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OFFICIAL SENSITIVE: COMMERCIAL ae
Department for
Business, Energy
Date: 11 June 2019 & Industrial Strategy
Director General: Gavin Lambert
Lead Official: Craig Watson
Lead Official Telephone: ;« GRO!
Recipient To Note / Comment To Approve / Decide
Greg Clark X
Kelly Tolhurst x
Permanent Secretary x
Special Advisers x
Post Office Limited litigation
Summary
1. Atthe industry meeting on 4 June, you (SoS) asked for advice on how the ongoing
Post Office Limited (POL) litigation could be brought to a swift and satisfactory
conclusion, ensuring postmasters who had been treated unfairly were
appropriately compensated.
Timing
2. Routine. To note following the recent exchange of correspondence Kelly Tolhurst
is due to meet Tim Parker (POL Chair) and the board’s new legal advisors to
discuss POL’s litigation strategy on 24 June.
Recommendations
3. That you note the advice and our recommendation that you choose from the
following options (which are not mutually exclusive):
1: Challenge the POL Chair and Board to review their litigation strategy and
consider opportunities for early settlement
2: Commission POL to carry out a project on how to structure and operate a
settlement — including a fund which would subsequently assess claims,
consider effect, and award compensation according to pre-agreed criteria
3: BEIS Ministers to state publicly that they want to see justice resulting from
litigation for claimants with valid claims
4: Challenge Post Office to announce that it is taking on board some of the
legitimate criticisms in the judgments to date and is taking action to address
them.
5: Put UKGI lead legal counsel (or other legal adviser) on the POL litigation
sub committee as director or observer
6: Invite Nigel Boardman, chair of the BEIS Audit and Risk Committee, to
carry out some independent due diligence on POL’s litigation strategy
4. More radical options are presented in options 7 -10; we recommend these are not
pursued at this stage.
5. We recommend deciding on these options after POL provides an update on its
litigation strategy at the meeting currently being scheduled for 24 or 25 June.
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& Industrial Strategy
Advice
Latest position of the current litigation and current POL strategy
6.
The litigation has been broken down into four trials scheduled between November
2018 and March 2020. The current status of the litigation is that at a hearing on 23
May the judge denied POL permission to appeal his judgment in the first “Common
Issues” Trial and awarded the Claimants their costs of the Common Issues Trial
rather than reserving this judgment until later in the litigation. Setting out his
reasons in a written judgment of 4 June, the Judge criticised POL’s conduct again,
namely POL’s “veiled or implied threat that mirrors the approach adopted by Post
Office on the recusal application, namely that in adopting a course of action in the
face of opposition by the Post Office ... runs the risk that the Post Office will say
that the overall outcome of the litigation ... has already been decided”. The Judge
also expressed concern about the escalating costs of the litigation overall — he
puts the figure at gyer £13m for POL, including £500k for the failed attempt to get
the judge recused.
POL will now apply directly to the Court of Appeal by its 13 June deadline and,
after reviewing its approach under the new legal team, will narrow its focus onto
the most material legal issues affecting its contract with Postmasters. If the Court
grants permission, the appeal will likely be heard within the next 12 months while a
refusal will mean that the original judgment stands. The part-heard second
“Horizon Issues” Trial concerning the function and reliability of the electronic
accounting system (Horizon) used by Postmasters resumed on 4 June with expert
evidence and is expected to conclude on 2 July, with the judgment expected
several months later.
The Board has a litigation sub-committee to oversee its litigation strategy, which is
chaired by Tim Parker and attended by Shareholder NED Tom Cooper. Following
the adverse and unexpected judgment in the first trial on the “Common Issues”
POL took additional external legal advice prior to pursuing the recusal, which
subsequently failed. POL’s Board decided that new legal leadership and a wider
review of its strategy was required; they replaced the company’s General Counsel
and appointed new legal advisors (Herbert Smith Freehills) to advise them directly
on their litigation strategy. A new QC has also been appointed.
The Claimant group involved in the litigation is large, with 561 Claimants involved.
