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UK Government Department for
Business, Energy
Investments & Industrial Strategy
Date: 15 November 2019
Director General: Justin Manson
Lead Official: Joshua Scot
Lead Official Telephone:
Recipient To Note / Comment To Approve / Decide
Andrea Leadsom x
Kelly Tolhurst x
Special Advisors
Permanent Secretary x
Tom Taylor 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 Horizon litigation
case 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.
Timing
3. Urgent - A decision is required by 22 November.
4. Perm Sec’s Office have 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
5. 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
Background
6. Our submission of 8" November 2019 (attached Annex A) provided the background to
this litigation and POL’s mediation strategy. We advised that a decision seeking approval
to a settlement range would be required by 22 November 2019. Since then POL’s
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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 on whether or not to grant permission to appeal is likely to have a bearing on the
parties mediation strategy and has indicated that his decision will be sent to the parties
next week. If permission is granted and POL’s appeal is successful, POL will still be
liable for damages. The recovery expected by the Claimants would fall but the eventual
outcome would still be expected to be higher than the proposed settlement amount,
particularly after taking account of the cost of additional trials.
7. 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.
Mediation
8. The POL Board sub-committee with oversight of the litigation and delegated authority to
decide 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 the sub-committee.
9. 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 ata
figure beyond £48m and up to £65m.
10. 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 B).
11. 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
12. In broad summary the advice from HSF (Annex C) 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.
13. 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;
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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.
14. Against the background of the judgement in the Common Issues trial which was heavily
critical of POL, the expectation of another adverse and critical judgement 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.
15. 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).
16. 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).
17. So far, the claimants have quantified their claims 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 they account for circa £148m of their claim. HSF
consider that for the purposes of their settlement advice a 1-2 year loss of earnings
period is the best proxy. Applying that to the non-convicted claimants (494) 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.
18. For the convicted claimants (61 cases) then 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.
19. 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.
20. HSF have also advised around the difficulties with settling with the convicted claimants.
The have produced a separate note (Annex D) specifically covering this cohort. Broadly
their advice is to leave it to the claimants to decide how to divide any settlement sum
between them. They advise there are significant risks in offering settlement sums to
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convicted claimants as that will undermine the convictions. Assuming the
mediation is unsuccessful HSF advise that individual offers should be made to each non-
convicted claimant which if that claimant does not better at trial means they are at risk of
paying POL's costs incurred after the offer was made. We consider further thought needs
to be given to this strategy, particularly because it is likely POL could refuse to settle with
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 their approach is likely to be unacceptable
for the convicted Claimants and therefore reduces the chances that the mediation 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
21. 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, POL
cannot enter the mediation without an agreed and approved settlement strategy —
specifically a starting position and a ceiling beyond which it will not be willing to go in the
initial mediation.
22. 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 prior to the next trial in
March 2020 or any settlement talks that take place in the meantime.
Comms Handling
23. 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
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
24. 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.