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Establishing Loss
eam Training
November 2021
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Agenda for today
Objectives
GLO — background / context
Common Issues Judgment — key findings & outcomes
. Establishing Loss — the legal principles underpinning discrepancy investigation
Policy and Documents
2auVpwne
. Next Steps & Additional Support
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Why am I here...
Following the introduction of the new Target Operating Model for investigation of
accounting discrepancies, a need was identified for additional guidance and training in
relation to investigating Discrepancies and how Post Office establishes that it has suffered a
loss that it is legally able to recover from a postmaster.
The Dispute Resolution Teams are working to the Postmaster Accounting Dispute Resolution
{PADR) Policy—aim of this training is to draw out and develop the legal principles
underpinning the investigation process set out in the PADR Policy, explain some of the key
concepts used and their basis on the obligations in the contracts in place between Post
Office and the postmasters
Explain the background of the GLO and the outcomes of the Common Issues Judgment -
how these have changed Post Office contracts with its postmasters and how these underpin
the PADR Policy and Post Office's approach to investigating Discrepancies
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Objectives & Outcomes
Objectives:
* Allow you to better understand some of the terminology and concepts arising from the Common
Issues Judgment that are now embedded into the PADR Policy and Post Office working more
generally.
Provide guidance on making judgements when Investigating a Discrepancy to establish a genuine
loss or gain to Post Office.
* Allow you to understand Post Office's contractual obligations when undertaking an investigation.
Outcomes:
+ Team members have the knowledge and skills required to properly undertake an investigation
into a Discrepancy and establish whether a genuine loss or gain has occurred.
Team members are able to better support postmasters through the investigations process
Team members understand that investigating Discrepancies involves difficult and often nuanced
legal concepts - escalation to the Review Committee and further legal advice may be required in
respect of some Discrepancies.
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GLO — background / context
The case was brought by a group of current and ex postmasters in 2016 ~ the case is sometimes
referred to as the "Group Litigation" or "GLO".
Postmasters alleged that discrepancies and shortfalls in branch accounts were caused by the Horizon
system not by the fault of Postmasters.
Postmasters alleged that Post Office's previous decisions to require them to pay back shortfalls and in
some cases to suspend or terminate their contracts were wrong.
There were two trials in 2018-2019:
= Common Issues Trial - looked at the meaning of the contract between Post Office and
postmasters — judgment given March 2019
= Horizon Issues Trial - looked at a number of issues in relation to the Horizon system — judgment
given December 2019
Settlement of the claims reached in December 2019. This ended the litigation.
Post Office has made lots of changes to business processes and procedures to reflect the outcome of
the case and to re-set the relationship with Postmasters,
Change to loss recovery processes - the new target operating model and introduction of the PADR
Policy.
Compliance — ongoing and a collective responsibility
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Duty of good faith
“Both the parties must refrain from conduct which in the
relevant context would be regarded as commercially
unacceptable by reasonable and honest people.
Transparency, co-operation, and trust and confidence
ORE cross implicit within the implied obligation of good faith"
Justice Fraser , CU
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en I took up this job in September 2019, I said that the key priority for me and
the business was to
“For our respective businesses to succeed, Post Office needs to adopt a fresh
approach to how it supports postmasters to run thriving businesses and serve our
shared customers every day.
“Our business needs to take on board some important lessons about the way we
work with postmasters, and I am determined that it will do so.
“We are committed to transforming our relationship with postmasters,
. They are at the heart of our purpose and
everything we do should support them and their businesses - otherwise we should
be doing it. Post Office Limited’s role is to be here for postmasters - supporting ani
working with them to deliver for customers and corporate clients.
“We look forward to continuing the hard work ahead of us in shaping a modern and
dynamic Post Office and a genuine commercial partnership with postmasters.”
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Common Issues Judgment
Implied Terms
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Key definitions before we go further...
“Discrepancy” means any difference between (i) the actual cash and stock position of a branch and (ii)
the cash and stock position shown on Horizon as derived from transactions input by branch staff into
the branch's terminals.
“Established Gain” means an event that causes a positive Discrepancy (i.e. the situation where the
branch has more cash and/or stock than the derived figures for cash and/or stock on Horizon), which
has been investigated by Post Office, or agreed by the postmaster, and found to be a genuine gain to
Post Office.
“Established Loss” means an event that causes a negative Discrepancy (i.e. the situation where the
branch has less cash and/or stock than the derived figures for cash and/or stock on Horizon), which
has been investigated by Post Office, or agreed by the postmaster, and found to be a genuine loss to
Post Office.
