must have prior approval from BEIS Ministers and CST. This note seeks your approval to
a proposal from the POL Board to authorise settlement at a figure up to £65m. CST
approval is being sought in parallel by HMT. Kelly Tolhurst has a phone call with officials
on Monday 18 November to discuss.
2. The settlement working group of BEIS/UKGI/HMT officials met on 14 November and
agreed to support the POL board’s proposal for settlement at a figure up to £65m.
3. In line with the decision of the POL Board, any offer above £48m could be made only if it
ensures a settlement takes place and would require POL [CEO and Chair] approval, as
well as the approval of officials from BEIS and HMT.
Timing
4. Urgent - A decision is required by 22 November. It is also worth noting that the next
judgment in the Horizon case is expected imminently.
5. The Permanent Secretary’s office has confirmed that this issue is classed as ‘essential
business’ which should be allowed to continue during the pre-election period. The
scheduled mediation cannot reasonably be delayed until after the General Election without
posing significant risks to POL’s business. There is also a risk that, should POL ask to re-
schedule the mediation to a later date, this would be looked upon unfavourably, including
by the Court, and could ultimately lead to increased costs to the taxpayer.
Recommendation
6. We recommend that you:
- Approve the POL Board’s proposal for a settlement of up to £65m.
- Note POL’s mediation strategy, in particular noting the difficulties in settling
claims of claimants who have been convicted of criminal offences
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UK Government Department for
Investments Business, Energy
OFFICIAL — SENSITIVE & Industrial Strategy
Background
7. Our submission of 8 November (attached Annex A) provided the background to this
litigation and POL’s mediation strategy. Mediation is scheduled to take place on 27-28
November. It is important to note that this is not the final opportunity for mediation, but the
start of a potentially long process. It is common for settlement not to be reached at the first
attempt. However, in order to enter mediation POL must have agreed how much it is
prepared to offer to settle the case, and this figure must have prior approval from BEIS
Ministers and CST.
8. We advised that a decision seeking approval for a settlement range would be required by
22 November. Since then POL’s application for permission to appeal the first Common
Issues judgment was heard by a Court of Appeal Judge on 12 November. The Judge is
aware his decision is likely to have a bearing on the parties’ mediation strategies and has
indicated that his decision will be sent to the parties by the end of next week. The outcome
of the permission to appeal does not change this advice. If permission is granted, POL will
be in a slightly stronger position to achieve a positive outcome at the mediation, however
even if the appeal was subsequently successful POL would still be liable for damages. The
recovery expected by the Claimants would fall but would still be expected to be higher than
the proposed settlement amount, particularly after taking account of the cost of additional
trials. Conversely, if POL is refused permission to appeal, this lowers the likelihood of
success at the mediation.
9. POL’s articles require them to have shareholder approval for any spend over £50m but as
advised in our 8 November submission given the novel and contentious nature and
Managing Public Money principles, any settlement amount will require approval by CST
as well as by BEIS Ministers.
10. The POL Board sub-committee with oversight of the litigation and delegated authority to
propose to Ministers a settlement range met on 13 November and considered the attached
advice (Annex B and C) from their lawyers Herbert Smith Freehills (HSF) on possible
settlement ranges and criminal cases. That sub-committee agreed that HSF should be
given authority to settle at up to £48m but that if a full and final settlement with all the
claimants could be achieved for up to £65m then HSF could seek swift approval for a figure
up to that limit from POL’s CEO and Chair. Note that this figure would be inclusive of
interest and costs.
11. The BEIS/HMT/UKGI settlement working group also meet on 14 November to consider
that advice and the settlement range agreed by the POL Board sub-committee. HSF also
attended the initial part of that meeting to answer queries about their advice. The working
group agreed that POL should have authority to settle up to £48m but that if a full and final
settlement with all the claimants could be achieved for up to £65m then POL could seek
further BEIS/HMT agreement to that. It is proposed that Carl Creswell (BEIS) will be the
official authorised to consider, and if satisfied agree, a request from POL to settle at a
figure beyond £48m and up to £65m. A designated HMT official will be authorised to agree
on behalf of the CST.
12. POL have provided written confirmation to BEIS that on the basis of current forecasts it
will be able to fund the proposed settlement range up to £65m (Annex D). POL would
fund the settlement through expected annual profits. The opportunity cost of which is the
ability for POL to fund investments elsewhere in the business. However, it will not affect
their ability to fund the current investment programme that was agreed as part of the
existing Funding Agreement. In addition, any decision on future subsidies will be
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UK Government Department for
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OFFICIAL — SENSITIVE & Industrial Strategy
considered entirely separately as part of the Spending Review, and we will make this clear
to POL if you approve the settlement proposal.
13. HSF have confirmed that their likely strategy at the mediation will be to make a first offer
significantly below £48m and they will only look to increase it if there is a realistic prospect
of achieving a final settlement with all the claimants at the mediation.
Settlement advice
14. In broad summary the advice from HSF (Annex B) confirms their view that POL is likely
to be unsuccessful in its defence of most of the 555 claims brought as part of this litigation
and that a settlement level of between £40 and £65 million would be a good result for POL.
15. The key considerations around liability are:
a. Whether Post Office was entitled to hold the Claimants accountable for shortfalls;
b. Whether Post Office was entitled to suspend Postmasters without pay;
c. Whether Post Office was entitled to terminate the Claimants’ contracts with or
without notice;
d. Whether Post Office was in breach of its "good faith" duties and, if so, whether that
has a bearing on (a), (b) and (c) or otherwise caused the Claimants any loss.
