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

This appeal raises an issue as to the entitlement of the purchaser under a one-off commercial agreement for the supply of software licences during a defined period to terminate the agreement early “for convenience”. Although the question has been argued in comprehensive detail both on this appeal and in the court below, and is the subject of an extensive judgment by Ramsey J, it turns on what is ultimately a short point of construction, raising no issues of principle. I mean therefore no disrespect to counsel, still less to the Judge, by setting out my conclusion, and my reasons for it, without dealing in full detail with every submission made.

The agreement in question (“the Licence Agreement”) was dated 17^th December 2010 and was made between BAE Systems (Al Diriyah C4I) Limited (“BAE”) as Purchaser and Northrop Grumman Mission Systems Europe Limited (“NGM”) as Contractor. I shall have to refer to some of its terms in detail in due course but, in outline, it provided for the supply by NGM to BAE of 2126 specific software licences, described as Deployment Licences, together with associated training and software support, in two tranches. The first tranche of 532 licences was to be delivered (and invoiced for) on 20^th December 2010, and the balance of the licences on 20^th December 2011. Training was to be provided in conjunction with the delivery of the licences. NGM was to commence provision of software support on the earlier of the start of the installation of a System Support Facility, stated in Clause 1.2.2 of the Licence Agreement to be planned for 29^th August 2011, or 20^th December 2011. It was to be provided for one year from commencement, at a standard and price to be agreed (for which a formula was provided in Annex A) but BAE was obliged to provide a “minimum commitment” of no less than £300,000 upon commencement of the software support. Training was to be paid for in accordance with a specified Consultancy Man-Day Rate, applicable throughout 2011. The prices for the licences themselves were specified as £937,361 for tranche 1 and £2,664,139 for tranche 2, and therefore £3,601,500 for the totality.

Clause 1.1.3 made detailed provision for common terms to be included in all the licences supplied. In particular, they were to be both perpetual and transferrable for use, and (by clause 5.6) end-users would be required to sign NGM’s standard licence agreement.

The Licence Agreement is, by comparison with many commercial agreements, refreshingly short and, apart from an Entire Agreement clause, almost devoid of the typical boiler-plate provisions dealing for example with jurisdiction, dispute resolution, limitation of liability, force majeure and assignability. More particularly, it contains no express provisions as to termination. But clause 5, headed “Terms”, contains the following:

“5.1

This Agreement shall be governed by the terms contained within the ‘Enabling Agreement for Design Services and Task Work, Version 2, dated the 3^rd March 2010’.”

I shall refer to that agreement as “the Enabling Agreement”.

The Enabling Agreement was made between NGM as Contractor and BAE Systems Integrated System Technologies Limited (“BAESI”) as Purchaser, which was, as its name implies, a company connected with BAE. Its background was described by the Judge, with admirable brevity, as follows:

“4.

BAE was engaged by the Ministry of Defence in Saudi Arabia to provide it with a Command, Control Communications, Computer and Intelligence System (“the System”). BAE engaged another company, BAE Integrated Systems Limited (“Insyte”), a sister company in the BAE Systems PLC Group to perform work, including the management of subcontractors and associated tasks that could be done outside Saudi Arabia.

5.

Under a subcontract Insyte engaged Lockheed Martin (“LM”) to provide a computer-based command and control sub-system, including ancillary data, documentation and technical and engineering services. In turn LM engaged NGM to supply certain software products and to supply licences for use on development rigs outside Saudi Arabia.

6.

Insyte also entered into the Enabling Agreement with NGM which contained terms and conditions which governed purchase orders placed by Insyte with NGM in connection with the Data Links Interface Processer (“DLIP”) and the Command and Control Personal Computers (“C2PC”). The Enabling Agreement was originally dated 17 July 2009 but was amended on 3 March 2010.”

As might be expected of a enabling or framework agreement, the Enabling Agreement did contain boilerplate provisions covering the matters to which I have just referred as being, apparently, conspicuously lacking in the Licence Agreement. Thus it dealt at clause 2.2 with a particular form of force majeure, in clause 5 with confidentiality, in clause 11 with limitation of liability, in clause 18 with assignment, in clause 23 with law and jurisdiction and in clause 24 with dispute resolution. More particularly, it dealt with early termination in clause 10, duration (i.e. expiry by efluxion of time) in clause 19, and the limited force majeure provision in clause 2.2 was an additional ground for early termination.

Clause 10.4 provided for early termination both of the Enabling Agreement itself and of all or any Purchase Orders made thereunder “for convenience at any time by the Purchaser serving on the Contractor notice of twenty (20) calendar days of termination…”.

