On 15 March 2019, the claimants in Bates and others v Post Office won a far-reaching victory at the High Court.
In the Common Issues trial judgment, significant sections of the various Subpostmaster contracts were held to mean something entirely different to that which the Post Office contended.
Key clauses in the Subpostmaster Contract (SPMC) and its successor, the Network Transformation Contract (NTC), were found to be so onerous, oppressive and unfair as to be unenforceable.
The behaviour of senior Post Office managers in the witness box was found to be "misleading", "completely unrealistic", "unhelpful" and suffering from "an overarching reluctance to provide accurate evidence".
In short, the Post Office took a shoeing, and not just in a been-made-to-look-bad-in-public kind of way.
Aside from what it means for the claimants, the ruling radically changes the existing business relationship current Subpostmasters have with the Post Office. After studying the evidence and case law, the judge decided the contract between Subpostmasters and the Post Office is a "relational" one.
Relational contracts are a relatively new area, acknowledged in this piece on the Lewis Silkin law firm website.
The piece defines a relational contract as a category of contract in which the contracting parties are "committed to collaborating with each other, typically on a long-term basis, in ways which respected the spirit and objective of their venture but which they had not necessarily tried to specify"
The Lewis Silkin article was prompted by a 2018 High Court judgment which expanded the definition of a relational contract. The judgment stated that the parties to a relational contract could expect that the other would act with integrity and in a spirit of co-operation, ie: “The legitimate expectations which the law should protect in relationships of this kind are embodied in the normative standard of good faith.”
One of the reasons the Post Office was very keen not to have its relationship with Subpostmasters defined as relational was because it could have implications for its existing business model. But as the Common Issues judgment stated:
"It would... be entirely wrong to start consideration of an issue such as whether the contracts are relational, by taking account of a risk said to lurk in the background that if the answer in this litigation is unfavourable to the Post Office, then the Post Office would no longer be able “to control” its network of branches, or that its business would as a result of such a finding come under “existential threat”."
For the claimants, the obligations in their relationship with the Post Office have now been clearly defined, and can be applied retrospectively.
The general gist of the Post Office's approach to its treatment of the claimants appears to be that whatever it did in the past, it acted lawfully. The closest it has ever come to an apology was when the Post Office's director of communications, Mark Davies, gave the only interview the Post Office has ever given on the subject, during which he said:
"I am really sorry if people have had... have faced lifetime difficulties, lifestyle problems as a result of their having been working in Post Office branches. It doesn't necessarily follow, though, that the Post Office is responsible for the issues that people have had."
It is a matter of dispute as to whether the Post Office acted lawfully even if there were no "relational" element to the Subpostmaster contract. Now a High Court judge says the contracts are and were relational, the Post Office is potentially in deep trouble.
Contradictory and confused
The Post Office's response to the 15 March judgment has been contradictory and confused.
In public, the Post Office has acknowledged it needs to change. Its chairman Tim Parker came out on the day of the judgment to say: "the Judge’s comments are a forceful reminder to us that we must always continue to do better. We have taken his criticisms on board and will take action throughout our organisation." [my italics]
What this means on the ground is unclear. None of the Postmasters I'm in contact with (including those currently engaged in disputes outside the group litigation) have been able to get any sense from the Post Office as to whether the Post Office believes it is dealing with them under the judge's interpretation of their contract or the Post Office's pre-15 March understanding, or some weird, limbo, hybrid pre-appeal interpretation. Nothing has, to the best of my knowledge, been explicitly stated to any party, certainly not in writing.
In the courts, the Post Office has done everything it can to reverse the judgment. Firstly by asking the High Court for permission to appeal, and when that failed, going to the Court of Appeal, which is where we are now.
As we know, the Court of Appeal dismissed the Post Office's first application out of hand on grounds of excessive length (the order is quite funny and worth reading). It appears to have accepted the second application for consideration and has indicated it will make a decision on whether to allow some or all aspects of the appeal this autumn.
The main thing the Post Office wishes to appeal is the relational element of the ruling.
