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Annual Report 207-18
Contingent Liabilities Disclosure — Part II
CONFIDENTIAL AND SUBJECT TO LEGAL PRIVILEGE
Summary
1. Ernst & Young are considering the extent of the proposed disclosure in Note 19 of
Post Office’s 2017-18 Accounts relating to the Postmaster Litigation. This has been
considered by the Post Office Limited (‘POL’) Board Audit & Risk Committee (‘ARC’)
and the proposed draft disclosure approved by that Committee is set out in
[Appendix 2].
2. A paper explaining the rationale behind that wording. was presented to Ernst &
Young on Wednesday 11 July 2018. By email dated 12 July from Peter McIver,
POL was requested to provide further information to its internal Review Panel. This
paper addresses the issues underlying those questions and where available,
answers to the specific questions have been included in [Appendix 1].
Horizon
3. The Horizon system is the point of sale system operated by POL across all
branches. It was developed by Fujitsu in 1995 and has been subject to a series of
upgrades since that time.
4. Key statistics:
e 500,000 users since it was introduced in 1995, serving millions of customers;
e 78,000 users successfully process six million transactions every working day in
communities throughout the UK, across 11,500 branches and by 8,000 agents.
e POL handles £70 billion cash and £636 million coin every year.
5. As part of POL standard operations Horizon is constantly monitored and managed,
with numerous checks and independent audits including:
e Ernst & Young produce an annual ISAE3402 service auditor report over the
Horizon processing environment;
e Each year Horizon is subject to IS027001 certification -the industry standard
security accreditation; and
e Horizon is accredited to Payment Card Industry Data Security Standards on an
annual basis.
Background to the Litigation
6. Complaints regarding the reliability of Horizon were made by postmasters as early
as 2012 through the sponsorship of James Arbuthnot MP. In response to these
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claims, POL initiated a number of investigations, including by forensic accountants
Second Sight whose interim report in July 2013 stated ‘We have so far found no
evidence of system wide (systemic) problems with the Horizon software’. Alan
Bates - one of the lead claimants in the litigation, stated to the BIS Select
Committee in February 2015:
“The whole point of the scheme-it is not purely the software that we are talking
about. Everyone seems to homing in on the computer system. It is about the
support package that works with it. It is the training and the lack of
investigation”.
7. In 2013 POL announced the establishment of a Complaint Review & Mediation
Scheme and invited postmasters to register with the Scheme. Under the Scheme,
applicants whose cases had not been subject to a court ruling, had their cases
investigated at POL’s cost and were then invited to mediate with POL, and the
mediation was independently facilitated by CEDR.
8. The following table summarises the outcome of the Scheme:
Applications to the Scheme 150
Applications rejected (ineligible) 4
Cases resolved prior to entry into the Scheme 10
Cases accepted into the Scheme 136
No. of cases not I Cases POL found unsuitable for mediation 42
suitable for Cases the WG found unsuitable for mediation 2
mediation: 48 Cases closed owing to a missing / ill applicant 4
Residual I 88
Cases resolved during investigation 5
Cases resolved prior to mediation meeting 4
No. of cases Cases resolved at mediation 22
suitable for Cases not resolved at mediation 22
mediation: 88 Cases referred to CEDR for mediation by POL which I 35
could not be resolved due to actions of the
Applicants such as unilateral withdrawal or refusal to
attend mediation meetings.
Residual I 0
9. 43 of the Postmasters who had registered for the Scheme had criminal convictions
which therefore could not be addressed through mediation as only the criminal
courts have authority to overturn a conviction.
10. Claimants in the schemes were requested to quantify their claims, although this
was not required to be done to the same standard as would be required for a Court
process. The resulting aggregate financial claims sought by the scheme claimants
exceeded £65 million. The largest single claim was for £13 million, and over 20%
of the applicants each made claims in excess of £1 million. The aggregate losses
from branches operated by the 136 applicants in the Scheme totalled £1.28
million. Of the 26 cases resolved through mediation, 14 resulted in ex gratia
payments totalling £131,000 with payments ranging from £461 to £50,000.
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11. Since 2016 the Criminal Cases Review Commission (‘CCRC’) has been reviewing
the convictions of some [33] former postmasters. Prior to 2014 there were, on
average, 40 prosecutions brought each year. The majority of these relate to the
period during Royal Mail’s ownership; there have been very few prosecutions since
2014. POL has actively cooperated with the CCRC enquiry supplying over
[100,000] documents. The CCRC has recently advised POL that it does not expect
to complete its review until at least April 2019.
