UKGI00007881
UKGI00007881
OFFICIAL - SENSITIVE Eo
Department for
Business, Energy
& Industrial Strategy
Date: 12 February 2018
Director General: Mark Russell
Lead Official: Richard Call:
Lead Official Telephone: :__
Recipient To Note / Comment To Approve / Decide
Permanent Secretary xX
POST OFFICE — LITIGATION RE HORIZON IT SYSTEM
Summary
1. To notify and update you about the litigation being undertaken against Post Office
Limited (POL) in relation to historic claims about the Horizon IT system, and to
propose ongoing protocols to manage the risk.
Timing
2. Routine. This is not a new issue; we are seeking your steer as both parties work
towards the first case hearings in November this year.
Recommendations
3. That you note the issues and risks below, and provide a steer as to the
appropriate protocols to ensure you, the Department, and UKGI remain sufficiently
sighted.
Advice
Background
4. Transactions at the post office counter are undertaken on the Horizon system,
which is used by c50,000 people per day across the network, and which POL
estimates has been used by around half a million employees, agents, or their
employees since it was introduced in 1999.
5. In 2012 a small number of (mostly former) subpostmasters, under the banner of
the “Justice for Subpostmasters Alliance” (JFSA) and with support from some MPs
led by then-MP James Arbuthnot, claimed POL’s Horizon IT system had caused
accounting losses which they had had to make good, and in some cases for which
they had been prosecuted (usually for either false accounting or theft). Most of
these cases, at least initially, related to issues prior to Post Office’s separation
from Royal Mail in 2012.
6. POL and the JFSA jointly commissioned an independent firm of forensic
accountants, Second Sight, to examine the system for evidence of flaws which
could cause accounting discrepancies. Second Sight’s initial report in June 2013
found no evidence of systemic flaws in Horizon that could cause the issues raised.
A final report in 2015 did find that in some cases POL could have provided more
training and support to subpostmasters. POL have since made changes to
UKGI00007881
UKGI00007881
OFFICIAL - SENSITIVE a
Department for
Business, Energy
& Industrial Strategy
address this although the Court's view as to what is sufficient given their
relationship with subpostmasters is yet to be tested.
7. Amediation scheme was established 2014 to work through around 130 cases, in
an effort to resolve the individual disputes. This included specific forensic
investigation in to those cases. As before, no evidence of systemic flaws in the
system were found, rather the investigations (by Second Sight and Post Office)
found that the main reason for losses in the majority of cases was “errors made at
the counter” by the subpostmaster or their staff. While UKGI and BEIS have
always maintained that the details of individual cases are confidential between
POL and the individual, we understand that the cases considered in the mediation
scheme have ranged from, at one end, examples where POL could and should
have provided more support to the subpostmaster in preventing errors being
made, to the other end, where there has been clear incompetence, fraud or
dishonesty from the subpostmaster or their staff.
8. The mediation scheme ultimately proved unsatisfactory to the JFSA and was
closed in early 2015. Whilst some subpostmasters were able to settle their
disagreements with POL, or at least progress the issues between them, the JFSA
were not satisfied with the outcome and continued to campaign for a better
resolution. One important factor was that many JFSA members were seeking
substantial sums in compensation, which was not forthcoming, and indeed some
were seeking to overturn convictions for false accounting, fraud or theft, which the
mediation scheme could never resolve. It is worth noting that none of those
convicted of an offence have appealed their conviction or their sentence,
according to POL. Since the mediation scheme launched, around 20 individuals
with convictions have referred cases to the Criminal Cases Review Commission
(CCRC), whose review process has now been going on for around two years.
BEIS/UKGI have disclosed information to the CCRC, as we are required to do by
law, for their investigations. We do not know when the CCRC might form a
judgement on any case.
