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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
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 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?
3. What is our recommendationand why?
Conclusion
1. There aresnow 522 applicants to the litigation. These include both current and
former postmasters; DMB employees and postmaster assistants. Some of them
have criminal convictions; some have been the subject of debt collection
proceedings;»generally their claims against Post Office arise out of very different
factual circumstances.
2. The High Court determined in January 2017 that the best way to manage this
variety of claims was via the Group Litigation Order. At the CMC the Court will
determine how the litigation should be managed over the next 6-24 months so as
to best address the matters in dispute.
3. 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 whether the postmaster contract is fair and supports
Post Office's current operating practices. There is a strategic choice as to the
sequence in which these arguments are addressed.
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4. 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.
Input Sought
The Board is asked to note 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
major themes are addressed is critical:
e whether Horizon is robust and accurately records branch transactions?
e 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. It would be possible for Post Office to deploy stalling tactics so that the litigation
drags on 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.
What are the issues¢@lating tosthe 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.
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 and how a shortfall arose. This is
particularly the case, where postmasters actively seek to conceal losses.
10. By contrast, Post Office believes that the following 2 duties should be 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.
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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.
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 Post Office could effectively apply stalling tactics, these issues will remain
and they will have an increasing impact on Post Office’s ability to continue to
operate the business pending resolution. Already there are.a significant 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 bythe legal team.
What are the risks of the various options?
14. Although an adverse finding on thesother implied duties 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
require:
e substantial changes»to the design and operation of Horizon;
e the restructure of the legal relationship between Post Office and agent, which
would impact the whole agency 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 a substantial 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 these terms 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 a degree of latitude in 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.
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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).
« Asuccessful 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.
e 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.
e 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.
e Having established this principle, it will be
easier to settle the claims without opening the
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
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Recommendation: This is our e floodgates to claims / complaints from other * postmasters, albeit to a lower standard than
recommended approach in
conjunction with Option 3.
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.
A successful 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.
Some early victories might shake the
confidence of the Claimants and their litigation
funder,
The Claimants are trying to portray themselves
asshaving 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.
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).
It may also cause Post Office to incur costs
on matters that only have a micro effect on
the overall dynamic of the litigation.
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
Try to agree a settlement now that
closes down the litigation at an
early stage.
An immediate settlement avoids the possibility
of an adverse Court decision under Options 1
and / or 2.
A settlement avoids further legal costs (though
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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Recommendation: This option is
not recommended as it would
result in Post Office having to pay
significantly over the odds.
these are anticipated to be considerably less
than the amount of a settlement at this stage).
large margin of error and we believe it to be
highly inflated. A settlement now, without
proper challenge to these figures, would lead
to a much higher settlement number.
A Settlement 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.
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.
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.
A number 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.
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.
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.
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
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.
Over time the litigation will become more
disruptive to Post Office's business as more
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Recommendation: This option is e limit arguments at the CMC. * operating practices are put under the
not recommended as we believe spotlight and then have to be overseen by
the pressure on, and cost to, Post lawyers in order to avoid problems in the
Office would become unbearable litigation process.
before the Claimants gave up. «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:
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;
e 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;
e to seek to identify such causes itself, in any event;
e to disclose possible causes of apparent or alleged shortfalls (and the cause
thereof) to Claimants candidly, fully and frankly;
e to make reasonable enquiry, undertake reasonable analysis and even-handed
investigation, and give fair consideration’to the factssand information available as
to the possible causes of the appearance of alleged or apparent shortfalls (and
the cause thereof);
e 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 causé)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);
Horizon
e 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;
Training
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e 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);
Suspension or Termination of Postmasters
e 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;
General
e 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;
e not to exercise any discretion arbitrarily, capriciously or unreasonably;
e to exercise any such discretionsin accordance with the obligations of good faith,
fair dealing, transparency, co-operation, and trust and confidence;
e 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
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