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BOARD DECISION PAPER
Postmaster Litigation
CONFIDENTIAL AND SUBJECT TO LEGAL PROFESSIONAL PRIVILEGE
Author: Jane MacLeod Meeting date: 26 September 2017
Executive Summary
Context
There are now 522 applicants to the litigation. These include both current (103) and
former (346) postmasters; DMB employees (3), and postmaster assistants (29). Some
of them have criminal convictions; some have been the subject of debt collection
proceedings; some of them have previously signed settlement agreements with Post
Office (c115 - eg on exit as a result of network transformation), and Post Office would
argue that the claims of many are time barred (193). As a result, the range of claims
against Post Office arise from very different factual circumstances.
The High Court determined in January 2017 that the best way to manage this variety
of claims was via the Group Litigation Order. The next procedural step in the Postmaster
Litigation is the Case Management Conference (‘CMC’) to be held on 19 October 2017.
At this hearing, a Judge will decide on the strategic direction of the Group Litigation for
the next 6 - 24 months following representations from both parties.
There are a therefore a series of strategic decisions to be made as to how Post Office
should approach the CMC. These are set out below.
Questions addressed in this report
1. What are the options regarding the ongoing management of the case?
2. What are the risks of the various options and how would we mitigate them
3. What is our recommendation and why?
Conclusion
1. Post Office has various options as to the approach it takes at the CMC. These are
not without risk. In essence there are 2 key themes emerging from the documents
filed by Freeths:
« whether Horizon is robust and accurately records branch transactions, and
e whether the postmaster contract is fair and supports Post Office's current
operating practices. Of particular concern is the question as whether any terms
should be implied into the postmaster contract over and above those which are
explicitly set out. Freeths argue that there are a large number of terms which
should be implied, and that Post Office has been in breach of some or all of
these as regards the applicants.
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There is a strategic choice as to the sequence in which these arguments are
addressed.
2. It is the recommendation of Post Office’s legal team (and in particular of our QC
Anthony de Garr Robinson) that we should seek to have the issue of the postmaster
contract addressed first.
3. The rationale for this is that although alleged issues with Horizon have to date
caused the most publicity, the question as to whether Horizon is robust and
accurately records branch transactions is a factual one. Even if Horizon is found to
be robust, it is only possible for the applicants to succeed if they can also show
that the contract contains additional implied terms regarding Horizon.
4. Accordingly, addressing the question of the scope of the implied terms first, allows
the Court to determine whether Post Office has in fact breached those terms. If
Post Office is successful in limiting the scope of the proposed implied terms, then
many of the Applicants’ claims will fail.
Input Sought
The Board is asked to endorse the recommended strategy and the risks inherent in it.
The Report
What are the options regarding the ongoing management of the case?
5. There are 3 major strategic questions that will be addressed through the litigation,
together with a number of smaller issues. The sequence in which the following
questions are addressed is critical:
e whether Horizon is robust and accurately records branch transactions;
« whether the postmaster contract is fair and supports Post Office's current
operating practices; and
e whether all of the applicants should in fact be party to the litigation or whether
there are legitimate legal reasons for excluding them.
6. In.addition, it may be possible to defer the court’s determination of the key issues
for some time; and of course it would be possible for Post Office to seek to settle
the litigation outside of the Court process.
7. Set out in Appendix 1 is a high level summary of these options, together with initial
thoughts on the risks and benefits of each option. The legal team recommend
addressing the issues relating to the Postmaster contract as a priority. In parallel
we will seek to address the issue as to whether all the applicants should properly
be parties to the litigation.
What are the issues relating to the postmaster contract?
8. Freeths have argued that some 20 separate terms should be implied into the
postmaster contract. These are set out in Appendix [2] and for convenience we
have grouped like terms together, although this is not how they are set out in the
pleadings.
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9. We believe that the most damaging group of terms sought to be implied are those
that seek to reverse the burden of proof so as to make Post Office responsible for
investigating shortfalls. Post Office’s contention is that only the Postmaster can
know what happens in branch, such that the Postmaster is best placed to deal with
a shortfall. This is particularly the case where postmasters actively seek to conceal
losses.
