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Keith Todd Esq
ICL ple Post Office Counters Ltd
26 Finsbury Sq ° . -
London
EC2A 1DS
24 May 1999
Dear Mr Todd
POCL AUTOMATION PROJECT
POCL,; ICL Pathway, ICL and DSS have been negotiating, with the assistance ,
of HM Treasury, the withdrawal of DSS from further involvement in the
Project and certain material amendments to the existing contracts between the
parties.
Most recently, negotiations have proceeded on the basis that the Project will
be amended to introduce a new service, the Benefits Payment Service or BPS,
and the draft Heads of Agreement dated May 1999 between POCL, ICL
Pathway and ICL (document reference 207738/10582 CA991020.027 JRT
060599.2352) (the ““Heads”) reflect that position.
Ministers have decided that the Project will be scaled down and completed on
~* the basis that the claims’ of each party against the ‘others will be settled on the
following terms: .
1. The Heads as amended by Schedule 1 to this letter take effect from the
date hereof. ;
2. ; ICL Pathway will complete its obligations under the Related
Agreements, as the same‘are amended by the Heads, and as the Related
Agreements and the Heads are further amended by this letter.
3. POCL will pay ICL. Pathway the sums set out in Schedule 2 to this
letter in the manner and at the times set out in Schedule 2.
4, ICL Pathway will provide services under the Related Agreements (as
amended) until 31" March 2005 (notwithstanding any later date that
may appear in the Related Agreements or the Heads). On cessation of
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the services, POCL will have the option, subject to due payment of all
sums payable up to that date, to purchase from ICL Pathway for the
sum of £1 the Project Assets (using the definition-of that term in the I
Heads which is expressed to be “ICL’s view”), such Project Assets to
be sold “as is”, free of encumbrances including perpetual royalty free
licences of all IPRs in accordance with the Related Agreements. but
with all express or.implied warranties and conditions excluded to the
full extent permitted by law.
5... In-parallel with performance of ICL Pathway’s obligations under 2
above, and following our discussions with you, we wish to confirm our
desire to use the Core System for network banking and the provision
~ of services (via smart cards) for Modern Government. We will
therefore work with you to revive and continue the discussions on the -
Public Private Partnership which we have previously considered. It is
hoped that we can together develop a business strategy in these areas
which we can deliver through appropriate arrangements under a Public
Private Partnership in order to leverage the use of the Core System and
develop to the full its potential for the delivery of electronic business
services. 5
6. ICL Pathway shall provide such services as may be agreed by ICL
Pathway and POCL for Royal Mail, DVLA, NAS, Girobank and the
Co-Op (and other POCL clients as may be agreed) at marginal running
costs. :
7... This. letter agreement will come into effect on signature and will
"remain ‘binding on all parties unless and’ until replaced by a
comprehensive codification of the relevant ‘terms of the Related .
Agreements, the Heads and this letter (a “Codified Agreement”) which
is agreed between all the parties thereto. The. parties will use
reasonable endeavours to produce and agree such’a codification by 16
July 1999. This provision shall be without prejudice to any ‘change to
this letter, the Heads or the Related Agreements which is agreed
> “between the ‘relevant: parties in accordance with the terms of the =~”
document in question. : ,
8. In the event of any disagreement conceming the terms to be included
in the Codified Agreement, POCL and ICL Pathway will negotiate in
good faith to reach a resolution of the matter in question. If the
Managing Director of POCL (or any equivalent executive) and the
Commercial Director of ICL are unable to reach resolution of the
matter at their initial meeting to discuss the same they shall invite an
expert to give guidance and act as a facilitator. Where the matter in ‘
question is of a programme or technical nature, the expert shall be
Peter Copping of PA Consulting Group (or, if he is not available, a
person chosen in accordance with paras. 6.2 and 6.3 of Schedule 6 to
the Heads). Where the matter is of any other nature the expert shall be
an independent City solicitor to be agreed between ICL Pathway and
POCL within 7 days of the date of this: letter or, in default of
agreement, to be appointed at the request of either of them by the
President for the time being of the Law Society. ICL Pathway and
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POCL do not expect that the identification and notification of the
disagreement, reference of the -disagreement to the expert and
obtaining his guidance should take longer than 7 days.
If the parties have used all reasonable endeavours to agree the terms of
the Codified Agreement, including pursuing the dispute resolution
procedure above, but by 16-July 1999 material issues still remain
unresolved, POCL shall have the right (to be exercised by a written
notice served on ICL Pathway by 30 July 1999) to terminate the
agreement contained in this letter including, for the avoidance of
doubt, the Heads and the Related Agreements as amended. Where
-POCL does not exercise this right of termination this letter shall
continue in force. However, this shall not prevent POCL and. ICL
Pathway from agreeing to replace this letter in its entirety with an
incomplete Codified Agreement which incorporates those : matters
which have been agreed and, as regards matters which have not been
agreed, carries forward the relevant parts of the agreement contained in
this ‘letter. .In the’ event that POCL does exercise .its: right of °
termination pursuant to this paragraph, it will make a payment of £150
million to ICL Pathway less the sum of £68' million ‘referred to in
Schedule 2, paragraph 1 if, at the date of-such termination, the sum of
£68 million has already been paid to ICL Pathway.