9. In recent years, the focus of the complaints by subpostmasters has shifted from
issues with the IT system, to the alleged ‘unfairness’ of the contract between POL
and subpostmasters. Subpostmasters are agents of POL, not employees, and the
contract requires subpostmasters to make good any losses given they are
responsible for managing third party monies (e.g. benefits, cash paid in to bank
accounts etc). This means that where there are discrepancies between cash in
the safe/till compared to the cash stated by the system, and no clear reason can
be identified, the subpostmaster is liable for the missing money. Where there is
evidence of theft or false accounting, POL can (and have) sought to bring a
prosecution against the individual responsible, often the subpostmaster, but
occasionally a member of their staff.
10. There has been significant lobbying by JFSA of Parliament and through the media,
although this has not altered POL’s position which is that these are individual
disputes best settled between each party. Absent any further movement from POL,
the JFSA announced a group civil litigation against Post Office in November 2015.
There have been a number of debates in the House since 2012, POL appeared in
2
UKGI00007881
UKGI00007881
OFFICIAL - SENSITIVE Eo
Department for
Business, Energy
& Industrial Strategy
front to the BIS Select Committee, and this has featured on programmes such as
The One Show and Panorama. Public attention has been much reduced since the
civil case was launched, except for the litigants’ solicitors advertising for further
subpostmasters to come forward. There are now around 500 parties to the case —
we understand from POL that there is limited commonality in the complaints and
claims being put forward.
Measures taken by POL and UKGI
11.POL has undertaken a significant amount of work ever since the claims were first
raised to establish whether there are any issues here and identify any solutions.
In addition to the mediation scheme, which was entirely funded by POL, and
paying for the Second Sight forensic investigation (who have increasingly forged
close links with the JFSA), POL has undertaken a number of activities:
e POL appointed Deloitte in 2013 to look at the Horizon system to establish its
veracity. Whilst this was a limited study due to the passage of time, no issues
were found.
e At Baroness Neville-Rolfe’s request, POL Chair Tim Parker commissioned a
new QC to investigate the matter when he joined POL in October 2015. The
initial findings of this investigation satisfied the Chair that POL had taken the
appropriate action at each stage. With the announcement of the group
litigation in November 2015, the Chair decided following legal advice not to
conclude the investigation as it could have impacted the Court's consideration
of the claims.
e POL have spent many millions of pounds investigating individual cases and
have not identified any systemic issues which could have caused these
problems (rather finding a range of issues as outlined above).
12.UKGI and its forerunner ShEx have followed this issue throughout:
e UKGI has been in close touch with POL to understand how the various
investigations, mediations and legal cases are progressing, although we have
always avoided getting involved in the details of individual cases. We are
aware of some details where individuals have discussed their cases in the
press.
e UKGI has provided numerous briefings to Ministers, and in day one briefings.
The Post Office Chair and CEO have also briefed Ministers in the past and
would be happy to do so again.
e As part of his role on the Board, shareholder representative Richard Callard
sat on the Board sub-committee on this matter, until this was disbanded after
the mediation scheme ended.
e ShEx/UKGI assisted the CCRC in its enquiries, disclosing files held.
e BEIS Legal have been kept updated and held discussion with POL shortly after
the last case management meeting (more details below).
13.Since the High Court proceedings for the civil litigation were issued in April 2016,
the issue has been much quieter as we awaited further details and likely direction
of the case, which are only now emerging. We have informed Andrew Griffiths in
UKGI00007881
UKGI00007881
OFFICIAL - SENSITIVE Eo
Department for
Business, Energy
& Industrial Strategy
person of the risk, and are arranging for him to meet Post Office’s General
Counsel.
The Litigation
14. The case, led by Freeths Solicitors, involves around 500 current and former
subpostmasters — the JFSA state the number of claimants as 561. Post Office
have engaged two QCs and are being advised by Bond Dickinson.
15.At a case management meeting held in October last year, it was agreed that the
first hearing would be held on 5 November 2018. Both sides will each select 6 test
cases, with 6 of those 12 being tested in the court, to establish what points of law
should be tested for the group of litigants as a whole. A further hearing will then
be held in February 2019 for that wider set of cases once the parameters have
been set by the first trial.