12. Postmaster complaints about Horizon have been the subject of significant press
coverage and investigation since 2013 including The One Show, Today
Programme, BBC Local Radio and Panorama, as well as print and specialist press
including Computer Weekly.
13. There has been significant parliamentary coverage of the issues as well as a
Westminster Hall debate in December 2014, and a BIS Select Committee in
February 2015. There has also been significant enquiry from UKGI and BEIS.
Current Position
14. In early 2016 Freeths solicitors issued proceedings against POL on behalf of a
number of postmasters. These proceedings are now being heard pursuant to a
Group Litigation Order (the UK version of a ‘class action’) through which the claims
of 561 claimants will be assessed. To date we have only had high level details of
the majority of the claimants, with more detailed claims being received in relation
to a pool of [12] claimants from which the 6 lead claimants were selected. The
group of claimants includes:
e both current and former postmasters;
e postmasters with criminal convictions;
e postmasters who have been declared bankrupt;
e POL employees, and
« employees (assistants) of postmasters.
The common theme among the claimants (although not universal) is that they
were required to. repay shortfalls occurring in their branches; in many cases this
resulted in postmasters being terminated and in some cases, prosecuted.
15. In order to manage the litigation, the Court has mandated the following:
¢ a4 week trial in November 2018 to determine as matter of legal interpretation
the proper construction of the contract between POL and postmasters, and the
meaning of key terms (the ‘Common Issues trial’). Put simply, this requires
the Court to make a legal decision as to whether any additional terms should
be implied into the current contracts in order for those contracts to operate
effectively as between POL and each postmaster. Although there are 6 ‘lead
cases’ which will be used to demonstrate the contractual terms, no findings of
fact will be made as part of this trial as to whether POL breached any of the
terms of the contract, nor will any of the 6 claimants be required to provide
details of the losses allegedly incurred as a result of POL’s actions;
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« a4 week trial in March 2019 to consider whether the Horizon System operates
as it should. This case will rely on expert evidence and the outcome will be
findings of fact; and
e Between the two trials, the parties will be expected to attempt mediation to
determine whether agreement or settlement could be reached on any of the
issues raised by the claimants.
16. Following the decision in the Horizon trial (and possibly before) the Court will set
out how it expects the issues raised by the various claimants will be addressed
through the Courts. This is likely to involve one or more trials in which claimants
will have the opportunity to put the legal basis on which they argue POL has
breached the contract (in light of the decision in the November trial), the damages
suffered as a result of that breach and to quantify the loss suffered asa result.
17. Given that the range of complaints raised by the postmasters to date is very wide
and encompasses a number of potential causes of action, we do not believe that
we will receive any indication of the potential damages sought by the claimants
(either individually or collectively) until after receipt of the decision in the Common
Issues trial, and potentially not until after receipt of the decision in the Horizon
trial
18. POL is actively defending the action. It believes that in many cases there are
operational reasons to explain in branch losses, however due to the nature of
branch operations, only the postmaster (or his employees) will be able to explain
how the loss occurred. Where a postmaster seeks to hide or cover up losses (eg
through false cash declarations), then POL has no way to determine the cause of
the loss.
19. POL’s response to operational losses varies according to the circumstances
however there are guidelines as to how losses should be addressed. Responses
include allowing the postmaster to repay shortfalls (or have them repaid via
deductions from remuneration); suspension while the cause of the loss is
investigated, and depending on the cause and materiality of the loss, termination.
POL seeks to recover losses from terminated postmasters through debt collection.
20. In 2017-18 £xm was identified as missing, £xm paid back, £xm_ being paid back
and everything else was 100% provided for.
Jane MacLeod
General Counsel & Company Secretary
[ ] July 2018
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APPENDIX 1
Specific responses
EY Question
POL Response
What analysis has POL undertaken to date to
determine the population of Postmasters affected,
both in number of Postmasters and quantum/value of
the claim?
There are 561 claimants in the Group Litigation. These include
c120 current postmasters. There are currently c 8000
postmasters some of whom are companies, others have multiple
post offices, and others operate single post offices. Since 2000
there have been c[ __] separate postmasters. Accordingly the
number of claimants represent a very small percentage of the
total number of current postmasters (120/8000) and an even
smaller percentage of all postmasters since the introduction of
Horizon.
As set out in paragraphs [16 and 17] there has been no
quantification of claims to date, and we do not expect to be able
to estimate the total claims with any reliability until receipt of
further particulars of claim specifying the damages sought, and
this is unlikely before at least early 2019
Do POL have a record of the number of postmasters
terminated over time that may be possibly part of this
claim (and possible future claims) ora list of all
Postmasters who were terminated for breaching their
contracts?