* “Postmaster” means the person or entity (which may be a company, sole trader or partnership)
contracted with Post Office. In Locals/Mains contracts the contracting party is the "Operator" and in
the Standard Subpostmaster (SPMC) contracts it is the "Subpostmaster".
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The Common Issues Judgment (1) — outcomes
The Common Issues Judgment was made public in March 2019. This judgment
dealt with the questions regarding the legal relationship between Post Office
and postmasters.
The key outcome in the Common Issues Judgment is that the contracts
between Post Office and postmasters were found to be relational and a duty of
good faith was implied into the contracts. This was a fundamental change to
the way the contracts operated and the obligations on both parties.
Duty of good faith - broadly speaking this means not acting in a way that
reasonable and honest people would consider to be commercially
unacceptable in the relevant context.
The judge was also critical of Post Office’s past behaviour towards postmasters
and the way in which Post Office had recovered shortfalls from postmasters.
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The Common Issues Judgment (2) - recovery of
shortfalls
Under the contracts, the postmaster is responsible for all losses caused through his or her own
negligence, carelessness or error and also for all losses caused by the negligence, carelessness or
error or his or her assistants.
The judgment restricted the way in which Post Office could recover losses and implied a number of
terms into the contracts dealing with what Post Office must do to be able to recover losses.
What is an implied term?
This is a contractual term that has not been expressly agreed between the parties (in writing or orally)
but has instead been implied into the contract by the Court.
Post Office is unable to recover losses until it has:
established that the alleged shortfall represents a genuine loss to it;
carried out a reasonable and fair investigation as to the cause and reason for the alleged shortfall and
whether it is properly attributed to the postmaster under the terms of the contract; and
it has complied with additional duties implied into the contract (or some of them) [see the next slide]
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The Common Issues Judgment (3) — implied terms
affecting Discrepancies
The additional duties implied into the contract regarding Discrepancies
Post office Lt shall provide adequate training and support, Including through the provision of traning materias, to the Operator,
particulary if and when the Post Office Lid imposes new working practices or systems or requires the provision of new services
Post Office Ltd shall provide the Horizon system, which shall be reasonably fit for purpose, Including any or adequate error repellency,
Post office Lt shal
properly and accurately effect, record, maintain and keep records of all transactions effected using Horizon;
properly and accurately produce all relevant records and/or explain al relevant transactions and/or any alleged or apparent shortfalls
Sttributed to the Operator:
co-operate in seeking to identily the possible or likely causes of any apparent or alleged shortfalls and/or whether or not there was indeed
Sry shortfall atl
seek to identify the causes of any such apparent or alleged shortfall, in any event
disclose possible causes of apparent or alleged shortfalls (and the cause thereof) to the Operator candidly fully and frankly,
‘make reasonable enquiry, undertake reasonable analysis and even-handed investigation, and lve falr consideration to the facts and
Information available as o the possible causes of the appearance of alleged or apparent shortfalls (and the cause thereof);
communicate alternatively, not conceal known problems, bugs o errors in or generated by Horizon that might have financial {and other
Fesulting) implications for the Operator;
communicate alternatively, not conceal the extent te which other operators of Post Office branches are experiencing problems relating to
Horizon and the generation of discrepancies and alleged shortals
‘not conceal from the Operator Post Office Ltd's ability to alter remotely data or transactions upon which the calculation of the branch
‘3ccounts (and ary discrepancy, or alleged shortfalls) depend; and
properly fullyand fairy investigate any alleged or apparent shortfall
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The Common Issues Judgment (4) — overriding duties
Inadaition a number of overriding duties were implied that affected not only the recovery of Discrepancies but also applied to the relationship between Post
Office and the postmasters more generaly. These ae referred to as Overarching Duties in the SPMC.
+ Each Party shall:
atall times in the performance of its obligations an exercise ofits rights under the Agreement act in good fat;
take reasonable care in performing its functions and/or exercising its functions within the relationship, particularly those which could affect the accounts
(and therefore iablity to alleged shortfals);
retrain from taking steps that would inhibit or prevent the other Party from complying with its obligations under or by vitue of the Agreement; and
provide the other Party with such reasonable cooperation as Is nacessary tothe performance ofthe other Party's obligations under or by vite of the
Agreement.
Post office Ltd sal
not take steps which would undermine the relationship of trust and confidence between the Operator and Post Office i
exercise any contractual, or other power honestly and in good fath forthe purpose for which twas conferred;
‘exercise any such discretion in accordance with the obligations of good faith, fair dealing, transparency, co-operation, and trust and confidence.
