UKGI00008026
UKGI00008026
OFFICIAL - SENSITIVE Eo
Department for
Business, Energy
& Industrial Strategy
Date: XX May 2018
Director General: Mark Russell
Lead Official: Richard Callan
Lead Official Telephone:....
Recipient To Note / Comment To Approve / Decide
Permanent Secretary x
POST OFFICE — LITIGATION RE HORIZON IT SYSTEM
Summary
1. To notify and update you about the potentially high-profile civil litigation brought
against Post Office Limited (POL) in relation to the Horizon IT system. We are
liaising with POL to ensure that you, the Department and UKGI have sufficient
oversight while protecting POL’s legal privilege in its defence against the litigation.
Timing
2. Routine. This is not a new issue but an update is timely as we approach the first
hearings in November this year. UKGI is developing an information sharing
protocol with POL that seeks to balance oversight requirements with POL’s legal
privilege concerns. We will submit the protocol for your approval in due course.
Recommendations
3. That you note the issues, risks and next steps set out below.
Advice
4. Paragraphs 5 to 22 below represent POL’s description of the background to the
litigation, the nature of the complaint to be considered by the courts, the litigation
process and measures — both past and ongoing — taken by POL. Paragraphs 23 to
27 below represent UKGI’s description of HMG oversight to date and UKGI’s
analysis of the impact of this case on POL.
Background to the litigation — provided by POL
5. 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
employees of agents since it was introduced in 1999.
6. 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 (now Lord) James Arbuthnot, claimed POL’s Horizon IT
system had caused losses (shortfalls in physical cash against cash holdings
recorded on Horizon) which they had had to make good. In some cases they had
been prosecuted for these losses (usually for false accounting, theft or both) while,
in other cases, they claim that it led to financial hardship, bankruptcy or
consequential, personal losses ranging from divorce to suicide.
UKGI00008026
UKGI00008026
OFFICIAL - SENSITIVE Eo
Department for
Business, Energy
& Industrial Strategy
7. An independent firm of forensic accountants, Second Sight, were commissioned 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. A final report in 2015 did find that in some cases POL
could have provided more training and support to some subpostmasters, though
Post Office disputes many of Second Sight's findings.
8. Acomplaint review and mediation scheme (“the scheme”) was established in
2013, with JFSA involvement, to work through 150 applications in an effort to
understand and ideally resolve the individual disputes. This included specific
investigation into each of the 136 individual cases accepted into the scheme (the
other 14 having been capable of summary resolution). As before, no evidence of
systemic flaws in the system was 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. To date, UKGI
and BEIS have not been privy to the details of individual cases, as POL considers
these to be confidential between POL and the individuals.
9. The scheme was closed in early 2015 once all 136 applicants had received
reports from POL and Second Sight into their individual complaints. The JFSA
however was not satisfied with the outcomes from the scheme, with many
applicants seeking substantial sums in compensation which were not forthcoming,
and others seeking to overturn criminal convictions which the scheme could never
provide.
10.None of the scheme applicants convicted of an offence have appealed their
conviction or their sentence.' However, since the scheme launched, 33
individuals with convictions have applied to the Criminal Cases Review
Commission (CCRC), whose review process has now been going on for around
three years. BEIS/UKGI have disclosed information to the CCRC, as required to
do by law, for their investigations, as has POL. POL does not know when the
CCRC will reach a decision in any of the cases.
11. There has been significant lobbying by the JFSA of Parliament and through the
media, although this has not altered POL’s position which is that these are
individual disputes which are now best resolved through the Court's processes.
Nature of the current complaint to be considered by the courts — provided by POL
12.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
1. On 14 August 2017 Post Office did however receive notice from the Criminal Appeal Office that a former
subpostmaster is seeking permission to appeal his 25 September 2008 conviction on 11 counts of theft
following losses of £208,000 at the Post Office branch where he had been subpostmaster. The appellant did
not apply to the scheme or to the CCRC, and is not a Claimant in the Post Office Group Litigation. This matter
currently rests with the Court for a decision.