10. The Post Office position is that we should agree that only the following 2 duties are
implied into the contract:
e Each party would refrain from taking steps that would inhibit or prevent the
other party from complying with its obligations under or by virtue of the
contract.
e ach party would provide the other with such reasonable cooperation as was
necessary to the performance of that other's obligations under or by virtue of
the contract.
What is our recommendation and why?
11. Post Office’s legal team believe that resolution of the issues regarding the proper
interpretation of the contract and whether these terms should be implied is critical
to the effective management of the case. The question as to whether Horizon is
robust and accurately records branch transactions is a factual one. However even
if Horizon is found to be robust, it is only possible for the applicants to succeed if
they can also show that the contract contains additional implied terms regarding
Horizon, and that Post Office has beached those implied terms.
12. Accordingly, if the contractual issue could. be resolved first, it would make it
significantly more difficult for the Claimants to sustain their claims, as those claims
are founded on the basis of the additional implied terms.
13. Even if the court’s determination of the contract issues is delayed for a period,
these issues will remain and have an increasing impact on Post Office's ability to
continue to operate the business pending resolution. Already there is an increasing
number of postmasters who have challenged Post Office’s ability to exercise normal
‘BAU’ remedies where shortfalls have arisen, and these 'BAU' processes are now
having to be supervised on a day-to-day basis by the legal team.
What are the risks and mitigations of the various options?
14. Although a finding that the other duties should be implied into the contract would
potentially impose significant cost and burden onto Post Office, the reversal of the
burden of proof would make it almost impossible for Post Office to ever determine
the cause of a shortfall, and therefore be able to recover that shortfall from the
agent.
15. Post Office’ whole framework is built on the notion of the postmaster as ‘agent
who therefore owes fiduciary duties to Post Office to account for cash provided by
Post Office and held in branch. A reversal of the burden of proof would therefore
have a substantial impact on the current operating model for the agency network
and require on or more of the following:
e substantial changes to the design and operation of Horizon;
« the restructure of the legal relationship between Post Office and agent, which
would impact the whole agency network;
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* acompletely different approach and legal basis for the provision of cash and
risk allocation in the network;
e a review and likely change to the commercial and remuneration model for
postmasters to balance the shift of risk to Post Office; and / or
e asubstantial increase in the numbers of support staff so that discrepancies may
be investigated by Post Office.
16. This may also trigger further claims from other postmasters looking to recover
shortfalls they have paid to Post Office over the last decade.
17. It is unlikely that any decision on the key legal questions would be made before
late 2018, and given the significance of the matter and that this is a question of
law, it is highly likely that Post Office would seek to appeal an adverse finding,
such that the impact may not crystallise for 12-24 months. Even then the Court's
decision will only be directly binding on those postmasters in the Group Action and
so Post Office will have options as to how to translate the judgment into operational
and commercial change. This creates the opportunity to further mitigate some of
the effects of an adverse judgment.
18. Included in Appendix 2 under each group of implied duties is a non-exhaustive list
of possible responses which we have identified to date should Freeths be successful
in arguing that one or more of the specific terms should be implied into the
contract. Many of these possible responses will be unacceptable. Over the next 6-
12 months further work will be undertaken to develop and cost appropriate plans
and we will brief the Board on these ahead of the hearings on the substantive
issues.
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Appendix 1
TACTICAL OPTIONS FOR THE CONDUCT OF THE LITIGATION
OPTION
BENEFITS
RISKS
1. Focus on Horizon
Push the Court to address at an
early stage whether Horizon is
robust and accurately records
branch transactions.
Recommendation: We do not
believe it is possible to address this
issue without first establishing Post
Office's legal obligations in relation
to Horizon (see Option 2).
« A successful Court decision on this issue would
lessen the strength of all Claimants’ claims
(though not as much as Option 2 - see below).
e Horizon is the high profile issue that attracts the
media attention - a successful result would
reduce media noise / chatter in the network.
« Losing this point is not fatal to Post Office's
overall legal case as it may still be successful on
the contractual issues (Option 2) and / or on
the facts of any individual case.