‘These overiding duties are binding contractual obligations and Post Office must ensure it unholds them in ts conduct with/and towards postmaster. This
‘means that they apply to Post Office's investigations into Discrepancles and its ability to recover shortfall,
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Establishing Losses & Gains
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Negative discrepancy
* What is a Discrepancy?
Any difference between (i) the actual cash and stock position of a branch and (ii) the cash and stock
position shown on Horizon as derived from transactions input by branch staff into the branch's
terminals.
* A Discrepancy can be either negative (also referred to as a shortfall) or positive (known as a gain).
But what does this mean in practice...
A negative Discrepancy could take one of three forms
1. Anaccounting entry on Horizon that causes a shortfall on Horizon. For example, where a customer
hands over the correct amount of cash but the transaction is incorrectly recorded on Horizon.
2. An accounting entry that does not cause a shortfall on Horizon but still causes a financial loss to Post
Office. For example, completing a transaction in branch without remitting the correct paperwork to
Post Office meaning that Post Office cannot then recover payment for that transaction from a client.
3. Aloss of physical cash or stock from a branch.
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Positive discrepancy
A positive Discrepancy could take one of three forms:
1. An accounting entry on Horizon that causes a gain. For example, where a customer hands over
the correct amount of cash but the transaction is incorrectly recorded on Horizon;
2. Anaccounting entry that does not cause a gain on Horizon but causes a financial gain when the
transaction is completed with the client. For example, incorrect paperwork is remitted that may
result in Post Office recovering incorrect payment from a client;
3. It could be a customer handing over too much physical cash or not taking stock that they have
purchased with them from the branch
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Recovering a shortfall
In order for Post Office to recover a shortfall it must:
establish that the alleged shortfall represents a genuine loss to it
carry out a reasonable and fair investigation as to the cause and reason for the alleged shortfall
and whether it is properly attributed to the postmaster under the terms of the contract; and
- comply with the implied terms relating to both Discrepancies and the relationship between the
parties more generally.
These obligations and how they translate to the work of the Investigations Teams are explored
further when we look at the Tier 3 workings and the Dispute Resolution Checklist.
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Investigating positive discrepancies
* Unlike for negative Discrepancies, the contract does not prescribe the scope and nature of the
investigation into positive Discrepancies.
Post Office must investigate to ensure that any issues that may be the cause, especially in relation to
errors or problems with Horizon, are ruled out and some of the procedural steps in the investigations
will be similar.
However, Post Office must be aware of its overriding duty to act in good faith and deal fairly with
postmasters when investigating a gain — this means dealing with the Established Gain in a timely way.
The obligations and tests in respect of Establishing Loss are more prescriptive being set out in the
contract and applying those to the investigation of a gain is not strictly necessary in all cases and could
potentially breach the duty of good faith
Post Office must be mindful of the duty of good faith both in respect of the investigation undertaken
and the timescales involved when investigating a gain and consider the scope that is appropriate to the
particular case.
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Proving the existence of a negative discrepancy
* Post Office must prove the existence of a shortfall, amongst other things, before it is able to take steps to
recover the loss from a postmaster.
In proving a shortfall, it is no longer adequate (as in pre-Common Issues Judgment) to rely solely on a
branch trading statement taken from Horizon that showed a shortfall. A trading statement of itself is not
proof of a shortfall
Post Office can seek to prove the existence of a shortfall by comparing:
+ the cash and stock figures shown on Horizon
against
+ the actual physical cash and stock present in the branch
The cash and stock on hand can be found on the branch trading statement or, if the shortfall arises mid-
trading period, may need to be compiled from the underlying branch accounts
The actual physical cash and stock in branch can be determined using:
* the figures provided by the postmaster (if they are not disouted); or
«the figures provided by e Brench Assurance Visit to the branch
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Proving the cause of a negative Discrepancy
Post Office is entitled to recover a shortfall based on the balance of probabilities
Post Office needs to be satisfied that it is more likely than not that the postmaster is liable to compensate
Post Office for the shortfall
Question is - Did the negligence, carelessness or error of the postmaster or their assistants more likely
than not cause the shortfall?
Shortfalls caused by either:
* Single incidents
+ Amalgamated shortfalls: where the shortfall only presents itself in the branch accounts after a period
of time (typically the end of a trading period) and is an amalgamation of smaller errors over time.
