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The Facts

In December 2010 BAE Systems (Al Diriyah C41) Limited (BAE) entered into an agreement with Northrop Grumman Mission Systems Europe Limited (NGM) whereby NGM would supply software licences together with associated training and support to BAE, in two tranches, on 20 December 2010 and 20 December 2011 (the licence agreement).

The licence agreement was conspicuous in its brevity and did not include the usual boiler plate clauses providing, for instance, for dispute resolution, limitation of liability, and as to the matter in dispute; termination. There was, however, an apparent intention to incorporate these provisions by reference, and sub-clause 5.1 stated that:

鈥�5.1 This Agreement shall be governed by the terms contained within the 鈥楨nabling Agreement鈥︹�� (the enabling agreement).

The enabling agreement was in effect a framework agreement between NGM and a company connected with BAE, 鈥淏AESI鈥�, which set out the terms upon which NGM would provide products and services to BAESI, on behalf of and for BAE.

The enabling agreement included the usual boiler plate provisions which were lacking from the licence agreement. These included a termination provision which at sub-clause 10.4 entitled BAESI to terminate 鈥渇or convenience at any time鈥�.

BAE subsequently terminated the licence agreement for convenience in November 2011. NGM disputed the termination and commenced Part 8 proceedings seeking a declaration that sub-clause 10.4 did not apply to the licence agreement.

On 8 September 2014 the issue was decided in favour of BAE in the TCC.

The Issue

The principal issue before the Court of Appeal in this case was whether sub-clause 10.4 of the enabling agreement was incorporated by reference into the licence agreement by sub-clause 5.1 so as to entitle BAE to terminate for convenience.

The Decision

The court firstly framed the issue as being 鈥減urely about contractual construction鈥�, namely, if sub-clause 10.4 of the enabling agreement was found to apply to the licence agreement then 鈥渋t is common ground that the licence agreement has been terminated鈥�.

It then went on to consider the 鈥渓eading case鈥� on 鈥渋ncorporation of provisions into a contract by reference to another contract, between the same or different parties鈥�, which is Skips A/S Nordheim v Syrian Petroleum Co Limited [1984] 1 QB 599.

Skips A/S Nordheim was decided on facts that make the decision inapplicable to the case at hand, however, the judgment includes observations which now represent well-understood principles of construction for incorporation by reference, and most particularly Oliver LJ鈥檚 two stages of inquiry:

鈥淸1] whether the terms are so clearly inconsistent with the contract鈥�that they have to be rejected or [2] whether the intention to incorporate a particular clause is so clearly expressed as to require, by necessary implication, some modification of the language of the incorporated clause so as to adapt it to the new contract鈥︹��

In applying this inquiry, the court found as follows:

1 The words 鈥済overned by鈥� in sub-clause 5.1 clearly demonstrated an intention that the terms of the enabling agreement be incorporated into the licence agreement
2 Termination for convenience under sub-clause 10.4 was not 鈥渇latly inconsistent鈥� with any clause in the licence agreement on the same subject matter
3 While not inconsistent, differences between the two agreements such as the parties and certain phrases meant sub-clause 10.4 could not be incorporated un-amended
4 It was therefore necessary to carry out an 鈥渁ppropriate manipulation鈥� of the language of sub-clause 10.4 to overcome these differences
5 The solution needed to strike a balance between giving effect to the words 鈥済overned by鈥� in sub-clause 5.1 and allowing 鈥渁 level of domination by the enabling Aagreement which would be 鈥渟urplus, insensible, or inconsistent鈥� with the provisions of the licence agreement.

Accordingly, the court found that sub-clause 10.4 was incorporated and the licence agreement had been validly terminated.

Commentary

The decision in Northrop provides for a common sense approach to be applied to the construction of incorporation by reference clauses, and confirms that this exercise must be carried out in accordance with the usual principles of contractual construction.

On these bases the court was dismissive of the use of technical arguments, including the considerable effort spent by NGM in attempting to downplay the force of the words 鈥済overned by鈥� by reference to synonyms.

While the issue of 鈥渋ncorporation of provisions into a contract by reference to another contract, between the same or different parties鈥� may well be a mouthful, the principles of construction as set out above are well-settled and straightforward.

Robbie McCrea
Fenwick Elliott LLP