The issue both before the Judge and on this appeal is whether Clause 10.4 of the Enabling Agreement has effect by reason of clause 5.1 of the Licence Agreement so as to make that agreement also terminable upon twenty days’ notice by BAE for convenience and at any time. The Judge held that clause 5.1 of the Licence Agreement did have this effect. For the reasons which follow, I agree with him.

It is necessary at this stage to set out some of the terms of the Enabling Agreement in full. Recital A provides that:

“The PURCHASER has been awarded a Contract in respect of a project designated the Aldiriyah Project by the Ministry of Defence Aviation (MODA) of the Kingdom of Saudi Arabia (the “End Customer”) through BAE Systems (Al Diriyah C4I) Limited the “Purchaser’s Customer” to develop a System which currently includes a requirement for the Data Links Interface Processor (‘DLIP’)”

Clause 1 provides as follows:

“1.1

Any Purchase Order placed by the PURCHASER, pursuant to and referencing this Agreement and in connection with DLIP and/or C2PC in support of the PURCHASER’s contract with the Purchaser’s Customer, to be performed by the CONTRACTOR shall be governed by the terms and conditions detailed in this Agreement.

1.2

Where the PURCHASER wishes to engage the CONTRACTOR in the provision of a defined Task or series of Tasks or additional design support, the PURCHASER shall issue a formal Request for Quotation (RFQ) and Statement of Work (SoW) to the CONTRACTOR detailing the requirements of the Task(s).

1.3

…

1.4

Subject to the acceptance of the CONTRACTOR proposal and agreement of the pricing arrangements the PURCHASER will place a Purchase Order with the CONTRACTOR. All Purchase Orders for Tasks shall be subject to the Terms and Conditions of this Agreement including those additional Terms detailed in ANNEX A to this Agreement.”

Clause 1 therefore makes a distinction between Purchase Orders simpliciter and Purchase Orders for Tasks. In particular, the additional terms in Annex A apply only to the latter.

Clause 2.2 enables NGM to terminate the Enabling Agreement in the event that USA state authority to NGM to provide relevant services to BAESI is terminated. The right to terminate applies both to the agreement itself and to any Purchase Order issued thereunder.

Clause 10, headed Termination, makes provision for three types of termination, namely upon breach, upon insolvency and “for convenience” which counsel agreed was synonymous with early termination at will. Each of them provided for termination of the Enabling Agreement and of any Purchase Orders made thereunder.

Clause 10.4 provides, in full, as follows:

“This entire Agreement and/or any or all Purchase Orders may be terminated for convenience at any time by the PURCHASER serving on the CONTRACTOR notice of twenty (20) calendar days of termination and the CONTRACTOR shall forthwith arrange the economical cessation of all work under the Purchase Order at its own premises and at those of its subcontractors and shall await disposal instructions from the PURCHASER. The PURCHASER undertakes to reach a fair and reasonable settlement with the CONTRACTOR within a reasonable time for costs reasonably and properly incurred in connection with the termination of this Agreement including any irrevocably committed costs and/or any or all Purchase Orders, including reasonable profits thereon.”

Clause 19.1 provides that:

“The duration period for this Agreement shall be from the date it is made until 31^st December 2011.”

By contrast with the other provisions for termination in the Enabling Agreement, Clause 19.1 has no effect on Purchase Orders or upon the duration of work done pursuant to them. For example, if a Purchase Order is placed for work specified to take over six months, on 29^th December 2011, it would not be invalidated by the expiry of the Enabling Agreement by effluxion of time two days later.

Annex A is divided into thirteen sections, of which only section 2, headed Intellectual Property Rights, is relevant. After a series of definitions, section 2 of Annex A makes provision, in summary, for ownership of all intellectual property to remain in NGM, for the grant of free, non-exclusive licences to use relevant parts of it to the extent necessary for the Al Diriyah Project for the Saudi Arabian Ministry of Defence, and for an indemnity from the Contractor to the Purchaser, in respect of any infringement claims by third party owners of the intellectual property. Section 2 of Annex A ends with clause A.2.7 as follows:

“Nothing in this Agreement shall affect or amend any licensing arrangements that exist in respect of any Contractor products and/or software delivered to the Al Diriyah Project outside of this Agreement.”

As will appear, this innocent-sounding little clause became the subject of intense scrutiny during submissions.

This is, as I have said, a case purely about contractual construction. If termination for convenience, as provided in clause 10.4 of the Enabling Agreement, is applicable to the Licence Agreement by reason of its clause 5.1, then it is common ground that the Licence Agreement has been terminated. If not, not. There is no separate issue before this Court as to the financial and other consequences, either of the termination or the continuation of the Licence Agreement.