A ‘The terms of this letter shall be in full and final settlement of all claims
and counterclaims which any of POCL, ICL, and ICL Pathway (the
“Parties”) may have against any other of them under or in connection
with the Related Agreements arising from or in connection with acts or
events which occurred or should have occurred, or statements that
were'made on or prior to the date of this letter (whether or‘not such
have been made the subject of a claim or counterclaim at: the date
hereof). Each of the parties hereby waives any rights whatsoever
which it might have against any other Party arising from or in
connection with such acts, events or statements.
~~ Words defiriéd directly or by Teférence in the Heads bear the same ¢ meaning in
this letter, unless the context otherwise requires. In the-event of any conflict’
between the terms of this letter (including its schedules), the Heads, and any of
the Related Agreements, the order of precedence shall be as follows (end so
that the document listed earlier prevails over the document listed later);
This letter (including its schedules)
The Heads
The Related Agreements
Any amendnient to this letter sliall, to be valid, be made in writing under the
hands of the signatories hereto or persons holding equivalent positions in the
department, agency or company in question. 7
In the event of any disagreement conceming the terms of, or arising under this
letter, the Heads or the Related Agreements, the Parties or such of them as are
in disagreement, shall negotiate in good faith to.reach.an amicable resolution
of the matter in question, but in default of resolution within a reasonable
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period any relevant Party (that is‘a Party having a direct interest in the matter
in question) may apply to the Courts of England & Wales for the matter to be
resolved in accordance-with English law. ° This provision shall be without
prejudice to the specific provision for the resolution of disputes relating to
Acceptance which is contained in the Heads and the provision in paragraph 8
as to the resolution of disagreements concerning terms to be included in the
Codified Agreement.
For the sake of completeness please confirm your agreement to the above
matters by signing the attached photocopy.
Yours sincerely
On original:
Signed for and on behalf of the
Post Office Counters Ltd
By:
Name: .....3./.N4 2M SE.6
Title:
GRO _
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SCHEDULE 1°
Incorporate only the paragraphs, paragraphs of Schedules and Annexes to Schedules, of the
Heads listed in column 1, subject to the amendments set out in column 2. For the avoidance of
doubt, ignore all other paragraphs, paragraphs of Schedules and Annexes to are
’ [Paragraphs and paragraphs
of Amendments:
Schedules of the Heads: . 7
Recitals Delete: recital 5
1 ICL view Delete: POCL view
2
4 Delete all and replace with the following: “The
Effective Date shall be the date that this letter
agreement is countersigned by ICL and ICL
Pathway.”
5.3. POCL view
Delete: “and the Benefit Payment Service
including, inter alia,- as to the specification,
development” and replace with “including”
5.4. POCL view
Delete “Updated POCL Agreement” (in the second
line only) and replace with “Codified Agreement”;
add after the words .“shall apply” the following
“(save that POCL and Pathway release ‘all
obligations and waive all rights they ‘may have in
Tespect. of each-.other under the Authorities
Agreement and the POCL Agreement in-respect of
BES, PAS and CMS)” and delete “[and has become
unconditional)”
“16 Delete "Schedule rw and replace with “th his letter
- agreement.”
7
8
9 Delete “Schedule 7” and replace with “the terms of
this letter agreement.” .
11.1, 11.2
13.1 Delete: “[by 31° December. 1999]” and replace with
“so as not to delay. Acceptance of the Core System
Release.”
13.2
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14.2, 14.3
16
Schedule 1
Delete the definitions of “POCL Account Service”,
“Post Office Account”, “Post Office Smartcard” and
“Post Office Smartcard Management Service”.
Delete references to DSS in definition of “Release
Authorisation Board”.
Schedule 4:
Annex 1
Annex 3
Annex 4
Delete Annex 4 except to the extent that it applies to
Orderbook transactions, girocheque transactions and
OBCS. Add forecast transaction volumes. for
EPOSS and APS as set out in the most recent
Workload Compendium adjusted to reflect reduced
footfall in post offices resulting from the elimination
of the Benefit Payment Card
Schedule 5:
Paragraphs as follows:
‘LL ICL view
1.1.2
Delete: POCL view. Continue end of paragraph
1.1.1. to read “...and the BES software code shall be
stripped out of NR2 at no additional cost to POCL.”