16. Against the background of the judgment in the Common Issues trial which was heavily
critical of POL, as well as the expectation of another adverse and critical judgment in the
Horizon trial due imminently, HSF advise that while they can identify some weak claims, if
the litigation runs its full course POL will be held liable and will have to pay damages to a
large number of claimants.
17. On quantum HSF advise that in general terms the claims comprise:
a) Claims in contract for the recovery of shortfalls, loss of earnings and capital losses.
b) Claims in tort or for breach of statutory duty (e.g. for harassment, stress-related
personal injury, stigma damages and malicious prosecution); and
c) Claims in restitution (e.g. for the recovery of shortfalls repaid by Claimants without
a contractual relationship with Post Office).
18. HSF have done both a “ground-up” recoverability analysis (considering the heads of loss
claimed and likely recoverability) and a “cost of fighting and losing analysis” (looking to put
numbers around worst-case scenarios).
19. So far, the claimants have quantified their claims to total £205.6m. This figure is likely to
be understated because the claimants have not quantified all their losses and have
expressly reserved their right to amend the values claimed. On a “ground-up”
recoverability analysis the most significant driver of value is the period for which the
claimants may be able to recover lost earnings resulting from the termination of their
contracts. On the Claimants calculations this accounts for circa £148m of their claim. HSF
consider that for the purposes of their settlement advice 1 to 2 years is the most
appropriate time period. Applying that to the 494 non-convicted claimants indicates a figure
of between £30 - £38m, including recoverable costs to date. Interest would also be
recoverable which, depending on the rate awarded by the court, could bring the total value
to £37m - £48m.
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UK Government Department for
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OFFICIAL — SENSITIVE & Industrial Strategy
20. For the 61 convicted claimants, and assuming all succeed in having their convictions
overturned, HSF estimate their total claim value could range from £10.4m to £51m. This
range could increase significantly if generous awards were made in favour of the 7
claimants who received custodial sentences — bringing the value recoverable across the
convicted claimants to £40.7m - £133.7m.
21. On a “cost of fighting and losing” analysis HSF consider there is a clear risk that POL
would be worse off financially fighting the litigation all the way and losing than they would
by settling at the levels they propose. If the claimants succeeded on all their quantified
claims two years down the line POL’s liability would be in the order of between £253.8m
and £309.4m. If POL succeeded in confining post-termination losses to 2 years its liability
might be in the order of between £104.7m and £124.5m.
22. HSF have also advised around the difficulties with settling with the convicted claimants.
They have produced a separate note (Annex C) specifically covering this cohort. Broadly
their advice is to offer a global figure and leave it to the claimants to decide how to divide
it between them. Assuming the mediation is unsuccessful HSF advise that individual offers
are made to each non-convicted claimant. If the claimant rejects the offer and is
subsequently awarded the same or less than this figure at trial, they are likely to be
required to pay both their costs and those incurred by POL after the offer was made.
23. HSF advise there are significant risks in offering settlement sums to convicted claimants
as that will undermine the convictions and potentially open up POL to further claims. They
are currently proposing not to make settlement offers to convicted claimants who, apart
from a conviction, are factually in exactly the same position as non-convicted claimants
i.e. they got into difficulty because of problems with Horizon and/or other breaches of duty
owed by POL and when faced with a prosecution by POL felt they had to plead guilty to a
charge of false accounting to avoid a more serious charge of theft. HSF has advised that
this approach is unlikely to be acceptable for the convicted Claimants who are thought to
be driving the GLO and therefore reduces the chances that the settlement strategy will
succeed. UKGI has challenged HSF to re-consider whether settling with the convicted
Claimants is a viable option and to advise POL as to what the consequences would be.
Next Steps
24. Mediation is scheduled for 27-28 November. At this stage it is considered unlikely that the
settlement amount proposed will be acceptable to the claimants. However, this first
mediation is a required to kick-off the process and POL require an agreed and approved
settlement starting position and a ceiling beyond which it will not be willing to go in the
initial mediation.
25. Although no precise figure has been put forward, the indications are that the Claimants will
be starting at a level very substantially higher than the level that POL’s advisers believe
could be achieved if the litigation runs its full course. POL’s primary objective in the
mediation is to obtain a better understanding of the Claimants’ negotiating position, better
understand the full extent of the claims and to make arguments to the Claimants to support
its offer in order to reduce the Claimants’ expectations to a more realistic level. This will
inform the approach to likely subsequent mediation that is likely to take place prior to the
next trial in March 2020.
Comms Handling
26. As noted in our 8 November submission, this litigation has attracted significant media
attention in the past. Given that we are now in Purdah, the BEIS Press Office will be
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Department for
UK Government Business, Energy
Investments OFFICIAL ~ SENSITIVE & Industrial Strategy
restricted in its ability to comment if approached by media. As far as possible, we will point
any enquiries to existing PQ responses setting out the government's position and direct
media to published Purdah guidance for an explanation as to why government can
approve spend of this nature during the election. Outside of Purdah, we will prepare full
reactive media handling working closely with POL, though are likely to be somewhat
constrained by ongoing legal proceedings and mediation.
Contributors
27.BEIS POL policy and finance colleagues have been consulted on this advice and are
content with its contents. BEIS and UKGI Legal have also been consulted on the content
of this submission. Note, BEIS Legal have not advised on or given a view on the litigation
strategy proposed by HSF.