Claim Nos.

HQ16X01238, HQ17X02637 & HQ17X04248

THE POST OFFICE GROUP LITIGATION

IN THE COURT OF APPEAL

ON APPEAL FROM

THE HIGH COURT OF JUSTICE (QBD)

BETWEEN:

ALAN BATES & OTHERS

Claimants / Respondents

AND

POST OFFICE LIMITED

Defendant/ Appellant

__________________________________________________________________

APPELLANT’S SKELETON ARGUMENT

FOR PERMISSION TO APPEAL

__________________________________________________________________

19
INTRODUCTION

1. The 555 Claimants (“Cs”) are mostly former or current Subpostmasters (“SPMs”).
SPMs run Post Office branches on its behalf in accordance with standard form
written contracts under which they are appointed as agent to Post Office. There are
two main contracts at issue: the Subpostmaster Contract 1994 (as amended)
(“SPMC”) and the Network Transformation Contract (“NTC”), which entered into
use from late 2011. Both contracts remain in widespread use.1

2. These proceedings are the subject of a Group Litigation Order. The Managing
Judge, Mr Justice Fraser (“the Judge”), split the litigation into a series of trials, the
first of which took place in November 2018 in order to determine 23 issues
concerning the contractual relationship between the parties - the “Common Issues”.
It is the judgment (the “Judgment”: [2019] EWHC 606 (QB)) and Order following
that trial that give rise to the present application.

3. Permission is sought on the ground that the appeal would have a real prospect of
success (CPR 52.6(1)(a)) and/or that there is some other compelling reason for the
appeal to be heard (CPR 52.6(1)(b)). The Grounds of Appeal have been
considerably narrowed from those in respect of which the Judge refused permission
to appeal (although all of the matters which Post Office now seeks to appeal were
included in its permission application below). It follows that some of the analysis
in the Judge’s Reasons Accompanying Form N460 (“N460 Reasons”) does not
match up with the content of this proposed appeal.2

Real prospect of success

4. The Judgment contains a number of novel and wide-reaching propositions of law.

In particular, the Judge’s holdings include the following:

1
The Judge, in his N460 Reasons, states at para. 5 that the SPMC is no longer a live
contract. That is incorrect; the SPMC is still in use for many existing SPMs. The
Judge records, at para. 33 of the Judgment, that he had been informed that a
significant number of SPMs (approximately 2,700) remained on the SPMC.
2
In particular, paras 2, 6-7, 9-15, 21, 26, 37, 59-60 and 73 to 91 of the N460 Reasons
relates to issues that are not pursued in this application.
1

20
(a) Any commercial contract classified as ‘relational’ automatically includes a
broad implied good faith term: para. 738.

(b) A commercial contract can be classified as ‘relational’ even if it is of no fixed

duration and terminable on short notice (para. 732) or even if it provides, in
detail, for an agent-principal relationship.

(c) Once implied, a good faith term imposes extensive obligations (in this case in
addition to broad obligations of good faith, 17 separate implied terms which
the Judge concluded were to be implied because they were incidental to the
good faith obligation), going far beyond honesty/a duty to co-operate, and
contrary to the view of Chitty on Contracts: paras 711, 738.

(d) Providing that a ‘relational’ contract “may be determined by [X] on not less
than three months’ notice” does not create a right to terminate on [X] months’
notice. Instead, it creates an obligation conscientiously to consider what period
of notice longer than [X] months (if any) should be given: paras 894-895.

(e) Alternatively, the express terms of a contract as to termination can be regarded

as of no effect on the basis that they do not represent the parties' “true
agreement”: para. 925.

(f) A relational contract can only be suspended in accordance with the

requirements of good faith: para. 879.

(g) A clause permitting termination for “material” breach in fact requires a

repudiatory breach: para. 907.

(h) The Court of Appeal’s decision, in Commerzbank AG v Keen [2006] EWCA

Civ 1536, that a banker’s employment contract did not represent the bank’s
“written standard terms of business” within section 3 of the Unfair Contract
Terms Act 1977 (“UCTA”), because its business for these purposes was “the
business of banking” and the “terms as to the payment of discretionary
bonuses were not the standard terms of the business of banking”, is limited to
the employment context: para. 1074.

(i) The requirement that, to come within section 3 of UCTA, a contract must
entitle one party “to render a contractual performance substantially different

21
 from that which was reasonably expected of” it,3 includes any case in which
the provisions in question have a substantial effect on that party’s performance
(without any consideration of reasonable expectations): para. 1108.

(j) For the purposes of section 3 of UCTA, a party is ‘performing’ his or her
contractual obligations if (i) he or she terminates the contract or (ii) he or she
suspends performance of the contract: para. 1084.

(k) Express appointment of an agent does not import common law agency
principles into the relationship: para. 799.

5. For reasons set out in detail below, Post Office submits that each of these
propositions is wrong in law, and that many of them are radically wrong.
Moreover, none of these propositions is settled law, in respect of which there is
no real prospect of the Court of Appeal, having heard full argument, taking a
different view. The converse of these propositions is, at the very least, “properly
arguable”.

6. For the reasons given below, Post Office submits that each proposed Ground is
strong. Post Office also notes that the implied good faith term is a central plank
affecting the Judge’s approach to many of the Common Issues. Accordingly, if
permission is granted on that issue then as a matter of logic and expediency
permission ought also to be given on the other issues in which the issues of good
faith affected the reasoning. Furthermore, if the Court of Appeal is to consider that
changed landscape, it should also consider related issues, such as the suggested
onerous or unusual nature or unreasonableness of certain express terms in the event
that the Judge’s conclusions as to good faith did not operate so as to modify them.

7. The authorities support the view that account should be taken of the
interconnectedness of various Grounds of Appeal: see R v The London Borough
of Haringey [2005] EWHC 2235 (Admin) where Ouseley J said (following his
delivery of judgment) that he would not “restrict the grounds” although he was
“unpersuaded” by certain points “in particular”, because “if different views are
taken of some of the grounds, it is possible that may lead to a different view of
some of the other grounds”, and Marashen Ltd v Kenvett Ltd [2017] EWHC

3
The alternative gateway being that it entitles that party in some respect to render no
performance at all.
3

22
 1706 (Ch), where David Foxton QC noted (at para. 12) that permission to appeal
had been given on various grounds because they had a real prospect of success, and
in respect of a further ground because it was “interrelated”.4

Other compelling grounds

8. Post Office also submits that permission should be granted on “other compelling
reasons” grounds (CPR 52.6(1)(b)), on the basis that there is a public interest in
favour of giving permission for two reasons:

(a) There are currently in excess of 11,000 branches whose contracts are in one of
the two forms considered in the Judgment. It therefore affects the contracts of
a very considerable number of people; and/or

(b) The Judge implied a broad duty of good faith into the commercial contracts at
issue on the sole basis that they fell to be categorised as “relational contracts”.
The Judge then used this implied duty to, amongst other things, (1) imply 17
separate terms on the ground they were incidental to the good faith obligation
and (2) read down express rights for termination on notice and suspension. The
Judge’s approach was novel, would have far-reaching effects on the English
law of contract and give rise to the danger of parties invoking the doctrine of
good faith to undermine contracts that Moore-Bick LJ expressly warned
against in MSC Mediterranean Shipping Co v Cottonex Anstalt [2016] 2
CLC 272 at para. 45. The whole issue of the circumstances in which it is
appropriate to imply obligations of good faith has not yet been the subject of
any extensive consideration by the Court of Appeal and requires review.

Common Issue 1: “Relational contract”/duty of good faith (Grounds para. 2;

Judgment paras 702-741)

The good faith term implied into the SPMC and the NTC

9. The Judge implied a good faith obligation into both the SPMC and the NTC,
which he described as prohibiting conduct “which in the relevant context would be

4
Para. 12. See also In the Matter of EV (A Child) (Scotland) [2017] UKSC 15,
where Lord Reed recorded, at para. 2, that permission had not been restricted to the
single issue which satisfied the relevant criterion (under the different test in that
case), because “it was closely interconnected with the other grounds of appeal.”
4

23
 regarded as commercially unacceptable by reasonable and honest people”, and as
including three subsidiary obligations as to transparency, cooperation and trust and
confidence: para. 738. He emphasised that this requires more than honesty,
disagreeing strongly with the editors of Chitty on Contracts: para. 710.

10. He reasoned that this good faith term followed automatically from categorisation
of the contracts as “relational”: see paras 712-721, and para. 738, where he said
that the contract was “relational”, and that “this means that the contracts included
an implied obligation of good faith” (emphasis added). This was a clear error of
law. Terms as to good faith are not terms implied by law into commercial
contracts, whether or not such contracts are properly classified as “relational”.

11. This was another point on which the Judge took a different view from Chitty,
which states, at 1-057, that a duty of good faith is not implied simply because a
contract has “relational” features. Its implication always depends on the terms of
the particular contract. The authority cited in support is Globe Motors v TRW
Lucas Varity Electric Steering [2016] 1 CLC 712, per Beatson LJ at paras 67-68
(emphasis added):5

“One manifestation of the flexible approach referred to by McKendrick and

Lord Steyn is that, in certain categories of long-term contract, the court may be
more willing to imply a duty to co-operate or, in the language used by Leggatt J
in Yam Seng PTE v International Trade Corp Ltd [2013] EWHC 111 (QB) at
[131], [142] and [145], a duty of good faith. Leggatt J had in mind contracts
between those whose relationship is characterised as a fiduciary one and those
involving a longer-term relationship between parties who make a substantial
commitment. The contracts in question involved a high degree of
communication, co-operation and predictable performance based on mutual
trust and confidence and expectations of loyalty "which are not legislated for in
the express terms of the contract but are implicit in the parties' understanding
and necessary to give business efficacy to the arrangements". He gave as
examples franchise agreements and long-term distribution agreements. Even in
5
The Judgment of Lord Steyn to which Beatson LJ referred in this passage is Total
Gas Marketing Ltd v Arco British Ltd [1998] 2 Lloyds Rep 209 in which Lord
Steyn said that “there are no special rules of interpretation” applicable to
“relational contracts” (see para. 211, quoted at para. 65 of Globe).
5

24
 the case of such agreements, however, the position will depend on the terms of
the particular contract...an implication of a duty of good faith will only be
possible where the language of the contract, viewed against its context, permits
it. It is thus not a reflection of a special rule of interpretation for this category
of contract.”

12. Similarly, in Monde Petroleum v WesternZagros [2017] 1 All ER (Comm)

1009,6 the Deputy Judge (Richard Salter QC) said that “it is clear that the mere fact
that a contract is a long-term or relational one is not, of itself, sufficient to justify”
the implication of a good faith term. 7

13. The principal authority upon which the Judge relied was Yam Seng, which even if
correctly decided, provides no support for the Judge’s approach. The following key
points can be taken from Yam Seng.

14. First, outside the established categories of contract into which good faith
obligations are implied by law (e.g. employment and partnership contracts), such
an obligation may only be implied if it satisfies the ordinary test for terms implied
in fact, i.e. the orthodox necessity test (as recently set out in Marks & Spencer v
BNP Paribas [2016] AC 742, per Lord Neuberger at paras 21, 23 and 29): see
Yam Seng, paras 131, 147-149.

15. Secondly, the content of any implied obligation as to good faith will depend on the
express terms of the contract (amongst other things), because this forms part of the
process of interpreting the contract: see Yam Seng, paras 147-149 and 152.

16. The Judge also wrongly relied on several other authorities as supporting his
analysis that, in “relational” contracts, Marks & Spencer should be bypassed.8

6
The Judge’s quotation (at para. 718) from Monde wrongly omits the crucial words
“or relational one” from this passage.
7
Para. references are to those paras in the Official Transcript.
8
In particular, Amey Birmingham Highways Ltd v Birmingham City Council
[2018] EWCA Civ 264 (in which Jackson LJ did not say that a consequence of the
contract being described as “relational” would or even might be that it contained an
implied term as to good faith), Hamsard 3147 v Boots UK [2013] EWHC 3251,
Greenclose v National Westminster Bank [2014] 1 CLC 562, Carewatch Car
Services v Focus Caring Services [2014] EWHC 2313, Myers v Kestrel
6

25
 However, on a proper analysis, none of them provides any support for the
contention that a term as to good faith is implied by law into such contracts.