"I Delete all under the heading “Further Releases” and
_I teplace with the following:
“Further releases of Core System software shall. be
provided by Pathway (by way of upgrades to CSR
and/or CSR+) either:
- on the basis of appropriate time and
material charges (as set out in paragraph
20.1 of Schedule A06 of the Authorities
Agreement which shall be expanded to
include Pathway’s rates for senior
management and consultants. and to
clarify that all expenses incurred by
Pathway in connection with such further I
releases shall be paid by POCL) which
shall be invoiced monthly in arrears; or
- for a fixed price to be agreed (on
payment terms to be agreed), which
shall not be audited;
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as elected by POCL, provided that payment is made
by POCL within 30 days of receipt of invoice and
any such further releases are introduced through the
change’ control process set out in: the Related
Agreements.”
Schedule 6:
Paragraphs as follows:
ll
1.2
2
NYARwW
Schedule 6 shall be amended to refer to Acceptance
of the Core System Release only
Se
Delete: 1.1 (ii).
Link second and third séntences sby insertion of the
words “..provided ‘always that..”
Amend paragraph 3.4 such that Schedule C5 of the
Authorities Agreement (liquidated damages to a
maximum of 13 weeks delay) shall apply to
Acceptance not being achieved by 30 September
1999 and, in addition to the CS Completion Date not
being achieved by 31 March 2001 (as such date is
adjusted to reflect any delay in Acceptance), in both
cases where delay i is due to Default by ICL
Pathway.
Delete: 4(i)
Schedule 7:
Paragraphs as follows:
1 f
Amend paragraph 3.1 to read “If Acceptance or Roll
Out of the Core System is changed...”.
Delete paragraphs: 3.1.1 - (ii), . (iii) and iy and
paragraph 3.1.2.
Amend paragraph 3.1.3 to read as follows: “To the
extent that compensation ‘is not payable by POCL
under paragraph 3.1.1 of Schedule’7, or liquidated
damages. are not payable by Pathway ‘under
paragraph 3.4 of Schedule 6, costs shall lie where
they fall.”
3.)
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4.1
Annex A
Schedule 8:
5.1
Paragraphs as follows:
Incorporate definition of “CS Completion Date” and
ICL view of definition of “Project Assets” only
subject to deleting all references to BPS. Delete
temainder of paragraph 5.1 i
Schedule 10:
All paragraphs. -
Amend recital 3 such that “the Agreement” shall be
the agreement set out in this letter.
Replace paragraph 1.2.with — .
1.2 On the date of execution of the
POCH Agreement, the Guarantor shall
execute a guarantee in the same form as this
Deed, mutatis. mutandis, relating to the
obligations of Pathway and shall deliver the
same to POCL on that date together with a
legal opinion of a Japanese law firm in a
- form reasonably acceptable to POCL
_ confirming that such guarantee has been
duly .authorised and validly executed and
that the Guarantor has the capacity to enter
into an agreement governed by English law.
Schedule 11:
Replace with form of legal opinion (document
reference 207738/10582 CA 991030.269 PKWL
190499:2255).
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SCHEDULE 2:
Payment Schedule
Capital Sum Payments
ICL Pathway shall be paid a Capital Sum of £480 million. The Capital Sum is to be paid
in four equal Progress Payments, subject to retention described below,.each to be paid
upon the later to occur of (i). achieving the Completion of Roll-Out to the cumulative
number of Post Offices set out below and’ (ii) the date set out opposite the cumulative
number of Post Offices:
Cumulative number of.Post Offices I .. . Date
completed _ ;
1,800 ~ 1/11/1999
6,000 ~ 1/5/2000
12,000 1/11/2000
The number of post offices to achieve 1/3/2001
CS Completion Date
A further £68 million (in addition to the £480 million described above) will be paid to
ICL Pathway on Acceptance of the Core System.
Retention of 25% shall be withheld from each Progress Payment.
_ Upon achieving appro’
Retention Sum”) shall be converted into an availability : ss (‘the First Availability Fee”)
to be paid as described below.
At the end of each calendar month following the later to occur of (i) conversion of the
First Retention Sum or (ii) 1 January 2001, POCL shall pay to ICL Pathway in respect
thereof an amount equal to the First Retention Sum divided by the lesser of 48 and the
number of months from the date of such conversion to 31 March 2005 until the full
_ amount of the First Retention Sum is paid... -
Following the first period of three consecutive months occurring after CS Completion
Date during which in each month ICL Pathway shall have achieved service levels which
relate to the performance of (as opposed to the operation of) the Core System which
exceed the Termination Review Thresholds (as‘refeired to in Schedule A8 of the
Authorities Agreement) the sums retained on the third and fourth Progress Payments (the
“Second Retention Sum”) shall be converted into a further availability fee (“the Second
- Availability Fee”).