Although there continues to be (or to appear to be) on-going minor adjustment at the periphery, the general principles for the construction of contracts are now too well known and well settled to need to be set out here, even in summary. Perhaps less well known are the authoritative dicta about the incorporation of provisions into a contract by reference to another contract, between the same or different parties. Since the dispute between counsel was as to the application of those dicta to this case, rather than as to their meaning, I can deal with them quite shortly.

The leading case is Skips A/S Nordheim v Syrian Petroleum Co Limited [1984] 1 QB 599, a decision of this Court. The question was whether an arbitration clause contained in a charterparty was incorporated into a bill of ladingissued pursuant to the charter, which stated that “all conditions and exceptions of [the] charterparty including the negligence clause are deemed to be incorporated in bill of lading”.

The conclusion, both at first instance and on appeal, that the arbitration clause was not thereby incorporated into the bill of lading, was for the most part type-specific, depending upon established commercial practice as to charterparties and bills of lading and the particular significance of arbitration clauses. But both Sir John Donaldson MR and Oliver LJ made observations of general application to issues of incorporation from one contract into another. At page 616B, Sir John Donaldson said:

“Operative words of incorporation may be precise or general, narrow or wide. Where they are general, and in particular where they are general and wide, they may have the effect of incorporating more than can make any sense in the context of an agreement governing the right and liabilities of the ship owner and of the bill of lading holder. In such circumstances, what one might describe as “surplus”, “insensible” or “inconsistent” provisions fall to be “disincorporated”. “rejected” or ignored as “surplusage” but the starting point must always be the provisions of the bill of lading contract producing the initial incorporation.”

Oliver LJ went into greater detail, at page 619D:

“The purpose of referential incorporation is not – or at least is not generally – to incorporate the intentions of the parties to the contract whose clauses are incorporated but to incorporate the clauses themselves in order to avoid the necessity of writing them out verbatim. The meaning and effect of the incorporated clauses has to be determined as a matter of construction of the contract into which it is incorporated having regard to all the terms of that contract.

There are in fact, as Staughton J. point out in the Astro Valiente case [1982] 1 W.L.R. 1096, likely to be two stages in the inquiry, for it inevitably happens that an incorporation in very wide general terms is appropriate to incorporate into the bill of lading terms not strictly appropriate for such a contract. One then had to see whether the terms are so clearly inconsistent with the contract constituted by the bill of lading that they have to be rejected or 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 into which it is incorporated. The question of consistency is, however, a quite separate question.”

Counsel took us in addition to a number of other authorities, including Aughton Limited v MF Kent Services Limited (1991) 57 BLR 1, AIG Europe S.A. v QBE International Insurance Limited [2001] 2 Lloyd’s Rep 268, Habas Sinaie Ve Tibbi Gazlar Isthisal Endustri AS v Sometal SAL [2010] 1 All ER (Comm) 1143. Although the dicta in those cases sometimes use different language, none of them seemed to me either significantly to augment, still less depart from, the dicta in the Skips case to which I have referred. For my part, I rather doubt whether even those dicta amount to any special principle of construction. Rather, they reflect the application of well-understood principles of construction to the particular context of incorporation by reference.

Clause 5.1 of the Licence Agreement is plainly couched in both wide and general terms. Literally construed, the phrase “the terms contained within the Enabling Agreement…” prima facie mean all of them. Clause 5.1 does not itself provide any guidelines for the application of only some of them. But unlike the bill of lading in the Skips case, clause 5.1 does not use words of incorporation (at least in the sense explained by Oliver LJ). Rather it uses the phrase “governed by”. Considerable effort was devoted by counsel in an attempt, by reference to synonyms, such as ruled or regulated. I did not find those efforts to be helpful. The parties have chosen “governed”, and it is a word with a sufficiently clear meaning. Although it points slightly away from Oliver LJ’s concept of notionally writing the incorporated clauses into the agreement being construed, it is a no less forceful word than incorporated. But even the concept of being governed would give way where, for example, a clause in the Enabling Agreement was flatly inconsistent with a clause in the Licence Agreement dealing with the same subject matter. In such a case, the general would give way to the particular.

This is however a case in which, as Oliver LJ contemplated, some modification to the language (or at least to the meaning) of provisions in the Enabling Agreement is necessary, so as to make them work at all in the Licence Agreement. This almost inevitably arises where, as here, the two agreements are not between precisely the same parties.