17. The Judge’s approach was wrong in law and would seriously undermine
contractual certainty by opening up a loosely-defined class of commercial contracts
to extensive redrafting.9 On the Judge’s analysis, the classification of a contract as
“relational” brings with it the automatic implication of the broad obligation of good
faith set out at para. 738, and opens it up to the implication of a raft of more
specific terms (which can be implied as “incidents” of the master obligation and do
not have to be shown to be necessary), as well as the reading down of other express
terms. The term should not have been implied.

In any event, SPMC and NTC not "relational"

18. The prior authorities to which the Judge refers indicate that a contract will not be
classified as “relational” if it is not “long term” in the ordinary sense of that phrase,
i.e. the parties have agreed a long contractual duration:

(a) In Yam Seng (where the total minimum duration of the contract was around
2.5 years), Leggatt J described relational contracts as involving a “longer term
relationship”, giving examples of some joint ventures, franchise agreements
and “long term distribution agreements”: see para. 142. In Globe Motors,
Beatson LJ apparently saw long duration as essential, referring to “certain
categories of long-term contract” and a “longer-term relationship” (para. 67).

(b) There are also cases in which the fact that the parties had not agreed to a long-
term relationship was relied on in finding that the contract was not

Acquisitions [2016] 1 BCLC 719 (in each of which the Court emphasised that
English law recognises no general implied duty of good faith), Acer Investment
Management v The Mansion Group [2014] EWHC 3011 (QB) (in which Laing J
concluded the contract did not contain any such implied term), and two cases in
which a good faith was implied but which nonetheless do not support the Judge’s
approach, namely Bristol Groundschool v Intelligent Data Ltd [2014] EWHC
2145 (Ch) and D&G Cars Ltd v Essex Police Authority [2015] EWHC 226 (QB).
9
For example, in the article to which the Judge refers at para. 726, Professor Hugh
Collins concludes that “relational contract” is a “loose legal concept that points
towards an approach rather than dictating particular rules”.
7

26
 “relational”: in Hamsard 3147 v Boots UK, Norris J found that an interim
agreement, which was terminable on reasonable notice, was not a “relational
contract”, including because it was not a “long-term arrangement” (para. 84);
in Acer Investment Management v The Mansion Group, Laing J found that
the relevant agreement was terminable on a “relatively short period of notice”
and this (amongst other things) told against it being “relational" (para. 109).

19. There is a coherent rationale as to why a long contractual term might be relevant to
classification as “relational” (if that concept is to play a role in justifying a good
faith term). The factual circumstances of a long-term contract’s operation may
change substantially over its duration. In some contexts, it would be difficult for
the express terms to account for all eventualities over a long contractual term, at
least where the contract requires close interaction between the parties. In
appropriate cases, a requirement of good faith might be necessary for the business
efficacy of a long contract of that kind. The implied term addresses that risk.

20. By contrast, contracts of short fixed duration/which are terminable on relatively

short notice do not expose the parties to the same risks. Parties to such contracts
already have a safety valve - the ability to exit the relationship. Absence of a long
minimum contractual duration may obviate the need for general implied terms.

21. It appears that the Judge did not accept that a “relational contract” must be long
term, at least not in this orthodox sense. He held that the fact that the SPMC and
NTC both permitted termination on notice was no more than a “relevant
consideration” (para. 732). He also concluded that the contracts were to be treated
as long term because this was the “objective intention of the parties when
contracting”. The Judge does not say how he identified this “objective intention”,
but it cannot have been through the process of interpreting the contracts, given that
they are expressly terminable on notice and have no fixed or minimum duration
(beyond the first year, in the case of the NTC only).

22. In other first instance decisions on allegedly “relational contracts” it was the
agreed duration of the contract that was relevant to assessing whether the contract
was “relational”: see, for example, Acer (Laing J) at para. 109. The Judge here
appears to have had in mind a different concept – not the agreed duration but the
expected duration. The latter may well differ from the former. Parties to
commercial contracts often agree clauses allowing termination on notice in the
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27
 expectation that the right to terminate on notice is unlikely to be exercised, at least
for some time. Each party might rationally expect the other to choose not to
terminate on notice, especially if they have committed time and money.

23. By having regard to the contract’s expected duration, rather than its agreed
duration, the Judge erred in law. If the fact of a contract being “relational” is to
play any part in its interpretation, that fact must be determined through the
construction of the contract, applying the orthodox principles.

24. Further, any other approach creates a glaring problem in a case of this kind. The
Judge had only six Lead Claimants before him. He cannot possibly have formed a
view as to what all of the many thousands of SPMs in fact expected when they
entered into their contracts, stretching over the 20-year period covered by the
claims; nor could he form a view as to what Post Office’s expectations were for
each of those many thousands of contracts. Subjective expectations could
obviously differ from case to case, not least given that there are corporate SPMs
that take over and relinquish various branches from time to time.10 If the relevant
duration of the contract were to be identified by reference to the parties’ actual
(subjective) expectations, a blanket approach could not be justified.

The Judge was wrong to ignore the agency relationship & agreed implied terms

25. Moreover, there was a fatal objection to implying the Judge’s extensive good faith
term into the SPMC or the NTC, namely that the parties had already agreed express
and implied obligations that filled any gap into which the good faith term could be
implied. In particular, the parties had agreed (i) a relationship of agent and
principal (bringing with it fiduciary duties), (ii) detailed terms governing the
operation of that agency relationship and (iii) (it was common ground) powerful
implied terms (Necessary Cooperation and Stirling v Maitland terms11). The
absence of any lacuna in the terms governing both the legal character and the detail
of the parties’ relationship should have barred the implication of a good faith term.

10
The Judge wrongly dismissed the relevance of corporate SPMs on the principal basis
that there are not many of them who are Cs in the proceedings: para. 733. There are
in fact many corporate SPMs.
11
Set out at para. 698 of the Judgment.
9

28
26. In Yam Seng, Leggatt J defined “relational contracts” as involving “expectations
of loyalty which are not legislated for in the express terms of the contract” (para.
142), and he went on to rely, in support of implying a specific term, on the fact that
the agreement at issue was “a skeletal document which does not attempt to specify
the parties’ obligations in any detail” (para. 161). That is not this case.

27. To the contrary, the parties did not fail to legislate for the “expectations of loyalty”
in the relationship. The SPM is Post Office’s agent and owes fiduciary duties to
Post Office as principal (para. 785 of the Judgment). The legal character of the
relationship and the loyalty required under it are clear. There was no scope for an
implied term to be inserted into the relationship, superimposing a lesser (but
mutual) good faith obligation on the same subject matter as is governed by the
existing fiduciary duties and express contractual obligations.12

28. More generally, the contracts are long and detailed commercial agreements that are
supplemented by extensive operating documents with contractual effect. It would
be unreal to describe these contracts as “skeletal” or to say that the parties had not
made provision for the nature and extent of the collaboration required by the
relationship. In Carewatch Care Services v Focus Caring Services, Henderson J
adopted the correct approach, refusing to imply general terms (including as to good
faith) because there was no “‘clear lacuna’ in the detailed provisions of the
agreement which has to be filled if the agreement is to work commercially”: paras
101-112.

29. It is also particularly unlikely that lengthy standard-form contracts, which sit within
a wider set of legal relationships (in this case, relationships between Post Office
and other SPMs, between Post Office and client businesses, and so on) would fail
properly to define the parties’ relationship, given that they knew that their
relationship had to function with that network of commercial arrangements.

Nature of the good faith term implied

30. As noted above (and notwithstanding the Judge’s statement to the contrary in para.
20 of the N460 Reasons), the particular good faith term implied in the Judgment

12
See Teeside Gas Transportation Ltd v Cats North Sea Ltd [2019] EWHC 1220
(Comm) (handed down after the Judgment):Butcher J refused (at para. 38) to imply
a general good faith term into terrain covered by express contractual provisions.
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29
 was broad. It prohibits all conduct “which in the relevant context would be
regarded as commercially unacceptable by reasonable and honest people” and
includes obligations of transparency, cooperation and trust and confidence (para.
738). That description is fairly high-level. But it is clear that the term which the
Judge implied was very wide, as is amply demonstrated by the 17 broad and (often)
unqualified duties which the Judge then implied as “incidents” of it.

31. Good faith requires only honest and cooperative behaviour. As noted above, in
Globe Motors Beatson LJ characterised the duty of good faith promulgated in
Yam Seng as “a duty to cooperate”. Leggatt LJ, sitting at first instance in Al
Nehayan v Kent [2018] 1 CLC 216, referred uncritically to that characterisation:
para. 170. This was the same case in which Leggatt LJ used the formulation, also
adopted by the Judge in this case, that good faith required refraining from “conduct
which in the relevant context would be regarded as commercially unacceptable by
reasonable and honest people”: para. 175.

32. If the latter formulation is construed as requiring only honest cooperation, it would
not be an objectionable definition of a good faith term (were such a term properly
to be implied in the first place). It was agreed, in this case, that a necessary
cooperation obligation should in any event be implied.

33. It is clear, however, that the Judge did not understand the term in this way:

(a) He said that it included an obligation of trust and confidence. This finds
expression in implied term (p), which is an obligation not to “take steps which
would undermine the relationship of trust and confidence between Claimants
and the Defendant”. This obligation, insofar as it requires anything beyond
honest cooperation, appears to replicate a duty implied by law into
employment contracts. That is not a feature of any ordinary good faith implied
term. It also makes no sense in these particular contracts, where it would
overlap with (but presumably differ from) the fiduciary obligations which
SPMs already owe to Post Office as agents under the express terms.

(b) He also said that it included an obligation of transparency. That goes far
beyond honest cooperation. It finds expression in (far-reaching and detailed)
implied terms (d) (g), (i), (j), and (k). All of those terms go beyond what good
faith requires. Honest cooperation will not (save perhaps in very particular

11

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 circumstances) require extensive disclosure. The Judge was wrong to treat this
as an aspect of good faith. There is no authority in support of that approach.

34. More generally, it is clear from the Judgment as a whole that the Judge had an
expansive understanding of the scope of the prohibited “commercially
unacceptable” conduct. The terms which the Judge implied as “incidents” of the
good faith term in fact go far beyond the requirements of honesty and necessary
cooperation. The Judge clearly understood refraining from “commercially
unacceptable” conduct to require much more than honest cooperation.

Common Issue 2: Implied terms (Grounds, paras 3 and 4)

35. In addition to the good faith term, the Judge implied 20 terms alleged by Cs (with
minor changes to two). The terms the Judge implied fall into two categories:

(a) 17 terms (identified in para. 746) that the Judge implied on the basis they were
“incidents” of the implied good faith duty. The Judge found that only seven of
these terms also satisfied the orthodox test of business necessity.

(b) A further three terms that the Judge implied only on the orthodox basis.

36. Save as amended by the Judge in the course of the Judgment,13 the implied terms
are listed in Common Issue 2 (following para. 45 of the Judgment) and are
identified by letters (a) to (t). The Judge did not imply term (u).

Seventeen terms implied on the basis that they are “incidents” of the good faith
obligation (Judgment, paras 743-748, 1117)

Ten terms implied solely as “incidents” of the implied good faith term

37. If the master good faith term is not implied, these 10 terms fall away with it, as the
Judge found no alternative basis to imply them. He effectively recognised that they
could not be implied on the basis of the Marks & Spencer test (given that he
found a dual basis for other, but not these, terms). Post Office therefore relies on its
arguments under Common Issue 1 (above) in relation to these terms. It also follows
that if any of the 10 is not, on analysis, properly justified as an “incident” of the
good faith obligation, the basis for its implication falls away.

13
(n) was amended by the Judge at para. 747 and (o) at para. 756.
12

31
38. Post Office submits that a specific duty can only be implied as an “incident” of a
more general duty if it follows logically from, and is necessary to give more
specific content or expression to, that more general duty. The “incident” must spell
out the general duty in relation to a specific subject matter or circumstance. If it
does something different from that, or goes beyond what the general duty requires,
it must be justified independently, as a stand-alone term and on its own merit. The
short-cut only works if the “incident” follows necessarily from the master duty.