* Losing this point is unlikely to cause an
existential problem for Post Office. It will
however create the need to rapidly fix any
identified problems in Horizon (or migrate to a
new system) and that will come with a
significant cost and create major short-term
commercial problems.
«. The Claimants cannot just point the finger at
Horizon with no legal basis for their
complaints. They need to ground their
claims in the postmaster contracts by
showing that there was some legal obligation
on Post Office to maintain Horizon to a
certain standard. Without clear legal
obligations, a Court cannot determine
whether Horizon meets those obligations.
We therefore do not believe that a Court will
be attracted to tackling this issue at an early
stage.
« The above issue also means that we do not
know exactly what disclosure and evidence is
required, which could lead to very wide
disclosure being given at a very high, and
potentially wasted, cost. Expert evidence on
Horizon will also be very expensive. This
lends weight to tackling another issue first.
2. Focus on contractual issues
Push the Court to address at an
early stage whether the postmaster
contract is fair and whether it
supports Post Office's current.
operating practices.
« A successful Court decision on this issue would
seriously undermine all Claimants’ claims.
« Moreover, it would establish the principle that
Post Office's contracts are fair and support the
way Post Office has been operating for the last
20+ years.
« Having established this principle, it will be
e The Claimants' arguments on the postmaster
contracts are not without merit. There is a
chance that they might be successful, in
which case Post Office would be left in a very
difficult commercial position .
* On Post Office's best case it accepts that it
had some responsibilities to support
postmasters, albeit to a lower standard than
easier to settle the claims without opening the
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OPTION
BENEFITS
RISKS
Recommendation: This is our
recommended approach in
conjunction with Option 3.
floodgates to claims / complaints from other
postmasters.
that sought by the Claimants. Winning the
contractual arguments will therefore not
determine the whole litigation but will leave
the Claimants with much more difficult
claims.
« There are dozens of sub-issues that are
connected to the postmaster contracts.
There is therefore unlikely to be a binary
win/lose outcome, with Post Office being
successful on some points and losing others.
3. Focus on weak claims
Ask the Court to strike out
Claimants who are facing legal and
procedural problems, such as their
claims being out of time, having
previously signed settlement
agreements or generally having
very weak claims on their own
facts.
Recommendation: We do not
believe that a Court would focus on
these satellite issues in insolation as
this would not tackle the major
issues at the heart of litigation.
They could however be addressed
in conjunction with Option 2.
« Asuccessful result on these satellite points
could see over 200 of the 522 Claimants being
struck out. This would make settlement easier
/ cheaper.
« It sends a message to the Claimants that Post
Office will not allow weak and poorly presented
claims to survive in this litigation.
e Some early victories might shake the
confidence of the Claimants and their litigation
funder,
« . The Claimants are trying to portray themselves
as having been oppressed by Post Office.
Getting some of the weakest and most
unattractive claims in front of the Court at an
early stage, especially those where there is
clear theft or dishonesty, might re-balance the
Court's views on the general fairness of Post
Office's position.
e The downside with this approach is that it is
piecemeal. It will require lots of satellite
issues to be run in parallel. The Court may
not want to do this as it may see it being
very burdensome for the Court to manage
(and Judges are very conscientious about the
use of Court resources).
e It may also cause Post Office to incur costs
on matters that only have a micro effect on
the overall dynamic of the litigation.
e It will not give Post Office a victory on a key
point of principle and so may not quell media
noise or complaints from other postmasters.
4. Settle now
e Animmediate settlement avoids the possibility
of an adverse Court decision under Options 1
and / or 2.
e The claims have not yet been fully valued but
early indications suggest the total claims
made by the applicants could be as high as
£100m. This figure is however open to a
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OPTION BENEFITS RISKS
Try to agree a settlement now that e Asettlement avoids further legal costs (though large margin of error and we believe it to be
closes down the litigation at an these are anticipated to be considerably less highly inflated. A settlement now, without
early stage. than the amount of a settlement at this stage). proper challenge to these figures, would lead
to a much higher settlement number.
e Asettlement now would undoubtedly cost
more than £21m as that is the litigation
funder's share of the winnings. The
settlement would need to be more than this
for the Claimants to receive any money.