UKGI00008026
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OFFICIAL - SENSITIVE Eo
Department for
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and subpostmasters. These allegations are now being progressed in the High
Court “Post Office Group Litigation”.
13.The litigants are claiming that their written contract did not reflect the true nature of
the POL-subpostmaster relationship. While they accept that there was a
principal—agent relationship in force, they nevertheless maintain that the
relationship was a closer one akin to an employment relationship and, as such,
they are trying to shift the burden of responsibility for explaining accounting losses
from subpostmasters to POL. Linked to this, they are also seeking to establish
that the contract implies other terms that further shift the burden of responsibility
onto POL — for example, that POL had an obligation to provide sufficient training to
Subpostmasters to help them avoid accounting errors.
14. There are now around 561 Claimants in the case. The common features of the
Claimants are that most were engaged on Post Office's standard contract terms
and all will have used the Horizon system. Post Office denies that the contracts
should be interpreted as contended by the Claimants, and also contends that
many Claimants do not have standing to bring claims because they are time-
barred, an abuse of process due to pre-existing criminal convictions, or have
already been resolved, with signed settlement agreements in place.
The Litigation Process — provided by POL
15. Post Office has engaged two QCs and are being advised by Womble Bond
Dickinson, a major transatlantic law firm.
16. The claim was served on Post Office on 5 August 2016. Several procedural
hearings have been held since then. The first substantive hearing (“Common
Issues Trial”) will commence on 5 November 2018 for four weeks. The Common
Issues Trial will principally look to determine the true meaning and effect of Post
Office's standard contracts. Six Lead Claimants have been selected to assist with
this. The “Horizon Issues Trial” will then be held in March 2019 to look in detail at
the specific technical issues claimed in relation to Horizon, which will be
determined with the assistance of expert evidence. Further trials will then be
needed to resolve other issues, including whether Post Office has breached any of
its obligations, and if so, the damage caused by such breach.
17.The nature of the claims include claims for loss of future earnings, other business
losses, reputational damage and emotional harm. Although some Claimants have
provided some indicative claim values, these are incomplete, inconsistent,
possibly duplicative and prone to inaccuracy, and Post Office has raised its
concerns in this regard with the Court. The Claimants have not yet formally
articulated the quantum of their aggregate claims and Post Office does not expect
that they will do so until after judgment is received on the Common Issues trial,
later in November/December 2018.
2 Bates & Others v. Post Office Limited, High Court of Justice, Queen’s Bench Division, Claim No’s
HQ16X01238, HQ17X02637, HQ17X04248.
UKGI00008026
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OFFICIAL - SENSITIVE Eo
Department for
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& Industrial Strategy
18.To date, there have been no settlement discussions between the parties. The
Court has ordered the parties to attend mediation after receipt of the judgment on
the Common Issues Trial.
19.POL is currently seeking security for its costs, such that they have assurance that
should they win the case they can seek to recover costs from the Claimants. Both
parties have filed cost budgets with the Court, with the estimated litigation costs for
each side up to the end of the Horizon Issues Trial being in the region of £13m
(inclusive of all costs incurred to date).
20. The Claimants’ action is being funded by a private equity firm, Therium, who
specialise in legal claims. If this follows a traditional litigation funding model,
Therium will take a cut of any compensation awarded to the Claimants. The
specific funding arrangements in place for this litigation are however privileged to
the Claimants, and therefore not available to POL at this stage of the proceedings.
Previous measures and ongoing measures taken by POL — provided by POL
21.POL considers that it has undertaken a significant amount of work ever since the
claims were first raised to establish the nature of the issues raised by the
subpostmasters. In addition to the scheme, which was entirely funded by POL,
and paying for the Second Sight forensic investigation (whilst also reinvestigating
each case itself), POL has taken and continues to take privileged legal advice
from Leading Counsel and engaged Dr Robert Worden of Charteris Consulting Ltd
as its experienced expert IT witness. This advice is being kept under continuous
review by POL’s senior management.