39. There is support for this analysis in Yam Seng. In that case, Leggatt J was invited
to imply two specific terms alleged to give effect to a general obligation of good
faith and fair dealing. In respect of the first of those specific terms,14 Leggatt J was
careful to ensure that it was formulated to prohibit only conduct that would be
contrary to good faith. He did this by re-drafting the term so that it distinguished
between innocent conduct and conduct contrary to good faith: see para. 156.

40. A specific duty that is genuinely incidental to the master duty of good faith should
only prohibit conduct that necessarily involves a guilty mental state and/or guilty
knowledge (where “guilty” means demonstrating an absence of good faith). It
should not prohibit conduct that may be innocent. A term that is not limited in
these ways goes beyond the master duty.

41. The terms implied by the Judge as “incidents” of the good faith term do not respect
these limits. They are not formulated to capture only conduct that would be
contrary to the requirement of good faith. They do not require any mental element
or knowledge element that would call into question the honesty and integrity of
Post Office’s conduct in acting, or failing to act, in any particular way in any
particular circumstance.

42. Moreover, a number of terms do not sit logically together – for example, term (h)
must be an alternative to terms (e) and (f); term (i) must be an alternative to term
(j); and term (l) must be an alternative to terms (e), (f) and (h). For other terms, Cs
advanced alternative cases for the term’s specific content, and the Judge did not

14
The second implied term was justified on different grounds. Leggatt J considered it
to be necessary on the specific circumstances of the agreement: see paras 160-164.
Good faith appears to have played a lesser, if any, role in that analysis.

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 select between those alternatives, instead copying across both Cs’ primary and
alternative language into the term he implied: see terms (i) and (j).

43. Post Office therefore contends that all 10 terms fall away together with the implied
obligation of good faith and that, even if that obligation is implied, none of them
could properly be implied as an “incident” of it.

Seven terms implied as “incidents” and/or as necessary for business efficacy

(Judgment, paras 753 to 766)

44. The Judge implied seven terms on the dual basis that they were “incidents” and/or
were necessary for the business efficacy of the agreements. In relation to these
terms, the first point is that, standing back, the Judge has wrongly engaged in a
very substantial redrafting exercise which does not properly respect the principle
that the Court’s ability to imply terms is an “ambitious undertaking” that involves
the use of an “extraordinary power” subject to “strict constraints”: Marks &
Spencer at para. 29. Moreover, even if their implication could otherwise have been
justified on these bases (which it could not), the Judge’s approach contravened the
principle that “where a contract makes…specific provision…care must be taken not
to construe a general and potentially open-ended obligation such as an obligation
to “cooperate” or “to act in good faith” as covering the same ground as other,
more specific, provisions, lest it cut across those more specific provisions and any
limitations in them”: see Mid-Essex Hospital Services NHS Trust v Compass
Group [2013] BLR 265 at para. 154, per Beatson LJ. The Judge implied terms that
cut across, limit or even effectively replace the express contractual provision made
for specific subject matter, such as termination and suspension.

45. The first two, implied terms (c) and (d), impose absolute obligations on the Post
Office properly, accurately and fully to maintain records of all Horizon transactions
and moreover properly and accurately to produce all relevant records and/or to
explain all relevant transactions and/or shortfalls attributed to Cs. They can be
taken together.

46. First, these are not “incidents” of the good faith term. They do not require a mental
element or knowledge element that would call into question the honesty and
integrity of Post Office’s conduct. They go beyond prohibiting conduct that would
be contrary to the good faith term.

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33
47. Second, they also go beyond what might be necessary for the business efficacy of
the agreement, for the following reasons:

(a) Post Office is already required, by the Necessary Cooperation and Stirling v
Maitland Terms not to prevent or inhibit, and to cooperate in, the discharge of
the SPM’s obligations. This would include taking reasonable steps to retain
accurate transaction records. It would also include taking reasonable steps to
provide the SPM such information as is necessary for him to comply with
those obligations, including accounting obligations that he owes as fiduciary.

(b) Those agreed implied terms are better-suited to ensuring the business efficacy
of the contracts and do not go beyond that purpose. Terms (c) and (d) exceed
that purpose by creating absolute obligations that are unlimited in time: for
example, Post Office would, on the face of implied term (c), be required to
retain records of billions of transactions for eternity, irrespective of the utility
of that to SPMs generally or any particular SPM. Implied term (d) (which is
inappropriately formulated as a duty to the Cs, rather than SPMs generally or a
particular class of SPMs) is not limited by reference to the circumstances in
which the records must be produced and so, on its face, creates a rolling duty
of disclosure and explanation without any trigger, let alone a requirement of
necessity. It is only limited by the concept of “relevance”, but it identifies no
criteria by reference to which relevance can be judged. In contrast, the agreed
implied terms provide a fact-sensitive but conceptually clear standard, namely
necessity for the SPM’s performance of his obligations (here, such records as
are reasonably necessary for the SPM’s proper and accurate accounting to Post
Office, including the records that may be necessary to resolve a dispute).

(c) That meets the Judge’s point at para. 762 that SPMs cannot account accurately
to Post Office without “proper and accurate records”. The Judgment does not
explain why absolute and unlimited obligations are necessary for that purpose,
rather than obligations directed specifically towards facilitating the SPM’s
performance (i.e. the agreed implied terms). The contracts do not lack practical
or commercial coherence because of an absence of absolute and unlimited
obligations on Post Office to retain and produce accounting records. The Judge
effectively applied a standard of desirability (seen from one side’s
perspective), rather than practical and commercial coherence.

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34
48. The third of the seven terms is (m). It prevents the recovery of a shortfall unless
and until “(i) the Defendant had complied with its duties above (or some of them);
(ii) the Defendant has established that the alleged shortfall represented a genuine
loss to the Defendant; and (iii) the Defendant had carried out a reasonable and
fair investigation as to the cause and reason for the alleged shortfall and whether it
was properly attributed to the Claimant under the terms of the Subpostmaster
contract (construed as aforesaid)”.

49. This is not an “incident” of the good faith term. It establishes a three-limbed
prohibition on recovering shortfalls, and none of them is limited by reference to
any mental element or knowledge element that would call into question the honesty
and integrity of Post Office’s conduct. They go well beyond prohibiting conduct in
breach of an obligation of good faith..

50. Furthermore, the first limb of the prohibition assumes the existence of the implied
duties considered above (i.e. the “incidents”). It refers to compliance with all or
some of them. The Judge again failed to identify which of the alternative
formulations he considered it appropriate to imply. In any event, this limb falls
along with the “incidents” to which it refers.

51. The second limb introduces a requirement that Post Office have “established”
something as a fact, rather than holding an honest belief that it is true. There is no
attempt to limit the term to a prohibition on conduct in breach of the obligation of
good faith. If Post Office honestly believed that a shortfall “represented a genuine
loss”, recovering in respect of that shortfall would not involve bad faith.

52. The third limb is hard to follow. It refers back to Cs’ pleading in relation to the
construction of section 12, clause 12 of the SPMC and Part 2, para. 4.1 of the NTC.
The Judge did not fully agree with those constructions: see para. 683. The Judge
failed to re-formulate the term to make sense of it in light of his holdings.

53. Nor is the term necessary for the business efficacy of the contracts. The Judge
accepted this in respect of limb (i) of the prohibition on recovery: see para. 763. He
does not explain why limbs (ii) and (iii) are, by contrast, necessary for the practical
or commercial coherence of the contracts. They are not.

54. As regards limb (ii):

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35
 (a) The SPMC and NTC provide that the SPM must make good any deficiency in
his account immediately, rather than awaiting the resolution of any process of
investigation or reconciliation against client records (i.e. processes that might
prevent ultimate loss to Post Office): section 12, clause 12 SPMC and Part 2,
para. 4.1 NTC both require that deficiencies be made good “without delay”.
The implied term is incompatible with those express terms.

(b) There is no lack of coherence in that position. It is no less coherent than the
alternative – i.e. Post Office having to await the conclusion of any and all
reconciliation processes before recovering the deficit on its agent’s account.
Each of the two options is commercially and practically coherent – all that
differs is which party is in or out of pocket in the interim period.

(c) It is a different question whether Post Office is required to reflect in its account
with the SPM any relevant correction that it makes to its accounts with its
clients – i.e. whether Post Office, having recovered or corrected the shortfall
through some other route, must pass on to the SPM the benefit of any recovery
or correction. The contracts do not make express provision for this, but Post
Office has this obligation, pursuant to the Necessary Cooperation Term.

55. Many of the same points apply to limb (iii). The logic of the contracts is that Post
Office be made good on the basis of the accounts provided to it by the SPM as
agent and accounting party. That is not commercially or practically incoherent.

56. The fourth of the seven terms is (n). It precludes suspension of Cs without
reasonable and proper cause and/or in circumstances where Post Office was itself
in material breach of duty in respect of the matters which the Defendant
considered gave it the right to suspend (words in bold added by the Judge).15

57. These limbs cannot be “incidents” because they are not limited by reference to any
mental element or knowledge element that could call into question the honesty and
integrity of Post Office’s conduct in deciding to suspend the SPM.

15
The Judge also implied a term preventing Post Office suspending Cs arbitrarily,
irrationally or capriciously. Post Office accepted before the Judge (para. 429 of the
written closing) that it could properly be implied that the decision to suspend must
be reasonably based on one of the grounds listed in the clauses governing
suspension and accordingly does not seek to challenge this aspect of term (n).
17

36
58. As regards implication on the ground of necessity, the starting point is the express
terms governing suspension. Section 19, clause 4 SPMC provides that an SPM can
be suspended “if that course is considered desirable” by Post Office on a number
of stipulated grounds. Part 2, para. 15.1 NTC provides that Post Office “may
suspend” an SPM if it considers that “necessary in the interests of Post Office” on a
number of stipulated grounds. These express terms make commercially and
practically coherent provision for suspension, especially if read with Post Office’s
acceptance that the decision to suspend must be reasonably based on one of the
listed grounds. There is no room or necessity to imply further restrictions.

59. As to limb (iii) specifically, there is no basis to imply a prohibition on suspension

where Post Office is itself in breach in some arguably relevant way. There are
circumstances in which a party may be barred from exercising a contractual right
where it is itself in relevant breach, but this is matter of substantive law, rather than
the basis for an implied term: see, e.g., Carewatch at paras 102-103, where
Henderson J refused to imply a term to the effect that a party could not benefit
from its own wrong on the basis that this was “essentially a proposition of law”
and “not really an implied term at all”. The same reasoning applies here.

60. In any event, there is nothing commercially or practically incoherent about a

principal being able to suspend an agent who has possession and control of his cash
and stock without regard to whether he, the principal, may himself be in breach of
the contract. The power to suspend has a strong commercial justification
independently of any broader disputes between the parties, and it must (as a matter
of commercial common sense) be capable of rapid and straightforward exercise.

61. The Judge held in a different part of the Judgment that, on the proper construction
of these express terms (or by necessary implication), the “interests” of Post Office
referred to in the clauses on suspension extend only to “legitimate interests”: see
paras 872 to 876. It is difficult to see what this adds to the clear words of the terms
(read with Post Office’s concession above) or to a requirement that the decision to
suspend not be arbitrary, irrational or capricious. It is unnecessary.

62. The fifth of the seven terms is term (o). It prevents termination of the Cs’ contracts
(i) arbitrarily, irrationally or capriciously; (ii) without reasonable and proper cause;
and/or (iii) in circumstances where the Defendant was itself in material breach of

18

37
 duty in respect of the matters which the Defendant considered gave it the right
to terminate (words in bold added by the Judge).

63. None of the three limbs can be implied as “incidents” (or otherwise), including
because general obligations as to good faith in relation to the performance of a
contract do not control the circumstances in which that contract may be terminated:
see Ilkerler Otomotiv Sanayai ve Ticaret Anonim Sirketi v Perkins Engines
Co Ltd [2017] 4 WLR 144 at para. 29 (per Longmore LJ, with whom Briggs LJ
agreed), and because Post Office has under the contracts express and unqualified
rights to terminate which the implied term would contradict. In any event, the
second and third limbs are not “incidents” because they are not limited by
reference to any mental element or knowledge element that would call into
question the honesty and integrity of Post Office’s conduct in deciding to terminate
the contract, for the same reasons as set out in relation to suspension.

