Northrop Grumman Mission Systems Europe Ltd v BAE Systems (Al Diriyah C4I) Ltd

Where one commercial agreement is stated to be governed by the terms of another, the referenced terms ordinarily regulate and are incorporated into the later agreement. They may also prevail over inconsistent terms, subject to the context.

Incorporation requires the court to construe the agreements together and make only those textual adjustments necessary to give effect to the parties’ intention. A framework agreement may be treated as governing a related purchase order without making the later agreement itself a framework agreement.

A software licensing agreement is capable of being terminable for convenience. Commercial objectives concerning price, quantity or expected completion do not prevent termination where the contractual terms, properly construed, confer that right.

The claimant supplied software deployment licences and associated support to the defendant under a Licence Agreement. The Licence Agreement stated that it was governed by the terms of an earlier Enabling Agreement made between the claimant and a sister company of the defendant.

The defendant purported to terminate the Licence Agreement for convenience under clause 10.4 of the Enabling Agreement. The claimant sought declarations that clause 10.4 had not been incorporated and that the termination was ineffective.

The central issues were the meaning and effect of the governing-terms provision, the effect of clause A2.7 of the Enabling Agreement, the extent to which the Enabling Agreement’s provisions applied to the Licence Agreement, and whether clause 10.4 conferred a right to terminate for convenience.

1. Meaning of “governed by”. Clause 5.1 meant that the terms of the Enabling Agreement ruled or regulated the Licence Agreement. They were incorporated into it and would generally prevail over inconsistent terms, depending on the context. Clause 1.1 of the Enabling Agreement illustrated that meaning.
2. Clause A2.7. Clause A2.7 did not prevent the Enabling Agreement from governing the Licence Agreement. The Licence Agreement was not a purchase order for a task to which Annex A applied under clause 1.4. Alternatively, clause A2.7 was directed to existing licensing arrangements outside the Enabling Agreement and did not nullify clause 5.1. A contrary construction would deprive clause 5.1 of practical effect and would be commercially absurd.
3. Adaptation of incorporated terms. The incorporated provisions had to be read with appropriate changes to reflect the different parties and agreement. BAE was treated as the Purchaser and NGM as the Contractor. The Licence Agreement was treated, where appropriate, as a Purchase Order governed by the Enabling Agreement, but it was not thereby converted into a framework agreement.
4. Termination for convenience. Clause 10.4 could be construed as applying to the Licence Agreement. There was no principled distinction between termination for default or insolvency and termination for convenience where the parties had agreed the relevant circumstances. A software licensing agreement was capable of being terminated in accordance with such an agreed term. The commercial background concerning negotiated prices, quantities and expected deployment did not displace the contractual right.
5. BAE was therefore entitled to terminate the Licence Agreement for convenience on 20 calendar days’ notice under clause 10.4. The court did not determine which obligations survived termination or the consequences for accrued rights.

This was a first-instance Part 8 claim in the High Court (Technology and Construction Court). No appellate history was stated in the judgment.