16.In the meantime, both sides are seeking to establish the facts of the cases. The
court recently opined that Freeths could make limited and relevant further requests
for POL to disclose information, and POL is seeking more information on the
extent of the claims, which have not been disclosed in any great detail.
17.Until the November hearing, which will set the parameters of the case, it is hard for
POL to determine with a reasonable degree of accuracy the potential level of
liabilities that the business is exposed to. Although few details have been
provided to them by Freeths, POL knows from its experience of the mediation
scheme and other bilateral discussions with subpostmasters before this case
started, that the high water mark for the quantum of the claims against them
extends to c£250m. However, POL knows from the mediation scheme that these
amounts include claims for loss of future earnings, school fees, reputational
damage etc, which POL and its legal advisers do not consider it would be liable for
even if the court found against them. To give this amount some context, the
average recovery made by POL from these subpostmasters is cEXX each,
equating to cEXXX if extrapolated across the 500.
18. It is worth noting that POL’s auditors EY have agreed with POL’s accounting
treatment of this, which is not to create a provision given the lack of claim details
put forward to date.
19.POL’s next priority is to seek security of costs, such that they have assurance that
should they win the case they can seek to recover costs from the litigants. The
claimants action is being funded by a private equity firm who specialise in legal
claims (who will take the first CE20million of any award should the litigants win),
but POL does not currently have certainty that this firm would meet POL’s costs
should POL win the case. This will be considered by the court in April and could
lead to the case being dropped if security of costs is insufficient. Whilst this would
be a good result for POL legally speaking, the JFSA would likely re-engage their
public campaign claiming that they had been denied the opportunity for their case
to be heard in court, with the issue possibly returning to parliamentary debates
and scrutiny.
UKGI00007881
UKGI00007881
OFFICIAL - SENSITIVE Eo
Department for
Business, Energy
& Industrial Strategy
20. Should the case proceed, there is clearly a risk that POL is not successful, or that
recent caselaw has some impact on POL’s case e.g. subpostmasters have not
previously been considered to be employees, but recent cases such that involving
as Uber may mean the duty of care between POL and subpostmasters has shifted,
with further implications for the Post Office. POL periodically face separate cases
whereby a subpostmaster claims that their status is that of an employee rather
than agent, and these could further complicate the litigation (or vice versa). [Post
Office are currently appealing a specific case whereby a temporary subpostmaster
successfully claimed that they were an employee].
21.[Insert POL legal adviser / QC view of the case]
Next Steps
22.As the case begins to progress more meaningfully, and given the financial and
reputational risks it carries for POL, we wish to put in place oversight protocols to
ensure the risks are flagged and managed as you require. We are conscious that
in addition to the risks associated with the litigation, the shift of the claimant's
argument from the IT system to the “unfairness” of the contract could give rise to
broader debate given the lack of employment or consumer protections for
subpostmasters. Accordingly, the case could have broader implications impacts
for employment or contract law more generally.
23.We have proposed below a number of measures, and would be grateful for your
steer and/or approval
24. [UKGI Legal to insert]
Impact on POL
25.In addition to the significant cost and distraction this has generated for POL over
the last few years, other implications include:
e POL has been less rigorous in its enforcement of its contract when money
goes missing. With a network of over 11500 branches it is inevitable that some
individuals working in the network, including subpostmasters, are less honest
or competent than the vast majority. POL has still suspended or terminated the
contracts of subpostmasters where they have been found to be at fault, but has
been less rigorous in its recovery of funds, focussing instead on trying to spot
discrepancies as the emerge. POL is seeing the effect of this, in that there
appears to be an uptick in issues of fraud (and with those accused of fraud
joining the litigation proceedings making recovery harder)
e POL has had to take greater care in the roll out of its new Horizon equipment
than would otherwise be the case, making a complex implementation all the
more complicated
UKGI00007881
UKGI00007881
OFFICIAL - SENSITIVE od
Department for
Business, Energy
& Industrial Strategy
26.POL is once again establishing a working group to consider the issues as they
arise on behalf of the Board, that the UKGI shareholder representative will sit on.