64. The term is not necessary for the business efficacy of the agreements. The contract
itself provides a “control mechanism” that relies on an “objective test”, such that
there is “no warrant for implying a different one”: see Mid-Essex at para. 139 per
Lewison LJ. More generally, the absence of substantial fetters on termination rights
does not undermine the practical or commercial coherence of the agreements.
Termination rights do not offend against business efficacy. It is not commercially
or practically incoherent for a contract to be terminable on notice, or in response to
material breach.

65. The final two terms are (q) and (r), requiring Post Office to exercise any
contractual, or other power, honestly and in good faith for the purpose for which it
was conferred and not to exercise any discretion arbitrarily, capriciously or
unreasonably.

66. The Judge’s reasoning in respect of these terms proceeds on the basis of a mis-
statement of Post Office’s case. The Judgment refers to Post Office having taken
the “extreme” and “wholly wrong in law” position that no such fetters were to be
implied: see paras 758 to 761. Post Office did not take that position. Post Office in
fact submitted that it was incumbent on Cs to identify the clauses that they
contended were subject to implied fetters, submitting that “the appropriateness of
implying a term (and what term) depends on the nature of the express term at issue,

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38
 including whether it creates, on its proper construction, a contractual discretion
(properly so-called) or a contractual power or a contractual right”.16

67. Post Office maintains those submissions on appeal. It is impossible to determine

what implied fetter may be appropriate without identifying the term(s) to which it
is contended to apply. In the absence of any proper pleading from Cs on the point,
Post Office itself undertook the task of identifying relevant contractual discretions
and accepting that those specific discretions were subject to an implied restriction
that they not be exercised dishonestly, arbitrarily, capriciously or irrationally.17
Post Office identified four such discretions in para. 343 of its written closing
(reflecting its pleading) and, in para. 430, Post Office identified two other
discretions or powers that “it might be argued with some force” should be included.

68. Post Office contends that neither term (q) nor term (r) should be implied in a
vacuum (rather than being implied, where appropriate, to govern specific identified
discretions and powers). Further, there are two important points of detail on the
terms’ formulation:

(a) The use of the words “good faith” in term (q) should, even were that term
implied, cover only the meaning of that term as set out in the case-law referred
by the Judge in para. 759, and not the much broader conception of good faith
used by the Judge in the term he implied under Common Issue 1.

(b) The case-law to which the Judge refers cannot justify the implication, in term
(r), of a requirement that discretions be exercised “reasonably” (as distinct
from “rationally”). That restriction cannot be implied under the orthodoxy.

16
At para. 347 of the written closing.
17
Only contractual discretions (properly so called) typically invite the implication of a
term to prevent irrationality and capriciousness: Mid-Essex, per Jackson LJ at paras
83-95 and BT v Telefonica O2 UK [2014] Bus LR 765, per Lord Sumption at para.
37. Contractual powers may be subject to slightly different restrictions depending on
the context: Property Alliance Group v The Royal Bank of Scotland [2018] 1
WLR 3529 at para. 169). Contractual rights are not controlled by any general
implied restriction - the existence of an unconditional right precludes the implication
of a term that would be inconsistent by restricting or limiting it.
20

39
Three terms implied solely on the basis of business efficacy (Judgment, paras
749-752)18

69. The first is implied term (a), requiring that, “Post Office provide adequate training
and support for its SPMs when it imposed new working practices, but particularly
new systems such as the Horizon system.” This term is not necessary for business
efficacy. Post Office is already required by the Necessary Cooperation Term to
provide such reasonable training as is necessary for the performance of the SPMs’
obligations. The contracts do not lack practical or commercial coherence because
of a failure to make provision for “adequate”, rather than “reasonable”, training.

70. The second term is implied term (b), requiring that Post Office “provide a system
which was reasonably fit for purpose, including any or adequate error repellency”.
The formulation of the term is unclear as to whether what is required is “adequate”
or merely “any” error repellence.

71. Post Office is already required by the Stirling v Maitland and Necessary
Cooperation terms to ensure that, where it specifies a means through which SPMs
must perform their contractual obligations, (i) those means do not inhibit such
performance and (ii) the requirement to use those means does not involve a failure
to provide reasonable cooperation in the discharge of the relevant obligations. As
regards a requirement to use Horizon (or any accounting system) to account to Post
Office, these implied duties will overlap closely with a requirement that the system
be reasonably fit for purpose. No further term is necessary.

72. Further, the Judge does not explain why it is necessary for the implied term to
make specific provision for a particular technical aspect of how the accounting
system works. If the IT system were to lack adequate “error repellency” but were
to deploy measures that corrected for all the errors that it failed to repel, it would
be fit for the purpose of effecting and recording transactions accurately,
notwithstanding that it was lacking in one technical respect. It must logically be the
outcome that matters, rather than how the system gets there at a technical level.

73. The third term implied by the Judge is a more modest version of the term sought by
Cs as implied term (t), namely that “Post Office take reasonable care in

18
Para. 24 of the N460 Reasons appears to overlook these terms, as they are not
justified on the basis of the good faith term.
21

40
 performing its functions and/or exercising its functions within the contractual
relationship, particularly those which could affect the accounts (and therefore
liability for alleged shortfalls) of SPMs”.

74. However, there is no justification for even this slightly slimmed-down term:

(a) Post Office is already required by the Necessary Cooperation Term to perform
all its obligations in a manner that enables SPMs properly to perform their
obligations to it under the contracts, including their obligations as fiduciaries.

(b) The term is unnecessary: if a party fails to comply with his contractual
obligations (including implied duties of cooperation), he has breached the
contract, irrespective of whether or not he took reasonable care; if a party fails
to take reasonable care but does not breach any contractual obligation
(including implied duties of cooperation), the absence of reasonable care is
immaterial and does not sound in damages.

(c) The Judge provides no reasoning as to why a requirement to take reasonable

care might be necessary in these specific contracts: see para. 752. If rightly
implied here, such a duty would logically be implicit in many or all
commercial agreements, even approaching the status of a term implied by law.

Common Issue 3: Contractual discretions and powers (Grounds para. 5;

Judgment para. 768)

75. Common Issue 3 asks to what contractual powers, discretions and/or functions
within the contracts the relevant implied terms apply. The Judge’s purported
answer to this issue at para. 768 is that those fetters apply to “the exercise of all
[Post Office’s] contractual powers and discretions”, going on to refer to “the four
identified in this Common Issue”, but the Common Issue does not identify any such
powers and discretions. Rather it specifically poses the question “to what
contractual powers, discretions and/or functions in the SPMC and NTC do such
terms apply?” Para. 768 does not identify which fetter applies to which clause(s)
of the contracts and on what basis.

76. In para. 29 of the N460 Reasons, the Judge appears to be suggesting, by his
reference to para. 757 of the Judgment, that his conclusion was in fact that the four
terms identified in Common Issue 3 apply to the four terms identified in para. 757,
namely implied terms (n), (o), (q) and (r). So far as (q) and (r) are concerned this is
22

41
 equally as circular as para. 768, as those terms do not (contrary to the apparent
view of the Judge) involve the exercise of any discretion but rather purport to
qualify the exercise of other, unspecified, contractual powers or discretions.
Implied terms (n) and (o) do at least identify contractual powers of Post Office,
namely the power to suspend/terminate, but for the reasons set out above the Judge
was wrong to conclude those powers were constrained by the duty of good faith.

77. The context to this is that Cs failed to plead the powers and discretions to which
they contended implied fetters applied. As noted at para. 67 above, Post Office
itself identified relevant discretions and volunteered orthodox implied restrictions.
The Judge should have answered Common Issue 3 by referring to those discretions.
Contra para. 28 of the N460 Reasons, this submission does not ignore the relevant
authorities on contractual discretions – it merely stresses the need correctly to
identify a (relevant) discretion before those authorities can be applied.

Common Issue 16: Termination on notice (Grounds paras 6 and 7; Judgment

paras 892-902)

78. The Judge construed each of the terms in the SPMC and the NTC that expressly
permit termination on notice as creating a contractual discretion as to the notice
period (above the stipulated minimum), in relation to which Post Office is required
to act in good faith, giving “conscientious consideration” to a non-exhaustive list
of relevant factors (para. 895),19 failing which the notice is in breach: para. 894.
Post Office submits that he was wrong: the terms at issue create rights to terminate
on 3 or 6 months’ notice in any case, that being the minimum amount of notice that
the contract indicates must be given. That is what such terms always mean.

Section 1, clause 10 of the SPMC

79. Section 1, clause 10 SPMC provides that the contract “may be determined by Post
Office Counters Ltd on not less than three months notice”. The Judge wrongly
rejected Post Office’s argument that these words created a right to terminate on
notice, as long as notice of at least three months was given (para. 893) and said that

19
Including (but not be limited to) (i) the reason that Post Office wanted to close the
branch; (ii) the length of time an SPM had been in post; (iii) their investment in
purchasing the business and (iv) whether they had residential accommodation as part
of the business premises in which they themselves lived.
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42
 the words “not less than” would be superfluous unless they created a discretion as
to how much notice to give (at para. 894).

80. This is not correct, either as a matter of construction or implication.

81. First, words of this kind (“not less than [X] months”) appear in very many
commercial contracts. They are construed as simply creating a right to terminate on
condition that the stated minimum period of notice is given: see, for example, Ham
v Ham [2013] EWCA Civ 1301 at paras 1, 6 and 61; Cavenagh v William Evans
Ltd [2013] 1 W.L.R. 238 at paras 11, 47 and 50.

82. Secondly, there are good reasons for contracts to include the words “not less than”.
They preclude any argument that a notice to terminate is defective because it gives
a different (longer) period of notice from that required by the clause. The law
adopts a strict approach to the validity of contractual notices: see, for example,
Mannai Investment v Eagle Star Life Assurance [1997] AC 749, and Lord
Hoffmann’s famous remark, “If the clause had said that the notice had to be on
blue paper, it would have been no good serving a notice on pink paper” (p.776B).

83. Thirdly, even if the words “not less than” were strictly superfluous, that fact would
carry very little weight in determining the proper construction of the term: see
Lewison, The Interpretation of Contracts, at [7-03].

84. Fourthly, it would be a very surprising construction of a termination provision that

it created a discretion to be exercised in good faith. Absent very clear words, the
construction of a termination provision should follow the rule that a general duty of
good faith does not qualify an express and absolute right to terminate on notice: see
Ilkerler Otomotiv, at para. 29. As stated in Monde Petroleum, at para. 272:

“the right to end a contract is different in kind to the sort of rights which may
arise in the course of that contract’s performance. The purpose of a contractual
right to terminate is to give the party on whom that right is conferred the power
to bring the contract to an end. It is a right to bring an end to the parties’
shared endeavour. In my judgment, it is unlikely that the hypothetical

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43
 reasonable commercial man or woman would expect the party exercising that
right to be obliged to consult anyone’s interests but its own.”20

Part 2, para. 16.1.1 NTC

85. Para. 16.1 NTC provides that the contract will continue until, inter alia, “either
Party gives to the other not less than 6 months' written notice… which cannot be
given so as to expire before the first anniversary of the Start Date”. The Judge
reached the same interpretation of this clause as he did of section 1, clause 10
SPMC: para. 901. Post Office submits that the Judge erred in that interpretation, for
the reasons set out above.

86. There is a further reason to conclude that the Judge was wrong in relation to the
NTC specifically. The words that grant Post Office the right to terminate on “not
less than 6 months’ written notice” are the same words as grant an identical right to
the SPM. It would be commercially absurd to require that an SPM who wishes to
cease operating the branch give “conscientious consideration” as to how much
notice to give, with this being a condition for lawful termination. 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.

87. The Judge, in para. 43 of the N460 Reasons, states that Post Office did not argue, at
first instance, that any implied good faith term should not apply to termination on
notice. That is not correct. In submissions which dealt with termination on notice,
Post Office submitted that no further restrictions on Post Office’s power to
terminate on notice, beyond those spelled out in the clause, should apply. 21 That
included the various restrictions which Cs alleged, in the context of termination on
notice, should give expression to an implied good faith term.