While POL has information on some of the cases from a previous mediation
process, the Claimants have never properly quantified their claim making it difficult
to estimate potential liabilities accurately but POL’s new legal team are reviewing
settlement and likely outcomes from the litigation, including potential costs, and
will discuss these with the Minister when they meet. To note, POL’s auditors have
been pushing them to put a figure on the potential liability, and there is a concern
that any figure provided to BEIS may result in this having to be disclosed in the
accounts. If that happens, this could potentially set a floor for any settlement
negotiations. [Needs to be edited per my conversation with Craig today)} We will
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Page 2 Comments
$1 See my emails with Tom Cooper there is a handling issue on cost specification
Steyn, Benjamin (BEIS), 10/06/2019 10:53 AM
w2 Addressed in para 8
Watson, Craig (Advanced Manufacturing and Services), 10/06/2019 01:40 PM
W3 Tom C — Alex referred to your email exchange on this and wanted to include a
reference, can you amend or confirm you are content?
Watson, Craig (Advanced Manufacturing and Services), 10/06/2019 01:36 PM
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ensure POL provide clear written briefing, including on settlement & Industrial Strategy
strategy, in advance of that meeting.
10.Should POL settle the existing case there is a chance that additional Claimants
may come forward so there may be a further and ongoing liability. We will ask
POL to provide an assessment of this risk in their briefing.
11.In addition, some of the Claimants may not have valid claims; for example, some
have pleaded guilty to criminal charges in the past. Therefore, in considering
options, including settlement, to resolve the litigation POL will need to consider a
process to determine which cases are genuine. With so many claimants, and the
strong personal feelings aroused by the cases, it may prove difficult in practice to
settle all aspects at acceptable cost without wasting public money on rewarding
bad behaviour. Financial payments would have to satisfy Managing Public Money
criteria, and would require ministerial and HMT consent.
Powers available to the SoS as sole shareholder
12. The Postal Services Act 2011 provided for a “Post Office company” to continue to
be owned by the Crown after the privatisation of Royal Mail. On separation, the
Secretary of State was granted a Special Share in the Post Office and the rights
and privileges this conveyed are set out in the “Articles of Association”. The
Shareholder is entitled to attend and speak at any general meeting or any meeting
of any other class of shareholders of POL, but the Special Share does not carry
voting rights or any other rights at any such meeting. The prior written consent of
the Shareholder is required for certain decisions, which generally relate to
appointments and remuneration, strategic planning, asset sales and commercial
decisions, large payments and borrowing. These arrangements ensure that the
Shareholder can influence key strategic decisions, with the need for day-to-day
involvement in the operations of the Post Office or the management of its branch
network and staff.
13.As sole shareholder, Government sets the strategic framework for the Post Office,
in particular providing a minimum, accessible, branch network in a way that is
sustainable for the taxpayer. POL is a large and complex business — the largest
retail network in Europe, and as such it is given the operational freedom to deliver
on its HMG-set objectives as a commercial business. Under the Articles of
Association, SoS approval is required for a number of reserved matters including
board appointments and remuneration and expenditure over £50m. This does not
include explicit powers to direct the board to take a specific course of action,
though ultimately Ministers have the right to appoint or remove any member of the
board, including the two executive members of the Board (CEO and CFO), which
could effectively be used as a lever to steer the board in a particular direction.
14.As you are aware, a competition is currently underway to recruit a permanent CEO
and panel interviews are due to take place this week [i.e. w/c 11 June].
15. While it is perfectly proper for the shareholder to express views and ensure the
Board understand their position, care needs to be taken that Ministers do not risk
being regarded as shadow directors. A shadow director is someone in accordance
3
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with whose directions or instructions the board are accustomed to & Industrial Strategy
act. A shadow director effectively has the same legal duties as a normal director
and can potentially incur personal liability for their actions.
Potential options available
16.The table at Annex A sets out the advantages and risks of a range of options
Ministers could take to address concerns over the management of the ongoing
litigation. These range from challenging the existing POL Board to change their
litigation strategy to more fundamental changes such as replacing the POL Board
or BEIS assuming control of the litigation strategy.