No
Do POL have an idea of the value or quantum of
money that was owed by these Postmasters when a
termination was sought?
No
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EY Question POL Response
4. I Do POL have a record of how much money if any has No, however the aggregate amount owing from former
been collected or has not been collected from these postmasters [and which is subject to debt collection
postmasters as part of the terminations above? processes][and shown in our accounts] is c£[ ]
5. I Are there any receivables or payables carried in POL’s I See Q4
books for these amounts?
6. I Has any amount been paid out by POL in the event of I POL does not have these records, however it is unlikely that POL
differences from Horizon (or Fujitsu) to postmasters would have made any material payments to postmasters where
who were terminated as per above? Do POL have a the postmaster was summarily terminated for breach of contract.
record of such amounts/value involved?
7. I Prior to the case, we understand there was mediation I £131,000. as set out in paragraph [10].
and possibly some settlements made - can we have
the full number and value of those please?
8. I You have mentioned some cases may be time barred No. Whether any particular case will be time barred will depend
now - do we have an analysis of those or others? whether the Court accepts the basis of their claim against POL.
9. I Similarly some instances where there was legal In light of the information already provided, please explain what
proceedings against the individuals an analysis of kind of information is anticipated by this question.
them please?
10.) How many terminations of postmasters were POL seeks to keep post offices open wherever possible in order to
subsequently replaced by alternative postmasters? maintain services to customers within local communities. Where a
contract is terminated there are a variety of options that POL can
implement including, with the consent of the landlord,
appointment of a replacement or temporary operator. Due to the
length of time covered by the litigation, it is not possible to
provide a definitive answer to the question.
11.I What were the key contractual terms under which The contract provides for termination in a variety of situations and
these terminations occurred and the general reasons
for termination?
notice of termination may be given by either the postmaster or
POL. Postmasters may be terminated by POL on minimal notice
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EY Question
POL Response
for breach of their contract. The exact wording of these terms
has varied over time.
12,
What is the level of analysis undertaken by in house
legal/ external lawyers on the terms of the contracts
i.e. are they relevant/water tight and the resulting
strength of POLs position?
There are a number of variations of the standard contract
depending on the status of the postmaster (company, sole trader,
multiple branches etc and the type of branch operated (mains,
local etc). Core provisions are broadly similar, although there
have been changes to the contract language over the period since
Horizon was introduced. The original standard contract terms and
any subsequent changes were drafted by external lawyers. The
process for amending the standard contract involves consultation
with the National Federation for Sub-Postmasters.
13,
Have any experts been used by POL to report on the
functioning of Horizon and Fujitsu to date? What was
the outcome of that?
Yes — beginning with Second Sight in 2013. No systemic
problems have been identified.
14,
What is the historic trend in terms of the accuracy of
the reporting from Horizon? Any assessment made to
date on its robustness?
POL believes that Horizon does accurately record transactions in
accordance with its design. As stated in paragraph [4], there have
been c500,000 users since Horizon was introduced in 1995. Over
78,000 Horizon users successfully process six million transactions
every working day across the UK in 11,500 branches and by 8,000
agents and[ ] employees in directly managed branches.
As stated in paragraphs [6] and 18] above, and as reported by
Second Sight as far back as 2013, in the vast majority of cases
losses can be attributable to human interactions.
Strictly Cony t to Leg
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APPENDIX 2
Draft Disclosure regarding Contingent Liability (note 19)
Following the meeting on 28 June, the draft disclosure was revised and reviewed
by ARC members. It is now proposed that the following text be included in Note
19 in relation to the Postmaster litigation:
“On 11 April 2016, a High Court claim was issued on behalf of a number
of postmasters against Post Office in relation to various legal, technical
and operational matters, many of which have been the subject of
significant external focus for a number of years. Post Office is defending
the claim and welcomes the opportunity to have these matters resolved
through the Court managed Group Litigation Order.
The Court has ordered two trials to be heard in 2018-19 to determine a
subset of the preliminary issues in dispute between the parties. The Court
has not yet ordered a process for determining any issues of liability or
quantum. To date, the Claimants have not asserted the aggregate value
of their claims in any of the Particulars. of Claim filed in the litigation.
While the Directors recognise that an adverse outcome could be material,
they are currently unable to. determine whether the outcome of these
proceedings would have a material adverse impact on the consolidated
position of the Group, and are unlikely to be able to do so until the Court
has made further determinations and the Claimants have provided the
necessary information about the value of their claims. The Directors
continue to keep this under close review.”
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