Single incidents — forensic examination of the branch records & discussion with the postmaster, Post Office
may be able to determine what happened in branch & have sufficient proof to show it was due to the
error of the postmaster or their assistants
Amalgamated shortfalls - it is unlikely that Post Office will be able to identify each of the errors made by
the postmaster or their assistants as Post Office is not present in the branch and does not have first-hand
knowledge of the transactions undertaken. Post Office is left with proving the postmaster is liable for the
shortfall by eliminating all other possibilities — Post Office, clients or Horizon
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Investigation Process
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General Principles
* Investigations should be:
proportionate in scope to the value of shortfalls or gains and complexity of the issues under investigation;
transparent to the postmaster, giving them fair access to information and fair opportunity to comment;
and
reasonably documented, including recording the investigations undertaken, factual findings made and
conclusions reached
* Must be fair, reasonable and transparent.
+ Each investigation will be different and will need to be adjusted to the circumstances, including
whether a loss or a gain is being investigated.
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For shortfalls
* For cases involving an amalgamated shortfall where a process of elimination is required, the various
areas listed in the Tier 2 checklist and the Case Investigation Checklist will need to be considered and,
if appropriate, reviewed and eliminated.
Not all areas listed will need to be reviewed and eliminated depending on the shortfall being
investigated
Horizon is a key area of investigation
The investigation will involve Post Office seeking information from the postmaster, Post Office teams
or clients about the various areas that have the potential to cause a shortfall — considering that
evidence & eliminating as appropriate.
This process of elimination will need to be followed for all of the potential causes of the shortfall so
that Post Office is either able to eliminate each potential cause or can identify the cause (or likely
cause) of the shortfall.
If Post Office is able to eliminate all potential areas that may cause the shortfall, then it must consider
whether, on the balance of probabilities, the error of the postmaster or their assistants was more
likely than not the cause of the shortfall.
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Policy & Documents
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Postmaster Accounting Dispute Resolution Policy
The PADR Policy sets out the process that needs to be followed in conducting the investigation
This includes the Case Investigation Report that must be completed by Tier 3 when they conduct
investigations — this will be provided to the postmaster as part of Post Office's upholding of transparency
and fairness obligations.
As part of completing the Case Investigation Report, Tier 3 must complete the Dispute Policy Checklist.
This lists 5 areas that Post Office needs to satisfy itself of before the contractual obligations of the
contract can be met regarding shortfalls & a loss can be established.
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Dispute Policy Checklist
1. The alleged shortfall has been properly, fully and fairly investigated in a timely manner
2. The shortfall represents a genuine loss to Post Office properly attributable to the postmaster
3. A review of the Horizon system has been undertaken to ensure that it was not a contributory
factor to the discrepancy
4. Any action (or inaction) by Post Office Limited has not been a contributory factor that led
directly to the shortfall
5. The shortfall has been caused through the postmaster’s negligence, carelessness or error
and/or the shortfall has been caused by the negligence, carelessness or error of their
Assistants
* These are the minimum thresholds that Post Office must meet to establish a loss whilst
continuing to apply the other terms implied into the contract.
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Outcomes — Establishing Losses, Gains or not?
Loss Established ~ If Post Office is able to show that the shortfall is an Established Loss then Post
Office may seek to recover the Established Loss from the postmaster.
NB: only by meeting the contractual requirements is Post Office able to recover a shortfall from a
Postmaster. In the event that Post Office is unable to satisfy itself that the 5 areas of the Dispute
Resolution Checklist have been met then a loss has not been established and recovery cannot take
place.
Loss Not Established - If Post Office is unable to show that the shortfall is an Established Loss then
Post Office cannot make a recovery from the postmaster and a decision regarding writing off the
shortfall must be made.
Gain Established - If Post Office has established that a positive Discrepancy is an Established Gain
then Post Office needs to ensure that payment is made to the postmaster as quickly as possible.
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Taking action if something isn’t right..
* If something is not right — call it out.
* Escalate to line manager or Post Office Legal
* Whistleblowing — be mindful of the whistleblowing policy and the protections it provides to both
postmasters and their assistants. This policy is available on The Hub:
https://poluk.sharepoint.com/sites/thehub/SitePages/Updated-Whistleblowing-policy.aspx
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Next steps
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Next steps
* Detailed Guidance Note — to be circulated
* Legal Support at Monthly Review Committee
* Further Training
* Refresher training on Establishing Loss in Q1/Q2 2022
* Scenarios
+ Report writing
* Questions...?
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