Bates & Ors v Post Office Ltd (No 3)

Factual and Procedural Background

This judgment arises from a Group Litigation Order made in March 2017 concerning approximately 550 Claimants, primarily sub-postmasters (SPMs), who contracted with the Defendant (Post Office Ltd), a state-owned entity operating over 11,000 branches across the UK. The litigation centrally concerns the Post Office's introduction and use of the Horizon computerised accounting system from 1999/2000 onwards, which the Claimants allege contained numerous software defects causing unexplained shortfalls in branch accounts.

The Post Office maintained that any shortfalls represented actual losses caused by negligence or dishonesty of individual sub-postmasters, who bore the burden of proving otherwise. The Claimants dispute responsibility for these losses, alleging inadequate training, failures in the Horizon helpline, and a cover-up of system defects by the Post Office.

The litigation is complex and highly contested, involving multiple trials addressing common issues, Horizon system issues, and individual claims. Six Lead Claimants were selected to represent different factual and contractual circumstances. The Post Office's contractual arrangements with SPMs evolved over time from the Subpostmaster Contract (SPMC) to the Network Transformation Contract (NTC) introduced in 2011, with significant procedural and substantive differences.

The court heard extensive factual evidence from the Lead Claimants and 14 Post Office witnesses, including senior management. The litigation has attracted significant public and media interest, with transparency and confidentiality issues arising in disclosure and document management.

Legal Issues Presented

1. Whether the contracts between the Post Office and Subpostmasters are relational contracts imposing duties of good faith, fair dealing, transparency, co-operation, and trust and confidence.
2. Which, if any, of a large list of terms are implied terms or incidents thereof in the contracts.
3. To which contractual powers, discretions, and functions certain implied terms apply.
4. Whether the Post Office's supply of Horizon, the Helpline, and training/materials are services within the meaning of the Supply of Goods and Services Act 1982, imposing an implied term of reasonable care and skill.
5. Whether certain express terms are onerous or unusual and thus unenforceable without fair and reasonable notice.
6. What steps the Post Office was required to take to draw such terms to the attention of Subpostmasters.
7. Whether any such terms are unenforceable under the Unfair Contract Terms Act 1977.
8. Proper construction of specific liability clauses in the SPMC and NTC concerning losses.
9. Whether the Post Office was the agent of Subpostmasters for rendering and making available accounts and/or effecting, reconciling, and recording transactions.
10. Whether Subpostmasters bore the burden of proving any Branch Trading Statement they signed or returned was incorrect.
11. In what circumstances and on what basis the Post Office was entitled to suspend Subpostmasters.
12. In what circumstances and on what basis the Post Office was entitled summarily to terminate Subpostmasters' contracts.
13. In what circumstances and on what basis the Post Office was entitled to terminate contracts on notice.
14. Whether the express written terms represent the true agreement between the parties as to termination.
15. Whether Subpostmasters are entitled to compensation for loss of office or wrongful termination.
16. Whether breach of contract claims for loss of business and consequential losses are limited by notice periods.
17. What restrictions exist on the Post Office's discretion to appoint prospective purchasers of Subpostmasters' businesses.
18. Whether certain contract terms confer benefits on Assistants under the Contracts (Rights of Third Parties) Act 1999.
19. What responsibilities Subpostmasters have for training their Assistants.

Arguments of the Parties

The opinion does not contain a detailed account of the parties' legal arguments.

Table of Precedents Cited

Court's Reasoning and Analysis

The court undertook a comprehensive legal and factual analysis of the Post Office's contracts with Subpostmasters (SPMs), focusing on the nature of the contracts, the operation of the Horizon accounting system, and the contractual and statutory implications thereof.

It found that the contracts between the Post Office and SPMs are relational contracts, characterised by long-term relationships involving significant trust, cooperation, and mutual commitment, including substantial financial investment by SPMs. This classification implies a duty of good faith on both parties, requiring them to act honestly, fairly, transparently, and cooperatively.