Both the Enabling Agreement and the Licence Agreement refer to their parties as “Contractor” and “Purchaser”. In both cases, Contractor means NGM. By contrast, Purchaser in the Enabling Agreement means BAESI, whereas in the Licence Agreement it means BAE. Similar and, I think, slightly more difficult, problems arise in relation to the phrases in the Enabling Agreement “this… Agreement” and “all Purchase Orders”, when incorporated into, or treated as governing, the Licence Agreement, particularly when those two phrases are used together in clause 10 of the Enabling Agreement, as part of the larger phrase “this entire Agreement or any or all Purchase Orders…” made thereunder. A solution to these difficulties has to be found which neither renders clause 5.1 of the Licence Agreement a brutum fulmen, of no application at all, nor gives rises to a level of dominationby terms of the Enabling Agreement which would be “surplus, insensible or inconsistent” with the provisions of the Licence Agreement.

There are a number of provisions in the Enabling Agreement which Mr Alex Charlton QC for NGM was disposed to accept (subject to submissions about the effect of clause A.2.7 in the Enabling Agreement) were not inherently surplus, insensible or inconsistent when applied to the Licence Agreement. He accepted, for example, that the provision for termination by the Purchaser on breach by the Contractor, in clause 10.1 of the Enabling Agreement, would operate consistently if incorporated into the Licence Agreement. But it would be absurd if the right of termination of the Licence Agreement was thereby conferred upon BAESI rather than upon BAE, merely because the word Purchaser in the Enabling Agreement meant the former, rather than the latter. For that reason, appropriate manipulation of the meaning of Purchaser is in my view necessary to give clause 5.1 of the Licence Agreement any real effect at all.

I have reached the opposite conclusion in relation to the phrase “this Agreement”. To treat that after incorporation as meaning the Licence Agreement would mean, for example, that clause 19 of the Enabling Agreement would bring the Licence Agreement to an end by effluxion of time on 31 December 2011. This would be flatly inconsistent with provisions in the Licence Agreement, for example, for software support in relation to the second tranche of licences, which plainly extend through most of 2012. It follows that, for my part, I would have difficulty in treating clause 10.4 of the Enabling Agreement as enabling the Licence Agreement to be terminated at will if it depended upon the phrase “this entire Agreement”, without recourse to the words which follow, namely “and/or any or all Purchase Orders”. In agreement with the Judge I consider that it is necessary to decide whether the Licence Agreement is, or should by an element of manipulation be treated as if it were, or contained, a Purchase Order within the meaning of the Enabling Agreement. In my judgment, the Licence Agreement should be so treated.

The conditions in the Enabling Agreement which had to be satisfied by a Purchase Order before it was to be treated as governed by that agreement are set out in clause 1.1. They are that the Purchase Order should be:

For reasons which relate to the complicated submissions about the effect of clause A.2.7 of the Enabling Agreement it is convenient at this stage also to consider whether the Licence Agreement should be treated as a “Purchase Order for Tasks” within the meaning of clause 1.4 of the Enabling Agreement so as to attract to it the provisions of Annex A. In my judgment, the Licence Agreement is not so to be treated. Its main subject matter consists of software licences, albeit that an element of training and software support is also to be provided. It would I think be an abuse of language to describe the supply of software licences as a “task”. As Mr Marcus Taverner QC graphically put it, software licences of this type can be supplied at the press of a button.

I must now address Mr Charlton’s main and, in my view, strongest point on this Appeal. He submitted that, looking at the Licence Agreement as a whole, it was a single indivisible agreement for the supply of a specified number and types of software licence, for a specified price, which was inherently unsuitable for early termination at will or convenience of the Purchaser. He was careful to distinguish termination at will from termination for breach or for insolvency, both of which he was prepared to accept would not be inconsistent with that type of agreement. He submitted that, in sharp contrast with an agreement for a provision of a service over time, an agreement for the supply of a specified number of particular products was inherently unsuited to termination by the buyer at will, even if the agreement provided for that supply to be delivered (as here) in two tranches, one year apart. In particular, he submitted that the provision for software support, with its single commencement date and up-front commitment of £300,000 by the Purchaser, was a single indivisible obligation wholly unsuited to early termination.

That submission was in part based simply upon a reading of the Licence Agreement as a whole, but Mr Charlton sought to bolster it by reference to what he described as the admissible matrix of fact, namely that NGM was only prepared to charge discounted prices for the software licences if a contract for the supply of the whole of the specified number was placed by a certain date, failing which BAE would have needed to pay a substantially higher price. He readily acknowledged that this “fact” could only be ascertained from a view of the negotiations of the Licence Agreement by exchange of emails which preceded it, but he submitted that this was one of those facts which it was legitimate to ascertain by reference to the party’s negotiations, not withstanding the general exclusionary rule about the admissibility of negotiating material in Prenn v Simmons [1971] 1WLR 1381, reaffirmed by the House of Lords in Chartbrook v Persimmon Homes Ltd [2009] AC 1101, per Lord Hoffmann at paragraphs 28 to 41.

