Legal briefing | 22 Jan 2020 |

The Post Office litigation: 4 lessons for franchisors and franchisees

In December 2019, after several years of litigation, the Post Office settled a major dispute with its sub-postmasters for £57.75 million. What lessons does this dispute have for franchisors and franchisees?

The dispute

The Post Office has a network of over 11,000 branches throughout the UK. These are generally operated as quasi-independent businesses by sub-postmasters, who are remunerated by the Post Office for the provision of various services (under the Post Office brand).

The horizon system

Sub-postmasters were required to use a computer system known as Horizon for accounting purposes. The Post Office relied on evidence from Horizon to take action against over 500 sub-postmasters in relation to discrepancies in their accounts. Many had their contracts terminated; some were made bankrupt and some were even prosecuted for criminal offences. Over a considerable period of time, evidence emerged that Horizon itself could have been at fault. This eventually led to group litigation by affected sub-postmasters against the Post Office, brought with the assistance of a litigation funder.

The Post Office suffered a series of setbacks in the litigation, with judgments on key preliminary issues going against it. In particular, the judge found that Horizon itself could indeed have resulted in the discrepancies which prompted the Post Office to take action against the sub-postmasters. In December 2019, the parties announced that a settlement had been reached, with the Post Office agreeing to pay £57.75 million to the claimants.

Here are 4 key lessons which can be drawn from this dispute:

Lesson 1: don't get carried away with franchisor-favourable drafting

Most franchisors, not surprisingly, want their agreements to be as favourable as possible to them. Generally speaking, English law will respect the terms of contracts drafted in this way where they are between businesses (different rules apply where one party is a consumer). However, the Post Office litigation provides an illustration of how it can be counterproductive to maintain that a contract gives the franchisor carte blanche to behave as it wishes.

For example, the Post Office argued that its contracts with sub-postmasters gave it a very broad discretion as regards how to respond to accounting discrepancies. The judge noted that the Post Office had proceeded as if the sub-postmasters were under strict liability for losses (when in fact the contract required negligence or fault), that it had not permitted legal representation at interviews and that it had in some cases authorised the destruction of potentially relevant evidence. It had even claimed that disputes were subject to the Official Secrets Act (on the basis that the Post Office is state-owned), which the judge described as "potentially oppressive".

Relational contracts and good faith

The court took the view that, as this was a relational contract, it was appropriate to imply a general duty of good faith. The effect of this was that the Post Office would have needed to prove that, in taking decisions in reliance on the Horizon data (e.g. to terminate subpostmasters' contracts), it had sufficient regard to issues of fairness and due process – and that it did not, as the sub-postmasters alleged, effectively presume guilt without considering other possible explanations for the discrepancies. For more on this aspect of the judgment and on relational contracts generally, see this briefing and this video explainer.

This is not to say that franchisors can't aim to draft agreements in terms which are as favourable as possible to them. But they should be cautious about tipping the scales so far in their own favour that a court could find that the express contract terms conflict with the relationship of trust and confidence which is essential to make the agreement work in practice: that is precisely the kind of situation where a general duty of good faith may be implied.

Lesson 2: termination for fault requires reliable evidence

As noted above, the judge found that bugs in the Horizon computer system (on which the Post Office had relied to take action against sub-postmasters) could have led to the discrepancies in the accounts. He also found that there was significant evidence that both the Post Office and its IT supplier were aware of these problems – yet the Post Office had largely proceeded as if the evidence from Horizon were entirely conclusive. Had the dispute not settled, the sub-postmasters would no doubt have gone on to argue that the Post Office terminated their appointments unlawfully because it did not have reliable evidence of fault.

COMPUTER RECORDS AS EVIDENCE

This is not to say that computer records can never be relied upon to justify, for example, terminating a franchisee's contract. In many instances, they will be highly persuasive. However, where possible, corroborating evidence should be provided from other sources. It's also worth noting that in this case, the judge was so concerned by the evidence from the Post Office's IT suppliers that he has sent a file to the Director of Public Prosecutions - see further this briefing.

Lesson 3: no pot of gold at the end of the group litigation "rainbow"

At first sight, the outcome of this dispute might be expected to encourage group litigation by franchisees, supported by litigation funders. After all, £57.75 million is a significant amount of money. But divided equally between 552 claimants, it is only just over £100K each (which is a relatively small amount of compensation for those claimants who were made bankrupt and/or served prison sentences). In reality, the average sum received by each claimant will probably be substantially less than that, because it has been reported that the settlement sum also has to pay for:

the success fee of the litigation funder (not known, but likely to be a fairly significant percentage of the of the overall settlement sum); and
the costs of the claimants' lawyers (not known, but also likely to be significant; for its part, the Post Office is known to have spent over £20 million on the litigation).

IMPACT ON FUTURE CLAIMS

These figures may give franchisees pause for thought before they embark on similar group litigation in future – and given some of the unusual features of the Post Office dispute, our view is that it's unlikely to encourage a flood of similar claims. That said, claimant lawyers will, with some justification, hold it up as a positive example of what can be achieved with the support of litigation funders, even against a large, well-resourced opponent like the Post Office.

Lesson 4: don't underestimate reputational damage

The Post Office has almost certainly suffered significant reputational damage as a result of this dispute. To take just one example of many, the judge described its failure to investigate the Horizon system in the face of substantial evidence of problems as demonstrating "the most dreadful complacency, and total lack of interest in investigating these serious issues, bordering on fearfulness of what might be found if they were properly investigated." Despite the settlement, there is potential for further adverse publicity; the Post Office now faces calls for a public inquiry and the convictions of numerous sub-postmasters are expected to be looked at again by the criminal cases review commission.

Ultimately, the key lesson for franchisors from this dispute may be that if you value your reputation, take care how you treat your franchisees.

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