The court analysed the express terms of the Subpostmaster Contract (SPMC) and the Network Transformation Contract (NTC) separately, noting significant differences. The SPMC imposes liability for losses on SPMs based on their negligence or fault, while the NTC imposes a broader, no-fault liability, which the court found to be onerous, unusual, and failing the reasonableness test under the Unfair Contract Terms Act 1977 (UCTA).

The court emphasised that the Horizon system's operation compelled SPMs to accept Branch Trading Statements including disputed items, with no mechanism within Horizon to dispute these except by contacting the Post Office Helpline. The court found that the Post Office treated disputed amounts as debts due and pursued recovery accordingly, effectively treating Branch Trading Statements as settled accounts, which was incorrect given the inclusion of disputed items.

Regarding agency, the court held that SPMs are agents of the Post Office with limited authority, primarily to operate branches and account for cash and stock. The Post Office is not the agent of SPMs in the respects contended for by the Claimants. The duty to account arises from express contractual terms, not common law agency principles, and Branch Trading Statements are not settled accounts in the legal sense when disputes are notified.

The court further found that the Post Office's powers to suspend and terminate SPMs must be exercised in good faith and for legitimate business interests. Suspension provisions allowing withholding of remuneration during suspension and after reinstatement were found to be onerous, unusual, and unreasonable under UCTA. Termination provisions were construed to require repudiatory breach for summary termination and reasonable consideration of notice periods for termination on notice.

On onerous or unusual terms, the court applied established principles requiring clear and reasonable notice for incorporation. It found certain clauses, especially those permitting unilateral variation of contract terms, broad liability for losses without fault, suspension remuneration provisions, termination without notice, and exclusion of compensation for loss of office, to be onerous and unusual. Incorporation of such terms depended on contract formation procedures; the NTC's signature and recommendation to seek legal advice generally sufficed, whereas the SPMC's procedures were deficient.

On the application of UCTA, the court found that the Post Office contracts are standard terms of business and subject to the reasonableness test. It concluded that several clauses, particularly in the NTC, fail the reasonableness test and are therefore unenforceable. The court rejected the Post Office's submissions that these terms were reasonable or that the parties were of equal bargaining power, finding a significant imbalance favoring the Post Office.

Regarding training, the court found an implied term requiring the Post Office to provide adequate training and support, and that SPMs were responsible for training their assistants only to the level of training they themselves had received. The Helpline was found to be an integral part of Horizon, and although not a statutory service under the Supply of Goods and Services Act 1982, an implied term requires it to be operated with reasonable care and skill.

The court found the NFSP (National Federation of Subpostmasters) is not independent of the Post Office, being funded by it under a restrictive confidentiality agreement that effectively controls the NFSP's activities and inhibits its support for the Claimants.

Overall, the court emphasised the need to interpret contractual terms objectively, in light of the factual matrix known at the time of contracting, applying established principles of contractual construction and implication, and cautioned against hindsight or rebalancing contracts based on perceived fairness.

Holding and Implications

DISPOSED OF

The court resolved the Common Issues in favour of the Claimants on key points, holding that the contracts between the Post Office and Subpostmasters are relational contracts imposing an implied duty of good faith. It found certain contractual terms to be onerous, unusual, and/or unreasonable under UCTA, limiting the Post Office's ability to rely on them. It rejected the Post Office's position that disputed Branch Trading Statements are settled accounts binding Subpostmasters without the ability to challenge them.

The decision requires the Post Office to exercise its powers of suspension, termination, and contractual variation in good faith, and with proper consideration of Subpostmasters' rights and interests. The Post Office's extensive reliance on the Horizon system and its treatment of disputed amounts as debts recoverable without full investigation is curtailed by the findings on contractual construction and implied terms.

No new precedent is established beyond the application of existing legal principles to the complex facts of this litigation. The judgment sets the framework for subsequent trials, including the Horizon Issues trial, which will determine the technical functioning of the Horizon system and its role in the accounting discrepancies. The judgment also highlights significant procedural and evidential issues, including transparency and document management concerns within the Post Office.