Recommendation: This option is
not recommended as it would result
in Post Office having to pay
significantly over the odds.
e Drawing the above two strands together, we
cannot see a viable settlement being reached
in the short-term without Post Office paying
out at least £40m.
e Settling now without any Court decision in
Post Office's favour may give the impression
that Post Office has a weak legal position.
This may encourage new claims against Post
Office or give postmasters an excuse to run
up losses in branches.
« Anumber of the Claimants have been
prosecuted and are looking for their
convictions to be overturned. A settlement
with these Claimants would cause their
convictions to become unsafe. Not settling
with these Claimants may make settlement
as a whole impossible.
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OPTION
BENEFITS
RISKS
5. Attrition
Stretch out the litigation process so
to increase costs in the hope that
the Claimants, and more
particularly their litigation funder,
decide that it is too costly to pursue
the litigation and give up.
Recommendation: This option is
not recommended as we believe the
pressure on, and cost to, Post Office
would become unbearable before
the Claimants gave up.
e This approach avoids tackling at an early stage
the issues in Options 1 and 2 and therefore
delays (but does not avoid) the risk of an
adverse Court decision.
e In effect, this approach would mean agreeing
with the Claimants' current case management
proposals which set the litigation on a long
course with no objective in mind. This would
limit arguments at the CMC.
e . The Claimants' litigation funder, Therium, is
an experienced funder with deep pockets. It
will be prepared for a long piece of litigation.
So long as it believes the merits of the case
are favourable, it can be expected to fund
the litigation.
e Over time the litigation will become more
disruptive to Post Office's business as more
operating practices are put under the
spotlight and then have to be overseen by
lawyers in order to avoid problems in the
litigation process.
« Although media reporting on this matter is
presently low key, there is increasing chatter
in the network and a feeling that the
litigation may start to dissuade individuals
from being postmasters. This will increase
as the litigation continues without a result in
Post Office's favour.
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Appendix 2
TERMS SOUGHT TO BE IMPLIED INTO THE POSTMASTER CONTRACT
The following are the terms which Freeths argue should be implied in to the contract
as duties on Post Office:
Implied Duty: Burden of proof to discover and investigate errors
e properly and accurately to effect, record, maintain and keep records of all
transactions effected using Horizon;
e® properly and accurately to produce all relevant records and/or to explain all
relevant transactions and/or any alleged or apparent shortfalls attributed to
Claimants;
« to co-operate in seeking to identify the possible or likely causes of any apparent
or alleged shortfalls and/or whether or not there was indeed any shortfall at all;
« to seek to identify such causes itself, in any event;
* to disclose possible causes of apparent or alleged shortfalls (and the cause thereof)
to Claimants candidly, fully and frankly;
« to make reasonable enquiry, undertake reasonable analysis and even-handed
investigation, and give fair consideration to the facts and information available as
to the possible causes of the appearance of alleged or apparent shortfalls (and the
cause thereof);
* properly, fully and fairly to investigate any alleged or apparent shortfalls; not to
seek recovery from Claimants unless and until:
(a) the Defendant had complied with its duties above (or some of them);
(b) the Defendant has established that the alleged shortfall represented a
genuine loss to the Defendant; and
(c) the Defendant had carried out a reasonable and fair investigation as to the
cause and reason for the alleged shortfall and whether it was properly
attributed to the Claimant under the terms of the Subpostmaster contract
(construed as aforesaid).
Possible responses
. substantial changes to the design and operation of Horizon to capture and retain
transaction records so as to address the perceived deficiencies;
. enhanced procedures to detect discrepancies;
. increase in size of network support team to perform weekly cash and stock
balances, network wide and investigative staff to investigate discrepancies;
. re-contract all operators on to new "agency" contracts that expressly exclude the
implied terms ordered by the Court;
° move to a more commonly used franchise model where operators provide their
own cash and stock and therefore directly bear the risk of losses;
. review current products and services to identify those with greatest risk of causing
losses, and discontinue these, moving to those products with lesser risk;
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. develop a branch portal to enable postmasters to access their own data so that
they can interrogate their own transactions as part of their own investigation to
any discrepancies
. require postmasters to provide a bond in advance to offset losses;
. take out insurance against losses;
. operate a zero-tolerance policy towards operators who suffer losses;
. change to the remuneration model for postmasters to balance the shift of risk to
Post Office;
. retain/increase the number of DMBs to enable more direct control of branch
operations;
. renegotiate client contracts to share with our trading partners the risks of
irrecoverable branch losses;
¢ introduce a more stringent recruitment and appointment process for Postmasters
and assistants;
. introduce a competency based assessment for postmasters and their assistants to
mitigate risk of errors being made;
. adopt a zero tolerance for vetting and training prior to providing access to Horizon
- this would cover process and systems (mainly Horizon) as well as compliance
and product knowledge.