17.More vigorous action carries greater risks, as flagged in Annex A. Forcing further
changes to the leadership team will risk disrupting the progress POL have been
making in other areas of the operation of the business, including transforming the
business from loss making to returning a profit for the first time in 16 years.
Making public statements or directing POL to take certain action could weaken
their negotiating position in relation to settlement and make it harder to stick to the
existing BEIS line that this is an operational matter for POL.
18.We recommend that you choose from options 1 — 6 (either individually or
collectively) as the most appropriate actions to take at this stage, either
individually or as a package. Taking these actions would send a clear signal to
POL on the direction Government would like the litigation to take, without exposing
Ministers to significant legal risk of becoming shadow Directors and without
opening the department up to additional financial exposure. We recommend a final
decision on the more fundamental options (options 7 — 10) should await the
outcome of the Ministerial meeting with POL on its litigation strategy.
Timing and potential settlement windows
19.Should you decide you wish to encourage POL to settle the case at the earliest
opportunity, they will need to identify the most appropriate time to begin settlement
discussions with the Claimants. Again, we will ask POL to cover this in the briefing
they provide for the forthcoming meeting.
Communications handling
20. The Daily Mail has recently taken on a campaign to ‘Save our local Post Offices’,
which has included one story on the impact of the trial. However, the litigation
does not feature as one of the paper's five demands. There has also been low
level reporting mainly in the trade media, specifically Computer Weekly, of the
Post Office litigation.
21. There is pressure from the Daily Mail campaign for the government to be seen to
be sympathetic to the plight of postmasters generally. and a carefully worded
statement would be a good opportunity to convey Ministerial support for them,
without showing public conflict with the Post Office.
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Department for
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22. If considered appropriate, we could inform the Daily Mail if options _! & Industrial Strategy
1, 3, 4, 5 or 6 were taken as this would demonstrate that BEIS was taking an
active role in the matter and is sympathetic to the claimants. However, any failure
to then significantly alter the Post Office’s approach to this litigation risks BEIS
being seen as complicit or powerless.
23. Option 2 would require careful wording, which we can advise on. Again, should the
litigation fail to change course significantly, the SoS could be left open to further
questions and criticism.
24.We agree with policy colleagues in advising against options 7, 8 and 9. SoS going
public with a view against the Post Office could lead to coverage of an outright
conflict between the two organisations. This could also add fuel to the Daily Mail’s
campaign, which we are working hard with Special Advisors and the Post Office
communications team to bring to address, working with their key correspondent.
25.Once a decision is reached, we will work on the necessary communications with
policy colleagues and Special Advisors.
Accounting Officer considerations
26.POL have previously advised both Ministers and the Permanent Secretary that
they could fund any settlement or compensation awarded of between £30m-£50m
from their own resources and possibly more. Anything above this they are likely to
need support from BEIS with (on the assumption that their social purpose targets
remain the same). The department does not currently have any spare budget
available to support such a funding requirement. However, there are other options;
for instance, raising funds from sale of non-strategic ancillary businesses such as
POL’s telecommunications business.
27. There are a number of Accounting Officer considerations across the range of
options that we have presented. These are included in the attached annex and
include risks around the legal, affordability and value for money of any option. We
will develop full Accounting Officer advice once you have indicated your preferred
option going forward.
Contributors
28. This advice contains financial considerations, as agreed with Richard Beckett.
29.Legal Richard Watson (UKGI) and Jane Corera (BEIS) have been consulted and
agreed the content of this advice.
30.Communications considerations have been taken into account and agreed with
Annabelle Miles.
31. This advice does not have parliamentary handling implications at this time, as
agreed with Craig Watson.
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Department for
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Annexes & Industrial Strategy
A. Options for Ministers to consider
B. Summary of changes in personnel in POL over last three years
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Track Changes
1 Insert Tom Cooper, 10/06/2019 08:51 PM
2 Insert Tom Cooper, 10/06/2019 08:53 PM