20
See also Lomas v JFB Firth Rixson Inc [2012] 1 CLC 713, at para. 46: “The right
to terminate is no more an exercise of discretion, which is not to be exercised in an
arbitrary or capricious (or perhaps unreasonable) manner, than the right to accept
repudiatory conduct as a repudiation of a contract.”
21
Written closing, paras 447 to 457.
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44
Common Issue 15: Termination for breach under the NTC (Grounds para. 8;
Judgment paras 896-908)22

88. The Judge held that the terms of the NTC permitting termination for breach were to
be construed as applying only to repudiatory breaches: para. 907. The relevant
terms are at Part 2, paras 16.2.1 and 16.2.2. They provide a right to terminate
where the SPM commits a “material breach” of the Agreement, which the SPM
then does not remedy within 14 days of receiving a written notice.

89. The Judge erred in construing these provisions as requiring a repudiatory, as

opposed to material, breach. The words of clause 16.2.1 are clear. Material breach
is the standard expressly chosen by the parties.

90. The Judge states in para. 907 that reading the clause as requiring a repudiatory
breach is “consistent with the views expressed” in Lewison, the Interpretation of
Contracts at [17.16]. That is wrong: that passage relates to a clause providing for
termination for “any” breach. The author goes on to refer to authorities on the
construction of terms permitting termination for “material” breach and concludes
that the “better view” is that in such a case the right to terminate may arise without
repudiatory breach. Indeed, clauses permitting termination in the event of material
breach have previously been upheld as imposing that different standard: see, in
particular, Forman Holdings Ltd v Modem Holdings [2001] EWCA Civ 1235,
per Judge LJ at para. 21 and Pill LJ at paras 5-6.

Common Issues 17 & 18: “True agreement” on termination (Grounds, paras 9

& 10)

91. In the alternative to his holdings on contractual interpretation as to the notice

period, the Judge said he would reach the same conclusion on the basis that
notwithstanding the express wording of the written contracts this represented the
“true agreement” between the parties. This alternative holding (which becomes
effective if the appeal against the primary holding succeeds23) was wrong.

22
It appeared, from para. 899 of the Judgment, that the Judge also found that a decision
to terminate the contract for cause had to be taken in good faith. The Judge has
stated, in para. 7 of his N460 Reasons, that the Judgment and Order should not be
read in this way. On that basis, no appeal on that point need be pursued.
23
Thus, it is respectfully submitted that para. 48 of the N460 Reasons is incorrect.
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45
The law on discerning the “true agreement”

92. It is well-established that, where there is a written contract that appears to govern
the parties’ relationship, the Court will (save in carefully-defined circumstances)
identify the content of their agreement by interpreting that document: see, e.g.,
Secret Hotels 2 v HMRC [2014] 2 All ER 685 at para. 31 (quoted by the Judge at
para. 922).

93. Chitty, at [2-171], identifies only two exceptions to this rule: shams, and cases in
which an agreement has been mis-labelled (e.g. called a “tenancy” when as a
matter of law it could not be). One sub-category of sham is that “an agreement may
take effect as a contract of employment even though (contrary to the reality of the
relationship created by it) it described the party who is in truth the other’s
employee as being an independent contractor and not an employee”. Autoclenz v
Belcher [2011] 4 All ER 745, the case which set out the “true agreement”
principle, is footnoted as authority for this proposition.

94. In Autoclenz, the Supreme Court held that the written contracts in which car
washers were described as sub-contractors did not reflect what had actually been
agreed between the parties, and that under the “true agreement” the car washers
were in fact workers. At para. 21, Lord Clarke said that “Nothing in this judgment
is intended in any way to alter those principles, which apply to ordinary contracts
and, in particular, to commercial contracts. There is, however, a body of case law
in the context of employment contracts in which a different approach has been
taken” (emphasis added).

95. The Judge was wrong to say, at paras 921 to 923. that the approach in Autoclenz is
merely an example of the ordinary process of contractual interpretation. It is an
application of a broad approach to identifying the “true agreement” that may be
used where there is a dispute as to whether the contract (deliberately) mis-states the
nature of the contractual relationship, particularly as regards the status of one
contracting party as an employee or a worker or a self-employed contractor. There
is no such dispute in this case.

96. The relevant allegation in this case is that written business-to-business contracts,
although generally reflecting what was in fact agreed, did not do so in relation to
termination on notice specifically. That was a very ambitious case, going well
beyond the scope of the principles in Autoclenz.
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46
97. Where commercial parties agree a detailed written contract that, on its face,
appears to be a complete record of their agreement and there is no suggestion that
the written contract is anything but a true record of that agreement (i.e. it is not a
sham or anything like a sham), a party that wishes to allege some different
agreement must plead rectification. Their recourse is not Autoclenz.

The Judge’s approach to the “true agreement” case on termination

98. The Judge’s key reasoning on this alternative finding was as follows, at para. 924:

“It would never have been in the reasonable contemplation of the parties at the
time of contracting that the Post Office could, or would, give notice to a newly
appointed SPM who had paid (say) £80,000 or even more to purchase branch
premises, just two weeks after they were appointed so that (under the NTC) that
appointment came to an end 6 months and 2 weeks after the purchase. The
appointment of a SPM was intended to be a long term one, to the mutual benefit
of both the parties. If this principle were to be applied, the same considerations
would be required as those in my approach to termination upon notice.”

99. The Judge posits a “hard case” and asks whether the parties would have anticipated
the facts of that hard case arising when they contracted. That is not a sound
approach to identifying the parties’ “true agreement”:

(a) It may well be that the parties would have been surprised if notice to terminate
had been given at the very outset of the relationship (by either side). That
would be unlikely, given that each side had invested time and money. The fact
that contractual rights granted by written terms can, if exercised in an unusual
and unlikely way, create surprising results is not a reason to conclude that
those written terms were not in fact agreed and so do not represent the “true
agreement”. Parties often agree terms creating contractual rights that they
expect will probably not be exercised, whether in particular circumstances or
at all. That does not justify replacing the express terms that were in fact agreed
with terms to give effect to a party’s subjective expectations or beliefs.

(b) The Judge could just as well have asked whether Post Office would anticipate
a particular SPM giving notice to terminate at the very outset of the
relationship. Post Office would be surprised by that (although it does, in rare

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 cases, happen). That would not mean that that the SPM’s right to terminate on
notice did not reflect the “true agreement”.

100. The Judge’s approach on this issue is not to identify the parties’ “true agreement”
(e.g. from the surrounding circumstances or post-contractual facts) and then to
test this against the written terms, as in Autoclenz. He could hardly do so given
that Cs complain in these proceedings that their contracts were in fact terminated
on 3 and 6 months’ notice under the SPMC and NTC, respectively – i.e. the
parties’ conduct was consistent with the terms of the written contract.

101. In the absence of proven facts from which to identify the “true agreement”, the
Judge instead tested the written terms (construed in accordance with Post Office’s
case) against what he identified as the parties’ expectations, and he rejected the
written terms because they did not reflect those expectations. That is not the
Autoclenz test. The result of this approach is that the Judge, having rejected the
written terms, had to provide a replacement notice period of his own invention:

(a) The Judge rejected Cs’ argument that the “true agreement” was for a minimum
notice period of 12 months, observing that this would be “an arbitrary period”
(para. 925), for which there was no basis in evidence.

(b) The Judge was then left with a vacuum. There was nothing to fill the gap as to
the notice period because Cs did not prove an alternative “true agreement”
from, e.g., pre-contractual discussions or post-contractual conduct. The case is
unlike Autoclenz, where the Employment Tribunal was able to identify what
had in fact been agreed.

(c) Ultimately, the Judge concluded that the “true agreement” was that the notice
period under the NTC was to be determined on a case-by-case basis, having
regard to various factors, with a maximum required period of 12 months. The
conclusion for the SPMC is less clear: the notice period is to be determined on
a case-by-case basis, with a range “a little longer” than for the NTC.

(d) It is difficult to see how this is anything other than the implication of a term,
but without satisfying the strict principles which govern that process.

102. The Judge did not address the various other elements of the “true agreement” that
Cs alleged: set out at para. 910. There is no reasoning to support any finding that

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 those elements formed part of the “true agreement”. If, which is not entirely clear,
the Judge found that those elements were also included, he was wrong to do so:

(a) There was no basis for any finding that the parties did not intend the contracts
to be terminable on notice, which is the effect of a “true agreement” that
termination was only permitted for a “substantial cause or reason”. It would
be bizarre for an agent-principal contract not to be terminable on notice.

(b) There was similarly no basis for a finding that the parties intended that Post
Office would not be able to terminate the contract on notice if it was itself in
material breach of contract. The same goes for the “true agreement” that Post
Office would not decide to terminate vindictively, capriciously or arbitrarily.

(c) The final element of the supposed “true agreement” (that Post Office would
not use its right to terminate on notice “in response to reasonable
correspondence (of the kind engaged in by Mr Bates) about the difficulties of
working with, and the shortcomings in, the Horizon system”) is a device
created for this litigation. It is difficult to imagine a more obvious attempt to
re-write the parties’ agreement, using hindsight, to set up a claim for breach of
the invented terms. It is wholly unreal to say that thousands of SPMs each, at
the outset of the relationship, reached the same “true agreement” with Post
Office as to its (non) right to terminate the contract in response to “reasonable
correspondence” about a specific subject matter (that had not yet, for that
SPM, even possibly arisen). There was, unsurprisingly, no evidence of this.

Common Issue 14: Suspension of SPMs under express terms (Grounds paras 10-
12; Judgment paras 872-885)

Suspension under the SPMC

103. Section 19, clause 4 SPMC provides for suspension where “that course is
considered desirable in the interests of [Post Office]” in consequence of certain
stipulated grounds. The Judge held that this created a discretion, which had to be
exercised in good faith. That is wrong.24

24
As noted at footnote 15 above, Post Office accepted that its decision to suspend
under the clause must be reasonably based on one of the listed grounds and hence
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104. The right to suspend is just that – a right. In the terms employed by Jackson LJ, in
Mid Essex at para. 83, it involves “a simple decision whether or not to exercise
an absolute contractual right”, rather than “making an assessment or choosing
from a range of options, taking into account the interests of both parties”. The
clause itself makes clear that Post Office must have regard to its own “interests”
alone in deciding whether or not to suspend. The right to suspend provides an
essential protection to Post Office, given that the SPM holds its cash and stock
and has the authority to enter into transactions in Post Office’s name, binding Post
Office as principal. The Judge recognised the force of this basic point at para. 871
but failed to reflect it in his interpretation of the clause.

105. The Judge also held that the ability to suspend was subject to a further restriction,
namely that Post Office was not entitled to suspend the SPM in any case where it
was itself “in material breach in respect of the matters which [it] considers give it
the right to suspend”: para. 881. The Judge held that this restriction arose “as a
matter of construction of the clause in its commercial context”. He was wrong.
This is not an available reading of the words of the clause and cannot be its
construction. Nothing in the clause even refers to breach by Post Office.

Suspension under the NTC

106. Part 2, para. 15.1 NTC provides that Post Office can suspend an SPM “where
Post Office Ltd considers this to be necessary in the interests of Post Office Ltd”
on a number of stipulated grounds. Again, the Judge held that this created a
discretion to be exercised in good faith. He also imposed the same restriction that
Post Office could not suspend the SPM if it was itself in breach in some relevant
way. The Judge erred for same reasons set out above in relation to the SPMC.

Common Issues 5 & 6: Onerous and Unusual terms (Grounds paras 13-15;
Judgment paras 957-1061)

107. The Judge found that a number of clauses in the SPMC and NTC were onerous
and unusual. This formed the platform for his decision that, unless adequate
notice was given, those clauses were not incorporated. In respect of the two Lead
Claimants who contracted on the NTC terms, the Judge further found that, since

does not seek to appeal the Judge’s conclusion that the power to suspend could not
be exercised arbitrarily or capriciously (the two restrictions being very similar).
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 they had signed their contracts containing the relevant clauses, the NTC clauses
which he found to be onerous and unusual were incorporated in any event: see
para. 1055(3). The Judge nonetheless reached findings in this regard in case he
was wrong about the significance of the contracts having been signed: paras
1055(3) and 1058. Post Office seeks to appeal the decisions that these clauses are
onerous and unusual. Although the point does not affect Mrs Dar or Mrs
Stockdale, it could affect other Cs who may not have signed their NTC contracts.