According to the Post Office, the judge was "wrong to classify the contracts as “relational” and/or to imply a good faith term."
Furthermore: "the Judge was wrong to imply a broad and onerous good faith term, going well beyond cooperation and/or a requirement for honesty in relation to the contractual relationship."
His decision was apparently so wrong it could "seriously undermine contractual certainty by opening up a loosely-defined class of commercial contracts to extensive redrafting."
Many of the decisions in the common issues judgment stem from the finding that the SPMC and NTC were relational contracts. The appeal application seeks to have them all overturned.
The Post Office does not like the judge's ruling that suspending a Subpostmaster must be done "in good faith, and not arbitrarily or capriciously".
It accepted that: "the decision to suspend must be reasonably based on one of the grounds listed in the clauses governing suspension"
but: "The Judge erred in law in holding that... a decision to suspend an SPM had to be shown to be (1) necessary, (2) in accordance with the implied term of good faith and (3) a proper exercise of a contractual discretion (to which an implied fetter applied)."
The Post Office does seem to be hoping it can hold onto its previously exercised inclination to suspend unilaterally, at will.
The Post Office can terminate a Subpostmaster with "not less than" three months notice in the SPMC and "not less than" six months in the NTC. The judge found this meant the three and six month notice periods were minimums and that when deciding notice periods for each Subpostmaster, there would have to be some kind of formal process taking into account things like: "the reasons that the Post Office wanted to close the branch; the length of time a SPM [Subpostmaster] had been in post; their investment in purchasing the business; and whether they had residential accommodation as part of the business premises in which they themselves lived."
The Post Office doesn't like this. It argues: "The plain intention of the agreement is that the SPM be able to terminate for any reason or no reason at all, as long as he gives at least 6 months’ notice. The same must be true of Post Office’s right to terminate in reliance on the same words."
The infamous Section 12 Clause 12 and its lesser-known NTC relation, Part 2 Paragraph 4.1.
The judge found that to enforce Section 12 Clause 12 of the SPMC, which states: "the Subpostmaster is responsible for all losses caused through his own negligence, carelessness or error", the Post Office had to prove negligence, carelessness and/or error. Up till now the Subpostmasters had to prove they weren't to blame - a tricky bind.
The judge also found Part 2 par 4.1 of the NTC, which states: "The Operator shall be fully liable for any loss of or damage to, any Post Office Cash and Stock (however this occurs and whether it occurs as a result of any negligence by the Operator, its Personnel or otherwise, or as a result of any breach of the Agreement by the Operator) except for losses arising from the criminal act of a third party" to be so onerous and unusual as to be unenforceable.
The Post Office contends the judge has erred in law on both the above points, stating: "It is not almost a “punishment” or extraordinarily harsh in a commercial contract for a loss to lie with the party that caused it. This is particularly so where the party that causes the loss is a fiduciary of the other party and owes a duty to account. There is nothing extreme, or surprising, about requiring an agent to recompense his principal for losses incurred in the agent’s conduct of the principal’s business (it having been shown that these losses are real, rather than mere apparent losses shown on the accounting system). The Judge does not identify any factors, specific to the contractual relationship at issue, that alter that general approach."
When is an agent not an agent?
The thorny issue of the relationship between the Post Office and Subpostmaster is revisited. The Post Office is adamant is it agent/principal relationship. The judge has acknowledged it isn't quite an employee/employer relationship (although some SPMRs were on PAYE), but clearly finds it an oddity, if not unique in British business. The Post Office would rather re-establish it as a strict agent/principal arrangement.
In summary, the Post Office generally seeks to suggest the judge is wrong in his reading of the Subpostmaster situation and contract, wrong in his statement of the Post Office's case and wrong in law at almost every turn. The Post Office also suggests his rulings invent new and radical horizons (npi) in contract law which could have implications for many thousands of business relationships in every industry.
We should find out what the Court of Appeal makes of all this in October.
You can read the Grounds of Appeal and Skeleton Argument for Permission to Appeal here.
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