22.POL has established a board sub-committee to consider the issues as they arise
on behalf of the board. The schedule for both the sub-committee meetings and
board meetings has been synchronised to the Group Litigation Timetable so that
POL and its advisors can provide regular updates at critical junctures in the trial
process.
HMG oversight to date - UKGI’s description
23. This is not the first briefing on this matter. UKGI has been communicating with
POL to understand how the various investigations, mediations and legal cases
have been progressing. However, UKGI has not been involved in the details of
individual cases, nor can we assess or manage the legal or operational risks
attached to it, which is for POL to do. To date:
e UKGI has provided several briefings to Ministers, as well as day one briefings.
e At our request, 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 in 2015. A new sub-committee has now been
established as the case approaches, upon which the new shareholder
representative director Tom Cooper sits.
UKGI00008026
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Department for
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& Industrial Strategy
ShEx/UKGI assisted the CCRC in its enquiries, disclosing files held by BIS.
BEIS Legal have been kept updated and held discussions with POL shortly
after the last case management meeting (more details below).
24.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 briefed Andrew Griffiths in
person, and his office have an action to arrange a meeting with POL’s General
Counsel, so that the Minister may be directly appraised with respect to the
progress and risks attached to this case, and you may wish to attend.
25.UKGI considers that the case is potentially significant in light of:
(a) The presentational dynamics of a long-running and in some cases, bitter,
dispute between small sub-postmasters and POL;
(b) the threat to the agency relationship which is key to the POL business
model;
(c) the breadth and nature of the legal arguments that could arise, some of
which touch upon policy areas in the BEIS portfolio - for example, we are
aware of another group of sub-postmasters seeking to characterise the
relationship as an employment relationship (in an UBER type case). Another
potential tangent would be to characterise small subpostmasters as akin to
consumers, requiring protection from overtly punitive or unfair contractual
terms.
Impact on POL and mitigation - UKGI’s view
26.In addition to the significant cost and level of management attention this dispute
has entailed for POL over the last few years, UKGI believes that impacts include
the following:
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 they emerge and limit their size. POL is seeing the effect of
this, in that there appears to be an uptick in issues of fraud (and of those
accused of fraud joining the litigation proceedings, making recovery harder).
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.
Given the shift in the claimant’s argument from the IT system to the
“unfairness” of the contract, they may also seek to link into the broader debate
about lack of employment or consumer protections for contractors. POL itself
periodically faces separate cases whereby subpostmasters claim that their
UKGI00008026
UKGI00008026
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Department for
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& Industrial Strategy
status is that of an employee or a worker rather than an agent — POL was
notified on 25 April that 120 subpostmasters have launched such a claim - and
these could further complicate the Horizon litigation (or vice versa). Given that
the majority of post office branches are run by self-employed subpostmasters
on an agency basis, an adverse ruling could force POL to reformulate
contracts for new operators and renegotiate existing contracts, and, by
extension, potentially impact more broadly on its operating model and
commercial sustainability.
Communications Advice (agreed with BEIS Comms)
28.The JFSA has generated considerable coverage on this issue in the past,
including The Daily Mail, The One Show, Panorama and parliamentary debates. If
this court case proceeds, we will refer any media to POL and state that this is a
matter for POL and the courts and that it would be inappropriate for Government to
comment. If the court case is dropped, we would give media a line stating that we
respect the judgment of the courts and refer back to the independent
investigations by Second Sight and Deloitte that found no evidence of flaws in the
Horizon IT system.
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Department for
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Contributors (Retain the relevant sentence and identify who has provided input)
29. This advice does not have financial considerations, as agreed with Syed
Magrhabi. Financial advice will be provided once a better quantification of the
claim can be established.
30.Legal (Gareth Evans) and UKGI legal have been consulted and agreed the
content of this advice.
31.Communications considerations have been taken into account, and agreed with
Jessica Shepherd and Chris Swoffer.
32. Parliamentary handling has been taken into account, and agreed with Richard
Callard. As noted above, this issue flares up periodically, but whilst the case
remains with the courts Parliament it is less likely that the issue will be considered
in Parliament.