108. The Judge correctly held that, to qualify as onerous, a term must be harsh “almost
to the point of being a punishment” (para. 973), and that he thought it was another
way to put the same point to say that the clauses must be “literally extraordinary
in their harshness” (para. 979). The requirement that the clauses should be
unusual is additional to this (para. 973). It follows that a clause, however harsh,
would not qualify as onerous and unusual if it, or an equivalent of it, is in
common use. Post Office contends that, in seeking to apply that test, the Judge
erred in principle and/or reached decisions that were obviously wrong. 25

NTC liability provisions (Part 2, paras 4.1, 13.1 NTC; Judgment paras 1007-
1010)

109. 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.
The point is one of basic principle.

25
See the approach of the Court of Appeal in Goodlife Foods Ltd v Hall Fire
Protection Ltd [2018] CTLC 265, particularly at paras 27-28 per Coulson LJ.
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Withholding payment, taking steps to keep branches open, during a period of
suspension (section 19, clauses 5 and 6 SPMC; Part 2, paras 15.2 and 15.3 NTC;
Judgment paras 1023-1028)

110. There are three key points. First, during a period of suspension, the SPM is not
performing his principal obligations to Post Office – he is not running the branch
– so it is unsurprising that he also does not receive payment. Secondly, he can
only be suspended on one of the stipulated grounds, not on a whim. Thirdly, Post
Office has a discretion under both contracts (to be exercised with regard to “the
whole of the circumstances of the case”) to back-pay the withheld remuneration
after the suspension ends. Post Office stated below that a term might be implied to
the effect that that discretion must not be exercised dishonestly, arbitrarily,
capriciously or irrationally.

111. It is of course right that the suspension of payment by Post Office is a serious
matter for an SPM. That is a factor to weigh in the analysis. However, the Judge’s
reasoning on this issue rested on a mis-statement of the obligations on the SPM
under the contracts and an overstatement of the extent to which his remuneration
is analogous to an employee’s salary:

(a) The Judge reasoned that “running a branch Post Office is a full time
occupation” (para. 1027). That is wrong. The SPM is not required to provide
personal service, as the Judge accepted at para. 917. An SPM may operate
more than one branch and spend little or no time working in all or some of his
branches, leaving his employees to handle the day-to-day operations.

(b) Further, as the Judge noted in para. 1027, SPMs typically also operate a retail
business (usually in the same premises). The SPM is a businessperson and
will, in the ordinary course, experience periods of higher or lower income. It is
true that the Post Office remuneration may form a considerable part of his
income, but that remuneration is not analogous to an employee’s salary.

(c) The Judge rejected Post Office’s reliance on the fact that limited companies
also contract under the NTC by saying, at para. 1027, that such companies
contract with Post Office on the basis of a “wholly different contract form”, i.e.
the Mains NTC, and that the Mains NTC “is not a contract upon which any of
the Claimants in this litigation have contracted with Post Office”. Neither of
those points is correct. There are many Cs who contracted with Post Office on
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 the terms of the Mains NTC, and there are corporate SPMs on both forms of
the NTC contract.

112. The Judge makes one additional point, which is that, per Part 2, para. 15.3 NTC,
the suspended SPM is responsible for maintaining access to the branch. This was
not essential to his reasoning, as he reached the same view on the terms of the
SPMC, which does not contain such a term. In any event, the Judge’s construction
of the NTC here was wrong. The clause requires only that the SPM “take all
reasonable steps to maintain access for Customers”. The Judge concluded that
this meant that the SPM was obliged “to bear the cost and expense of keeping the
branch open” (para. 1025). In fact, as para. 15.2 makes clear, the SPM is not
required to keep the branch open in the sense of operating the branch. It falls to
Post Office, rather than the SPM, to find, appoint and pay a temporary SPM to
operate the branch. The suspended SPM’s obligation to “maintain access” for
customers (which is only a “reasonable steps” obligation) is an obligation not to
impede the operation of the branch during the suspension (e.g. by failing to
provide keys). The same obligations would follow from the implied duty of
cooperation. The requirement is modest and certainly not onerous or unusual.

Summary termination under the NTC (Part 2, para. 16.2 NTC; Judgment, paras
1034-1035)

113. The Judge found that this clause was not onerous and unusual on his construction
of them, i.e. that it required a repudiatory breach (para. 1034). The Judge
concluded that it would otherwise be onerous and unusual, because it would
entitle Post Office “to terminate without notice for any breach, no matter how
minor” (para. 1035, emphasis in bold was in italics in original).

114. On the proper construction of the NTC, however, the contract can be summarily
terminated in response to a “material” breach, as submitted above. The NTC
therefore does not permit termination for minor or inconsequential breaches. It
follows that the Judge’s sole basis for concluding that the term was onerous and
unusual – that it would permit termination for “any breach, no matter how minor”
– was based on an erroneous construction of the NTC. A right to terminate in
response to a material breach (that is either unremedied or incapable of remedy) is
neither onerous nor unusual.

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Termination on notice (section 1, clause 10 SPMC; Judgment, paras 1036-1040)

115. The Judge found that the termination provision in the NTC was not onerous and
unusual because the notice period (6 months) could not expire within the first
year: see para. 1040. It was the absence of a similar limitation within the SPMC
that led the Judge to conclude that its notice provision was onerous and unusual.

116. The Judge was wrong to conclude that the term of the SPMC permitting
termination on at least 3 months’ notice (section 1, clause 10) was onerous and
unusual. The right to terminate on notice was mutual: the SPM could also
terminate on 3 months’ notice: see section 1, clause 10 (first sentence). A mutual
right to terminate on notice is not almost a punishment; nor is it extraordinarily
harsh. Mutual rights to terminate on notice are commonplace in commercial
agreements and serve legitimate commercial purposes.

117. The Judge essentially reasoned by reference to a hypothetical “hard case” (a

decision by Post Office to give notice on the day after appointment). The Judge
stated that the term could create a harsh outcome on those (extremely unlikely)
facts. That is not enough to make the term particularly onerous or unusual.
Further, the Judge’s hypothetical facts include a “joint objective intention” that
the appointment would “run for many years”, but that is circular: if the notice
term is incorporated, the contract is incompatible with any such joint intention.

Non-compensation following termination (Section 1, clause 8 SPMC, Part 2, para.

17.11 NTC; Judgment, paras 1041 to 1046)

118. The clauses relate only to lawful termination. They preclude any claim from an
SPM that, notwithstanding that the contractual termination provisions were
correctly followed, he is for some reason entitled to compensation for “loss of
office” or equivalent. That could be superfluous; but it is not onerous or unusual.

Incorporation of terms by conduct

119. In any event, the Judge ought to have held that where an SPM referred to,
operated under and relied upon the detailed terms of the SPMC, that SPM had
sufficient notice of any onerous and unusual terms and was bound by the full
contract from the date of such references and/or reliance. For example, Mr Bates
(who the Judge found did not receive a copy of the SPMC at the time of
commencing his appointment) accepted that that he received a copy in the
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 following year;26 he referred to and relied on it;27 and he operated his branch on
the basis that he was bound by it.28 That removes any question as to the adequacy
of notice and whether terms were onerous and unusual.

Common Issues 7, 19 and 20: Unfair Contract Terms Act 1977 (Grounds, paras
16 to 20)

120. There are three separate reasons why s. 3 of the Unfair Contract Terms Act 1977
(“UCTA”) does not apply to these contracts.

The SPMC and NTC are not Post Office’s “written standard terms of business”

121. First, s. 3 only applies to contracts where one party “deals on the other’s written
standard terms of business”. That has two distinct components. The first requires
that the contracts be in standard form, i.e. not bespoke to the relationship. It is
common ground in this case that the relevant contracts are in standard form. The
second requirement is that the standard terms must be the other party’s “terms of
business”. The test for this is not that the other party entered into the contract in
the course of its business (the approach defended by the Judge at paras 70-71 of
the N460 Reasons). The contract must represent the other party’s “terms of
business”. That requires the identification of that party’s “business”.

122. In Commerzbank AG v Keen [2006] 2 CLC 844 the Court of Appeal held that a
banker’s employment contract did not fall within s. 3 because the “terms as to the
payment of discretionary bonuses were not the standard terms of the business of
banking” (Mummery LJ, para. 104), and a “bank's business is not entering into
contracts of employment with its employees” (Moses LJ, para. 115).

123. Mummery LJ approved a similar holding of Morland J in Brigden v American

Express Bank [2000] IRLR 94, which also concerned a bank employee’s
contract. Morland J said, at para. 20, that “Although the hiring and firing of
labour is almost inevitably an activity within any business it is not except in the
case of an employment agency its business”.

26
Individual Particulars of Claim, para. 23.
27
Common Issues Trial Transcript, Day 2, p.88, line 23.
28
Common Issues Trial Transcript, Day 2, p.89, line 2.
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124. Post Office’s business is the provision of products and services to customers, not
the engagement of SPMs. The SPM, as agent, conducts transactions on Post
Office’s behalf and so enables it to conduct its business with customers. The
contract with the SPM therefore facilitates Post Office’s conduct of its business,
rather than itself representing the conduct of that business. Appointing SPMs is no
more Post Office’s business than retaining employees is a bank’s business.

125. The Judge distinguished the authorities as follows:

(a) “SPMs are not employees” (para. 1074). That is true, but the ratio of
Commerzbank or Brigden is not specific to employment contracts. It is that
s. 3 only catches contracts which constitute the relevant party’s transaction of
its business. A bank is defined as such because it enters into banking
transactions. Post Office is defined as such because it provides Post Office
products and services. A bank might enter into contracts to employ staff, lease
premises, etc. Similarly, Post Office contracts with SPMs, or with the people
who make its advertisements, or run its pension scheme. These contracts are
entered into in the course of its business, but they do not fall within s. 3.

(b) “The Post Office's business includes the running of a large number of
branches, which are operated on the Post Office's behalf by SPMs. The
running of such branches is directly within the business of the Post Office.”
(para. 1074, emphasis added). That, again, is true. But it is no more an answer
in this case than it was in Commerzbank or Brigden. A bank’s business is
conducted, on its behalf, by bankers. Post Office’s business is conducted, on
its behalf, by SPMs. The contracts with the bankers, or with the SPMs, are not
thereby brought within the scope of s. 3.

(c) “The evidence is compelling that both the SPMC and the NTC were the Post
Office's standard terms of business” (para. 1075). To support this, the Judge
cited a number of authorities on what constitute standard terms (paras 1068 to
1071). But that was nothing to the point. It is common ground that these are
standard terms. That is separate from the requirement that the contract
represent Post Office’s transaction of its business.

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The terms do not entitle Post Office to render substantially different performance

126. There is a second, independent, reason why UCTA does not apply to these
contracts. At para. 1108, the Judge said that because the clauses he had identified
“seek to have a substantial effect on the contractual performance of the Post
Office”, they were “therefore subject to the requirement of reasonableness
imposed by UCTA”. That is wrong. S. 3 only catches clauses which would result
in performance which was substantially different from that reasonably expected
of Post Office. Assessing what the counterparty would reasonably expect, and
measuring the difference between those expectations and what the relevant clause
says, is a crucial part of the analysis required by the section.

127. Reasonable expectations will usually be grounded in the other terms of the
contract. The examples given in Chitty, at 15–085, are of a travel agent who sells
a cruise on a particular vessel, but then relies on a clause to change that vessel;
and a force majeure clause entitling one party not to provide the contractual
performance otherwise expected of him. In those cases, the terms of the contract
generally would entitle the party challenging the term to expect a certain level of
performance – from which the impugned term departs dramatically. More rarely,
a reasonable expectation could be grounded in a pre-contractual statement.