1
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12
13
1.4
15
1.6
7
1.8
2.0
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At the end of each calendar month following such-conversion of the Second Retention’
Sum, POCL shall pay to ICL Pathway in respect thereof an amount equal to the Second
_Retention Sum divided by the lower of 48 and the number of months from the date of
such conversion to 31 March 2005 until the full amount of the Second Retention Sum is
paid. 3
If in the event that after nine months following the CS ‘Completion Date, completion of
Roll Out (by reference to Annex 3 to Schedule 4 of the Heads as the same may have been
amended through change control) has not been achieved, then retentions from the Second
Availability Fee will be made to a maximum.sum of £4m and will be released in full -
upon completion of Roll Out.
All Progress Payments to ICL Pathway will be made within 30 days of the date on which
the Progress Payment becomes payable.
Subject to Clause 2.6 of this Schedule all payments to be made without set off: or
deduction whatsoever.
In the event that Acceptance of the Core System is delayed then payment of the next
Progress Payment following the delay will be adjusted in accordance with paragraph 3.1
of Schedule 7 of the Heads as amended in accordance with Schedule’! of this letter.
The final Progress Payment will be due on the date of completion of National Roll-Out °
or, if National Rollout has not been completed by 31/3/2001, on the CS Completion Date.
In'the event that the Roll-Out program changes from the program set out in Annex 3 to
Schedule 4 of the Heads then the relevant Progress Payments will bé-adjusted in
accordance with paragraph 3.1 of Schedule 7 of the Heads as amended in accordance
* with Schedule 1 of this letter.
The payments assume. that the following paragraphs of Schedule 7 of the “Heads shall
apply
- Paragraphs 1.1, 1.2, 1.3 and 1.5 (infrastructure program in Post Offices) -
- Paragraph 2.1. (Training)
- Paragraph 4.1 (In Office migration)
For the avoidance of doubt, the transition costs associated with converting existing
Benefits Agency customers with cards back to order books as referred to in paragraph 7
of this letter have not been taken into account in calculating the payments.
Operating payments
In addition, payments with respect to operating the Core System shall be made on.a
monthly basis from 1/4/2001 in accordance with the table below (“Monthly Operating
Fee”), The Monthly Operating Fee shall be calculated by taking the periodic payment
figure and dividing by the number of months in the period.
-2-
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21
22.
2.3
2.4
Period ‘ Periodic Payment
1/4/2001 - 31/12/2001 . £63m
1/1/2002 - 31/12/2002 £85m
1/1/2003 - 31/12/2003 £87m
1/1/2004 - 31/12/2004 . 81m -
1/1/2005 31/3/2005. £21m , ‘
If the CS Completion Date has not been achieved by 31/3/01 the Monthly Operating Fee
shall be adjusted pro rata to the number of Post Offices installed relative to the number
planned to be installed at the CS Completion Date provided however that Roll-Out has
taken place in at least 90% of those planned to be installed.. For the avoidance of doubt
amounts paid pursuant to the Capital Sum include operating, and maintenance costs
incurred Prior to 1 April 2001.
The payments assume an RPI of 2.5% from the date of this letter until 31/3/2005, In the
event that RPI is not equal to 2.5% over this period, the payments will be adjusted to to take
into account the actual rate.
The parties acknowledge that the Monthly Operating Fees include:
(i) - a Transaction volume cost element of 7% of the amount in the table above, which
is based upon the Transaction volume forecast as set out in Annex 4 to Schedule 4
of the Heads for the period up to 31/03/2005; and
Gi) —_an Outlet cost element of 32% of the amount in the table above, which is based
upon the parties’ intention that Pathway will roll out the Core System to 18,573
Outlets.
The amount of the Transaction volume cost element shall be adjusted for each month by
the proportion of the actual Transaction volume (calculated in accordance with Annex 1
to Schedule 4 of the Heads) to the Transaction volume forecast in the month in question,
and the Outlet cost element will be adjusted for each month by the proportion which the
:,actual number of Outlets to which services are being provided during such month bears to -
18,573.
In addition, POCL shall pay for the cost of Pathway ‘carrying out operational business
change in excess of the limits set out in the Related Agreements on an incremental basis
at marginal cost plus 10%.
The payments are based on the services comprised in the Core System Release. For the
avoidance of doubt the payments assume costs relating to all aspects of the system
including maintenance of the Post Office’ and data centre infrastructure including help
desk support, all telecoms charges including line costs and usage charges, and
Management Information Systems.
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2.5
2.6
ICL Pathway’ will be subject to service level’ commitments and liquidated damages
according to the Related Agreements and that these will be set off against payment. The
service level commitments and liquidated damages relating to Counter Transaction Times
will need to be adjusted to take reasonable account of the exclusion of BES. -
POCL’s rights to set off any sum against payments to Pathway Shall be as set out by
Clause 804 of the Authorities Agreement, save that POCL shall not be entitled to set off
any sum due other than under this letter agreement.
“