Northrop Grumman Missions Systems Europe Ltd v BAE Systems (AL Diriyah C4I) Ltd

Where a contract adopts another agreement in wide and general terms, the adopted terms ordinarily apply, subject to contextual adaptation and inconsistency with the new contract’s express provisions. Different party descriptions do not defeat incorporation where they can be sensibly adjusted. A staged agreement for products and later support can validly include termination for convenience before later performance falls due. A general compensation mechanism remains effective even where little compensation is payable for a particular order. Evidence of negotiations cannot establish a party’s negotiating position as an objective background fact for contractual construction.

BAE entered into a Licence Agreement with Northrop Grumman for software licences, training and support. The Licence Agreement stated that it was governed by an Enabling Agreement made between Northrop Grumman and BAE Systems Integrated System Technologies Limited. The Enabling Agreement permitted termination for convenience on 20 days’ notice.

Ramsey J held that the termination provision governed the Licence Agreement. Northrop Grumman appealed, arguing that the Licence Agreement was inherently unsuitable for termination at will, that negotiation evidence supported its construction, that the compensation provisions were inconsistent, and that an intellectual property provision excluded the termination clause. The central issue was whether the Enabling Agreement’s termination provision applied to the Licence Agreement.

Appeal dismissed. Briggs LJ gave the judgment, with Bean LJ and the Master of the Rolls agreeing.

1. Incorporation by reference. Clause 5.1 of the Licence Agreement used wide and general language. The phrase that the agreement was governed by the terms of the Enabling Agreement applied those terms generally, subject to necessary contextual adaptation. A term in the Enabling Agreement would yield to an express Licence Agreement term with which it was flatly inconsistent. The approach was consistent with Skips A/S Nordheim v Syrian Petroleum Co Limited [1984] 1 QB 599.
2. Contextual adaptation. References to Purchaser, Contractor, the Agreement and Purchase Orders had to be adjusted so that clause 5.1 had real effect without producing surplus, insensible or inconsistent provisions. The Licence Agreement satisfied the four conditions in clause 1.1 and was therefore to be treated as, or as containing, a Purchase Order. It was not a Purchase Order for Tasks, so Annex A did not govern it.
3. Termination for convenience. An agreement for specified products supplied in tranches, with associated support beginning later, was compatible with termination for convenience before the second tranche or support became due. The compensation wording in clause 10.4 did not prevent the termination provision applying merely because a particular order might generate little or no compensation.
4. Negotiations and clause A.2.7. The exclusionary rule concerning pre-contractual negotiations, recognised in Prenn v Simmons [1971] 1WLR 1381 and reaffirmed in Chartbrook v Persimmon Homes Ltd [2009] AC 1101, did not permit Northrop Grumman to rely on its negotiating position as part of the factual matrix. Clause A.2.7 was directed to the intellectual property provisions in Annex A and did not cut down clause 5.1. Clause 10.4 therefore enabled BAE to terminate the Licence Agreement on 20 days’ notice.

1. Court of Appeal (Civil Division) — dismissed the appeal.
2. High Court, QBD, Technology and Construction Court — Ramsey J held that the termination-for-convenience provision in the Enabling Agreement applied to the Licence Agreement.