128. The law was summarised by Stanley Burnton LJ, in Axa Sun Life Services Plc v
Campbell Martin Ltd [2012] Bus LR 203, at para. 50. He said, of section
3(2)(b)(i):29

“Quite how that ‘paragraph’ should operate is not entirely clear, as is

demonstrated by the somewhat tentative discussion in Chitty on Contracts,
30th edition, at paragraph 14-073. I have no doubt that it is principally aimed
at the small print that entitles a party to a contract to provide something other
than that defined by the principal terms of the contract, as where a holiday

29
See also Chitty at [15-085]: “where on its true construction a contract term provides
for performance to a certain level by the party relying on the clause, the other party
cannot claim that that very term entitles the party so relying to render a contractual
performance substantially different from that which he reasonably expected”, citing
Hodges v Aegis Defence Services (BVI) Limited [2014] EWCA Civ 1449 per
Longmore LJ at para. 52.
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 company reserves the right to substitute a hotel or resort for that specified in
the main part of the contract. In most cases, as Chitty suggests, the
performance reasonably expected of a party is that which is defined by the
written contract between the parties. But this ‘paragraph’ of section 3 refers
not to the performance specified in the contract but to the performance “which
was reasonably expected” of that party. It seems to me that in appropriate
circumstances a pre-contractual representation or promise may affect the
performance that is reasonably expected of a party.” (emphasis added)

129. But here the Judge did not identify any reasonable expectation – whether based on
other terms of the contract, or in a pre-contractual representation – at all. It
follows that the clauses cannot come within s.3.

The terms do not govern Post Office’s contractual performance

130. Third, and as was accepted by the Judge (para. 1082), a clause will only fall
within s.3 if it concerns Post Office’s contractual performance. The Judge
wrongly decided (at para. 1084) that a number of clauses did.

131. First, Post Office’s entitlement to update and vary contractual terms (section 1,
clause 18 SPMC; Part 2, para. 1.1, and Part 5, para. 1.3 NTC). The Judge said that
these clauses “relate to the way in which the Post Office sought to be entitled to
change the character or nature of its own performance”. That is wrong. By
updating or varying contractual terms, Post Office was not performing contractual
obligations. It was exercising a power that it had under the contract. Similarly, in
Paragon Finance v Nash [2002] 1 WLR 685 Dyson LJ said, at para. 75, that s. 3
did not apply to a lender’s entitlement to vary the rate of interest payable on a
loan, because “there is no relevant obligation on the claimant, and therefore
nothing that can qualify as ‘contractual performance’ for the purposes of section
3(2)(b)(i).” He added that “Even if that is wrong, by fixing the rate of interest at a
particular level the claimant is not altering the performance of any obligation
assumed by it under the contract. Rather, it is altering the performance
required of the appellants [defendants].” Exactly the same is true here: the
clauses relate to Post Office’s power to change the content of SPMs’ obligations.

132. Secondly, SPMs’ obligations to account, and liability for losses (section 12,
clause 12 SPMC; Part 2, paras 4.1 and 13.1 NTC). The Judge said that these
clauses “relate to the way in which the Post Office would be entitled to claim
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 payment from, or reduce remuneration otherwise due to, the SPM for running the
branch” (para. 1084). Clauses that govern the circumstances in which SPMs are
liable to Post Office do not relate to Post Office’s performance. They relate to the
SPMs’ performance: see Barclays Mercantile Finance Ltd v Marsh [2002]
EWCA Civ 948, per Dyson LJ at para. 21.

133. Thirdly, Post Office’s power to terminate its contracts with SPMs (section 1,
clause 10 SPMC; Part 2, paras 16.1 and 16.2 NTC). The Judge stated that these
clauses “relate to the way in which the Post Office could bring the appointment of
the SPM to an end, such that the operation of the branch by the SPM who had
been contracted for that purpose would come to an end.” (para. 1084). That is
correct. As is apparent from this description, terminating the contract is not a
means by which Post Office renders different performance from that reasonably
expected of it. It is a means by which the temporal scope of the contract is
determined (following which there could be no expectations, on either side, of
continued contractual performance). This analysis is endorsed in Chitty, at 15–
086 (approved by Dyson LJ in Paragon at para. 77); by HHJ Seymour QC in his
discussion of Timeload v British Telecommunications [1995] EMLR 459 in
Hadley Design Associates v The Lord Mayor [2003] EWHC 1617 at paras 76
and 85; and by Morland J in Brigden at para. 22.

134. Fourthly, Post Office’s power to suspend SPMs, which includes the power to
decide not to make payment to SPMs in respect of the suspension period (section
19, clauses 5 and 6 SPMC; Part 2, paras 15.2 and 15.3 NTC). The Judge said that
these clauses “relate to the way in which the Post Office could prevent the SPM
from running the branch, and also no longer observe the contractual
requirements to remunerate the SPM for running the branch” (para. 1084).
Preventing the SPM from running the branch (i.e. suspending his contract) does
not constitute Post Office’s contractual performance. It is Post Office exercising
its right to stop the SPM performing what would otherwise be his obligations.

135. Fifthly, Post Office’s non-liability to compensate SPMs for loss of office
following a lawful termination (section 1, clause 8 SPMC; Part 2, para. 17.11
NTC). The Judge said that these clauses “relate to the consequential effects of the
appointment of the SPM coming to an end (whereby the operation of the branch
by the SPM who had been contracted for that purpose would end)” (para. 1084).

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 Again, that description is accurate. These clauses do not seek to circumscribe or
alter any liability or obligation which would is imposed on Post Office by the
contracts. Rather, they provide that a theoretical liability which might otherwise
be argued to arise following the termination of the contracts does not arise.

The reasonableness test

136. Having found that UCTA applied, the Judge found that certain clauses failed the
reasonableness test. Reasonableness requires a context-specific, fact-sensitive
assessment, but it is a question of law. Where, as here, the first instance judge has
plainly gone wrong, the Court of Appeal considers the matter afresh.

137. Almost all of the clauses which the Judge found to be unreasonable he also found
to be onerous and unusual (with the exception of the NTC termination on notice
clause, which, surprisingly, was deemed unreasonable but not onerous). Although
the tests are distinct, the factors relied upon strongly overlap. Post Office relies on
what it has submitted about why the clauses are not onerous and unusual, mutatis
mutandis, in this context too.

138. One further specific point arises. In support of his decision that the power to
suspend payment during a suspension is unreasonable, the Judge, at para. 1107,
cited Lalji v Post Office [2003] EWCA Civ 1873. In that case, the Court of
Appeal allowed, in part, an appeal against a successful summary judgment
application by Post Office. One of the questions was whether Mr Lalji, who had
been an SPM, should be allowed to argue at trial that non-payment of
remuneration during a suspension period was unreasonable within the terms of
s.3(2)(b). The Court of Appeal decided that his argument should not have been
summarily dismissed. Sedley LJ said that it was “cogently arguable”: para. 26.
Brooke LJ expressed some agreement with the argument in principle, but said that
it would be for the trial judge to determine: para. 17. It is not entirely clear from
the judgment what submissions were advanced on this point (in particular as to
the reasons of principle why, even if these clauses had been unreasonable, UCTA
should not apply to them), but in any event an interlocutory decision of this kind
does not provide meaningful support for the Judge’s decision.

139. The Judge also erred in answering Common Issue 19 as follows: “the relevant
clauses do not form part of the contracts between the Post Office and the SPMs”
(para. 1110).
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Common Issue 20

140. Common Issue 20 is: “On a proper construction of the SPMC and NTC, in what,
if any, circumstances are [SPMs’] breach of contract claims for loss of business,
loss of profit and consequential losses… limited to such losses as would not have
been suffered if the Post Office had given the notice of termination provided for in
those contracts?”

141. The Judge’s holding, at para. 1122(20), states that “The clauses relied upon by the
Post Office in respect of removing or excluding any rights to recover
compensation for loss of office fail the test of reasonableness in UCTA, regardless
of whether such clauses were in each case as a matter of fact drawn to the
specific attention of the incoming SPM. The heads of loss identified in this
Common Issue are not therefore limited as the Post Office contends.” Given the
context, this was limited to a holding on UCTA. That holding was wrong for the
reasons given above in relation to Common Issues 7 and 19.

Common Issues 12 and 13: SPMs as agents & the Branch Trading Statement
(Grounds, paras 21 to 24; Judgment paras 782 to 853)

142. Common Issue 12 asked (inter alia) whether the effect of the agency conferred on
SPMs was such that the common law principles identified in 12(b) (account
stated) and (c) (presumptions of fact against an agent who deliberately renders a
false account) applied to the relationship. Common Issue 13 asked whether SPMs
bear the burden of proving that any Branch Trading Statement account (“BTS”)
they signed and/or returned to Post Office was incorrect.

143. In short, the Judge found that the SPM’s agency was limited to the express
contractual obligations as to matters including accounting. The Judge appears, at
least from some paras, to have held that the principles of account stated and
settled account do not apply at all to any BTS in relation to which any items were
put in dispute at the relevant time: see paras 810, 826, 841 and 842. From other
paras, however, it appears that the Judge intended to hold that the principles
would not apply to the extent of the dispute (which was Post Office’s case) – see
the use of the word “insofar” in para. 820. The argument below proceeds on the
assumption that the Judge intended the broader disapplication of the principles.

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144. The Judge stated that the question of presumptions of fact against an agent who
deliberately renders a false account “simply does not…arise” in relation to any
BTS that was subject to a dispute: paras 821 and 828. There is no conclusion as to
the application of the principle in other cases.

The errors of legal approach

145. Post Office submits the Judge erred in law at para. 789 in holding that “it is
relevant to consider the conduct of the parties and all the circumstances of the
relationship” to determine “the full extent of the agency”. The Judge referred to
Garnac Grain Company v HMF Faure & Fairclough [1968] AC 1130, but the
passage that he cited relates to identifying an agency agreement, including from
the parties’ conduct. It has no relevance to the present case: SPMs were expressly
appointed as agents under written contracts. It was therefore impermissible to
consider post-contractual matters to determine the terms or extent of the agency
relationship. The terms and extent of the agency relationship were to be
determined by interpreting the contracts (against the background of the common
law principles of agency, which are relevant matrix of fact– see para. 796).

146. Post Office contends that the Judge also erred in law at para. 819 in rejecting Post
Office’s case (correctly recorded at para. 800) that the normal common law
principles applied to the relationship as a result of the express appointment of
SPMs as agents (with duties to account). At para. 796, the Judge quotes from
Chitty at [31-006], including the statement that “On the orthodox and common
law analysis the full paradigm relationship of principal and agent arises where
one party, the principal, consents that another party, the agent, shall act on his
behalf, and the agent consents so to act”. The Judge appears implicitly to have
rejected that proposition, but the Judgment contains no explanation as to why it is
wrong as a matter of law. It is a different question whether a contract expressly or
implicitly excludes or modifies the ordinary agency law principles. Post Office
accepted before the Judge that such modification is of course possible.

147. The Judge should have held that the express contractual appointment of an SPM
as agent had full legal content and effect, and that the normal common law
principles of agency applied, save to the extent that those principles were
excluded or modified by agreement. The NTC, but not the SPMC, contains
unsurprising express limitations on the scope of the SPM’s authority to bind Post
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 Office as principal (see, in particular, Part 2, para. 3.3.3 NTC, quoted at para.
811), but those limitations assume what the Judge rejected – that the express
appointment as agent otherwise has full content.

148. The Judge merely identifies express terms that reflect or, potentially, modify the
ordinary incidents of an agency relationship (as to accounting and custody of cash
and stock). But the fact that the contract dictates that the agent is to render an
account to its principal and how it is to do so does not modify the usual common
law consequences of rendering that account. The Judge’s approach at para.810
therefore wrongly confuses the method by which an agent is required to perform
its duty with the effect in law of the agent’s performance. The Judge’s reasoning
creates a situation in which, as soon as any express provision is made for an
agent’s duty to account, his agency is otherwise hollowed out and limited to the
express contractual provision. That cannot be right. It is directly contrary to the
orthodox position identified in Chitty.

Sub-issue 12(b): The principles of account stated and settled account

149. The Judge accepted that these are recognised principles of the law of agency:
para. 826. He appears to have concluded that they did not apply to an account in
relation to which the SPM has raised any dispute, although (as noted above) it is
not entirely clear what the Judge intended to hold on this issue.