Implied Duty: Horizon
« to provide a system which was reasonably fit for purpose, including any or
adequate error repellency;
e to communicate, alternatively, not to conceal known problems, bugs or errors in
or generated by Horizon that might have financial (and other resulting)
implications for Claimants;
e to communicate, alternatively, not to conceal the extent to which other
Subpostmasters were experiencing relating to Horizon and the generation of
discrepancies and alleged shortfalls;
e not to conceal from Claimants the Defendant's ability to alter remotely data or
transactions upon which the calculation of the branch accounts (and any
discrepancy, or alleged shortfalls) depended;
Possible responses:
. substantial changes to the design and operation of Horizon to address the
perceived deficiencies - particularly as regards ‘error repellency’; this would need
to be an almost fool proof system with minimal risk of human error and no ability
to override the system.
. move to customer self-service estate
. introduce screen sharing capability at NBSC and for PO investigation team
. take legal action against Fujitsu for providing a defective system;
. pro-active communications to postmasters of all ‘bugs’ or ‘errors’ and operational
issues experienced by other postmasters which could result in postmasters relying
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on issues to account for any trading errors, with the consequential increase in
losses required to be borne by Post Office.
Implied Duty: Training
« to provide adequate training and support (particularly if and when the Defendant
imposed new working practices or systems or required the provision of new
services);
Possible responses:
. review and change the design and delivery of induction training for new
postmasters and for new products or changes, and ongoing/refresher training to
address any issues or perceived shortfalls identified;
. introduce periodic assessments for postmaster and their assistants. Failure to
reach the required level would instantly restrict access to Horizon system
. enhance Horizon so as to become intuitive with a Google type search engine
enabling quick answers to product and process questions
. introduce web chat functionality for NBSC to better support branches where
language/accent is a barrier to providing accurate support
. Post Office takes on direct responsibility for recruiting and training assistants;
. Post Office provides new contract terms that exclude or limit liability for training.
Implied Duty: Suspension or Termination of Postmasters
*® not to suspend Claimants:
(a) arbitrarily, irrationally or capriciously;
(b) without reasonable and proper cause; and/or
(c) in circumstances where the Defendant was itself in material breach of
duty;
* not to terminate Claimants’ contracts:
(a) arbitrarily, irrationally or capriciously;
(b) without reasonable and proper cause; and/or
(c) in circumstances where the Defendant was itself in material breach of
duty;
Possible responses:
. Update the Post Office standard contracts to specifically exclude the above
termination rights;
. Enhanced collation and retention of evidence and audit trails to explain the
rationale for any action taken against postmasters to demonstrate that it was not
arbitrary, irrational or capricious; was for due cause and that Post Office was not
itself in breach of a relevant duty.
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Implied Duty: General
« not to take steps which would undermine the relationship of trust and confidence
between Claimants and the Defendant;
e to exercise any contractual, or other power, honestly and in good faith for the
purpose for which it was conferred;
* not to exercise any discretion arbitrarily, capriciously or unreasonably;
e to exercise any such discretion in accordance with the obligations of good faith,
fair dealing, transparency, co-operation, and trust and confidence;
* to take reasonable care in performing its functions and/or exercising its functions
within the relationship, particularly those which could affect the accounts (and
therefore liability to alleged shortfalls), business, health and reputation of
Claimants
Possible responses:
. introduce account management for all branches;
. increase level of in-branch and remote (helpline and on-line) support for operators
to increase "trust and confidence";
. Introduce more controls and governance on ensuring Post Office standards are
consistently applied.
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