150. At least on one reading of the Judgment, the Judge’s approach to a BTS was
unjustifiably binary. The Judge appears to have reasoned that whether there is an
account stated is an all-or-nothing question: the fact that there is a dispute in
relation to an item in the BTS (e.g. a transaction correction for £10) deprives Post
Office of its ability to rely on the BTS as a true record, even in relation to the
undisputed matters that it records. That is wrong and extremely uncommercial:30

30
In para. 33 of the N460 Reasons, the Judge refers to evidence given in the next stage
of this litigation, relating to whether Horizon has a “dispute” function as justifying
his conclusion. This is difficult to follow because Post Office has throughout
accepted that items in the BTS that had been disputed via the Helpline (and not
subsequently resolved) were not subject to the account stated principle. Moreover,
Post Office pleaded that disputes had to be raised via the Helpline, not through any
function within the Horizon system itself (Generic Defence, para. 43(3)). The same
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 (a) The BTS summarises the cash and stock position at the start and end of the
accounting period. It includes the following statement, which the SPM must
sign: “I certify that the content of this balancing and trading statement is an
accurate reflection of the cash and stock on hand at this branch”.

(b) It is that certification, and Post Office’s ability to rely on its truth, that provides
the principal evidential value of the BTS. Post Office is entitled to be told
(and to rely on what it is told as to) what physical cash and stock, which
belongs to Post Office, is held in the branch. Post Office is able to see the
transactions that are recorded on Horizon and the derived figures for cash and
stock (i.e. what should be in the branch), but it does not know, without relying
on its agent’s certification, what physical cash and stock is actually present.

(c) That has nothing to do with points of detail as to precisely how the BTS was
produced in the various periods covered by the claims.

151. The Judge ought to have held that Post Office was entitled to rely on the principle
of account stated in relation to the BTS, subject to the point that amounts put in
dispute were not part of the account stated for the purpose of that principle.

Sub-issue 12(c): Presumptions of fact against agents who render false accounts

152. The Judge said that the question of presumptions of fact against an agent who
deliberately renders a false account “simply does not…arise” in relation to any
BTS that was subject to a dispute: see paras 821 and 828. This is hard to follow.
Post Office’s submission was simply that where a fiduciary’s breach of duty has
led to an incomplete evidential picture, the Court will be “entitled to make every
assumption against the party whose conduct has deprived it of necessary
evidence”: per Lord Millett, in the Hong Kong case of Libertarian Investments
Ltd v Hall [2013] HKCFA 93, at para. 174; see also Snell’s Equity, 20–018(4).
That has nothing to do with the honest inclusion of disputed amounts in the BTS.
It relates to the situation in which an SPM deliberately falsifies the accounts and

point was stated in Post Office’s written evidence for the Horizon Trial. The Judge
also appears to have confused the production of the BTS with the processing of
transaction corrections, which is a separate accounting step.

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 so deprives Post Office (and the Court) of the evidential value of honest accounts
when it comes to determining any relevant dispute between the parties.

153. The principle is an ordinary and unobjectionable principle of agency law and the
law of evidence. There was no good reason to dis-apply it to the accounting
relationship at issue in these proceedings.

Common Issue 13: The burden of proof in relation to the BTS

154. Post Office contends that the Judge erred in law at para. 1122(13) in holding that
SPMs did not bear any burden of proof relating to the BTS. The correct analysis
is, as submitted above, that the SPM is not bound by the BTS (whether for the
purpose of account stated or otherwise) to the extent that it reflects amounts that
were put in dispute at or around the time of its submission to Post Office.

155. The BTS is a document produced (and certified) by the SPM in his branch and
with the benefit of knowledge of the transactions conducted and, crucially, the
actual cash and stock present in that branch. If the SPM has not
contemporaneously disputed entries in the BTS but later wishes to contend that
the BTS is wrong, he should be required to prove that fact, in accordance with
ordinary agency principles.

156. In concluding otherwise, the Judge appears to have fallen into error by having
regard to post-contractual evidence comprising the allegations made by Mr Bates
and Mrs Stubbs (referred to at paras 823 to 826 of the Judgment) as well as
wrongly concluding that imposing the burden of proof on SPMs would require
them “to do the impossible”. (In fact, shortfalls typically become apparent when
the SPM conducts the mandatory cash declarations on each stock unit, which
must be conducted at the end of every trading day.31)

157. The Judge was wrong to hold, in the alternative, that an SPM could discharge the
burden of showing the BTS to be incorrect simply by showing that he had
“contacted the Helpline in respect of shortfalls, discrepancies and/or TCs, in any
particular branch trading period” (para. 853):

(a) The mere fact that the SPM had contacted the Helpline is self-evidently not
enough to discharge any burden in relation to the BTS. The SPM may for

31
The Judge refers to cash declarations at paras 346 to 347.
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 example have contacted the Helpline to question a discrepancy that he was
then able to understand and accept.

(b) At an even more basic level, the dispute that was raised via the Helpline may
be irrelevant to the issue which is later being contested in relation to the BTS.

Common Issue 8: Liability of SPMs for losses (SPMC) (Grounds, paras 25 and 26;
Judgment, paras 640-687)

158. Section 12, clause 12 SPMC provides that the SPM “is responsible for all losses
caused through his own negligence, carelessness or error, and also for losses of
all kinds caused by his assistants.”

The Judge’s approach to the burden of proof

159. The Judge held that, on its proper construction, clause 12 imposed a contractual
burden of proof on Post Office to show the existence of “a loss which falls within
the scope of the clause”: para. 653. In Post Office’s submission, that is wrong.

160. First, the clause does not contain any express allocation of the burden of proof. It
does not use any of the kind of language that is used to allocate a burden. It does
not, e.g., refer to either party having to “show” or “demonstrate” or “prove” any
given fact. The Judge concluded that the “natural meaning of the words” resulted
in the allocation of a burden of proof to Post Office, but he does not identify any
words in the clause to which he is giving that natural meaning, and there are none.

161. Secondly, there is no proper basis on which to conclude that the clause must
implicitly have allocated a burden of proof to Post Office. There is nothing to
displace the ordinary position that the burden of proof is a matter for the Court.
There is no need to imply any allocation. There is no reason, as a matter of
contractual interpretation, to conclude that the parties intended to tie the Court’s
hands in considering the specific circumstances of any dispute and allocating
persuasive and evidential burdens in accordance with the ordinary rules of
evidence and principles of justice. Indeed, a contractual allocation of the burden
of proof to Post Office is inconsistent with other provisions of the SPMC and
specifically section 12, clause 5 which provides that the SPM is “strictly
responsible for the safe custody of cash, stock of all kinds and other Post Office
Counters Ltd property”.

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The Judge’s reliance on post-contractual events to construe the clause

162. The Judge wrongly had regard to post-contractual findings of fact in the Lead
Claims, in seeking to construe section 12, clause 12. This was an error of law: see
Arnold v Britton [2015] AC 1619 at para. 21 per Lord Neuberger.

163. Post Office submitted that the clause would not extend to “Horizon-generated
losses” (i.e. apparent losses shown on the accounting system that were not
attributable to losses actually incurred at the branch but were instead the result of
bugs): see para. 651.

164. The Judge rejected this argument, essentially on the basis that it did not accord
with his findings as to Post Office’s conduct in relation to the Lead Claimants. He
found that Post Office had sought to recover shortfalls from Lead Claimants in
circumstances where they alleged that those shortfalls had been caused by bugs or
errors in Horizon: see paras 670, 675. But that was irrelevant to construction.

The Judge’s mis-statement of Post Office’s case more generally

165. In the course of considering the arguments on clause 12 and in paras 34 to 36 of

the N460 Reasons, the Judge mis-stated Post Office’s case in several respects and
wrongly accuses Post Office of seeking to advance a case on appeal which does
not reflect its case at trial. Post Office had in fact drawn a distinction in its
Generic Defence (July 2017) between real shortfalls and “Horizon generated
shortfalls”,32 and at trial submitted that where Horizon shows a shortfall which
was in fact generated by a bug in the system, that apparent shortfall was not a
“deficiency” for the purposes of clause 12: see paras 648 (final sentence), 651 and
669 of the Judgment. The fact that the parties might on particular facts disagree as
to whether a particular shortfall is “Horizon-generated” does not (contrary to para.

32
See para.41(6) of the Generic Defence which makes it clear that “discrepancy” and
“loss” for the purposes of clause 12 do not include what is defined separately as a
“Horizon generated shortfall”. Similarly, para. 41(1) refers to the Horizon figures as
the relevant starting point for calculating a discrepancy only insofar as they are
“derived from transactions input by branch staff into the branch’s terminals”. At
para. 34 of the N460 Reasons the Judge refers to para. 41(3), without giving the
relevant context in the remainder of that paragraph.
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 34 of the N460 Reasons) mean that Post Office does not accept the principle that
some shortfalls are not real shortfalls and are irrecoverable.

Liability for losses caused by assistants

166. The clause provides that the SPM will be liable for losses that he causes and also
for losses that are caused by his assistants. The plain words of the clause make
distinct provision for these two circumstances (numbers added for reference):
“The Subpostmaster is responsible for [1] all losses caused through his own
negligence, carelessness or error, and also for [2] losses of all kinds caused by
his assistants. Deficiencies due to such losses must be made good without delay.”

167. There are two things to note about the basic structure of this formulation:

(a) The clause draws a clear distinction between losses within the first part of the
clause and losses within the second. The two are not run together. They are
separated by a comma and by the emphatic double conjunctive “and also”.

(b) The part of the clause creating liability for losses caused by assistants is
essentially self-contained, rather than referring back to or relying on any words
in the part of the sentence that deals with the SPM’s liability for losses that he
himself causes. If the words relating to liability for losses caused by the SPM
himself are removed (along with the conjunction), the clause reads: “The
Subpostmaster is responsible for… losses of all kinds caused by his
assistants”. That is a strong indication that each type of liability is distinct.

168. The words that create liability for losses caused by assistants are plain. The SPM
is responsible for “losses of all kinds caused by his assistants”. Given the
contradistinction contained within the clause, the words “of all kinds” can sustain
only one meaning, namely that the category of losses is not limited by reference
to any fault requirement. As the words permit of only one meaning, the Judge was
required to apply them in accordance with that meaning: see Rainy Sky SA v
Kookmin Bank [2011] 1 WLR 2900, per Lord Clarke at para. 23.

169. Further, Post Office’s construction of section 12, clause 12 is the only
construction that coheres with section 15, clause 2, which is headed “Assistants”,
and which provides that the SPM must “make good any deficiency, of cash or
stock, which may result from his assistants’ actions”. That clause reflects the
words of section 12, clause 12 as regards liability for losses caused by assistants
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 and overlaps closely with it. It includes no reference to concepts of negligence,
carelessness or error. It makes clear that the liability is for “any deficiency”.

170. The Judge reasoned that it would be uncommercial for the clause to draw a
distinction between liability in respect of losses caused by SPMs themselves and
losses caused by their assistants: para. 644. That consideration cannot override the
plain words of the clause, and is in any event wrong:

(a) There is no obligation on SPMs to employ assistants. An assistant is the

employee of the SPM and is his responsibility. Section 15, clause 2 spells this
out in clear terms. There is nothing unusual or uncommercial about an agent
(or any contracting party) being liable for losses caused by his employees.

(b) The assistant is selected by the SPM, trained by the SPM and supervised by
the SPM. His ability and diligence is a matter for the SPM to ensure, rather
than something with which Post Office is directly concerned.

(c) The use of an assistant is therefore fairly at the SPM’s risk in the sense that,
where an assistant causes a loss in the branch, it is the SPM (as his employer)
that is liable for that loss. The SPM is in a position to minimise such losses
through effective supervision and training. The SPM can reflect the risk of
such losses in the terms of its contractual relationship with assistants.

(d) By contrast, the SPM is selected and trained by Post Office, and there is a
close contractual and fiduciary relationship between them. It is commercially
rational for Post Office to be prepared to absorb the cost where its agent causes
a loss acting within his authority and without negligence, carelessness or error.
The same does not apply to any employees of the SPM.

HELEN DAVIES QC

OWAIN DRAPER

GIDEON COHEN

28 June 2019

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70-135