For present purposes I am, like counsel, content to adopt the Judge’s concise statement of the principle and of the exception to it, at paragraph 20.2 of his judgment:

“Evidence of pre-contractual negotiations is not generally admissible to interpret a concluded written agreement. But evidence of pre-contractual negotiations is admissible to establish that a fact was known to both parties and to elucidate the general object of the contract”.

It is in my view clear that, for this purpose, a “fact…known to both parties” means some objective part of the background matrix of fact other than a mere negotiating position taken by one of the parties, however vigorously expressed. In this case, the “fact” which Mr Charlton seeks to establish is precisely such a negotiating position, namely that NGM would only provide the software licences at a particular discounted price if a commitment to buy a specified number of them was made by a certain date. That is not part of the relevant matrix of fact, nor is evidence of the parties’ negotiations admissible to prove it.

The result is that Mr Charlton’s main submission must stand or fall by reference to an understanding of the Licence Agreement as whole. By that test I consider on balance that it falls.

It is, in one sense, true that the Licence Agreement provided for the supply of a specified number of software licences at a specified price and that, once it commenced, the provision of software support was indivisible. But the agreement was nonetheless for the supply of the licences in two tranches, and the terms as to software support clearly contemplated that a substantial period would elapse before commencement, thereby providing space (should the parties choose to agree to this effect) for BAE as Purchaser to terminate the agreement at will before either the delivery of the second tranche of licences became due, or before commencement of software support became an obligation of NGM. Putting it as shortly as I can, there is in my view nothing inconsistent with an agreement for the supply of products in tranches, spaced over time, and for associated services by way of support at a postponed date, for the inclusion by agreement of provision for early termination, before the second tranche or the associated support became deliverable. There being nothing inconsistent in such a provision for early termination, the only question is whether it was in fact agreed. Subject only to the submissions based upon clause A.2.7 of the Enabling Agreement, to which I must now turn, I consider that the effect of clause 5.1 of the Licence Agreement and clause 10.4 of the Enabling Agreement means that it was so agreed.

Mr Charlton also submitted that the provisions for compensation in clause 10.4 of the Enabling Agreement were inconsistent with the Licence Agreement, so that none of clause 10.4 should be treated as incorporated into, or governing, the latter. I disagree with both the premise and the conclusion.

It is true that NGM would not have to incur preparatory costs before issuing either tranche of licences. But it might well have to prepare to provide software support before the relevant commencement date, so that it might fairly seek compensation if the Licence Agreement was terminated just before that date. But even if there was little or no scope for such compensation, clause 10.4 is designed to cover termination of a potential multitude of different Purchase Orders, some of which might, and some of which might not, call for compensation. The fact that a particular Purchase Order might call for no compensation on termination cannot sensibly render termination for convenience inapplicable to it.

I have set clause A.2.7 out in full above. Mr Charlton’s submission was as follows:

There are in my judgment a number of reasons why, separately and a fortiori in the aggregate, Mr Charlton’s elegant submission based on clause A.2.7 cannot prevail. The first is that Annex A only applies to Purchase Orders for Tasks: see clause 1.4 of the Enabling Agreement, and the Licence Agreement is not that type of Purchase Order, or even analogous with such a Purchase Order, for reasons which I have already given.

The second reason is that even if limited to provisions which “affect or amend” any licensing arrangements, large parts of the boilerplate provisions of the Enabling Agreement, which were plainly intended to be incorporated or treated as governing the Licence Agreement, would be swept away. These would, in particular, include those provisions in the Enabling Agreement for early termination by force majeure (clause 2.2) for breach (clause 10.1(a)) and for insolvency (clause 10.2) all of which would appear to be eminently suitable for, and intended, for incorporation or governance.

Thirdly, clause 5.1 between NGM and BAE is later in time than clause A.2.7, as between NGM and BAESI. Even if, viewed on its own, the Enabling Agreement was not intended by its parties to apply to licensing arrangements “existing outside the Enabling Agreement” there was nothing to prevent the parties to the Licence Agreement later agreeing in their bespoke agreement to the contrary, and this is plainly what they did, by clause 5.1.

Finally, I am minded to agree with Mr Taverner that, on a careful reading, the apparently torrential effect of the phrase “Nothing in this Agreement” was not its real meaning. Clause A.2.7 comes at the end of Section 2 of Annex A which was specifically concerned with terms as to the ownership, licensing and indemnity in respect of intellectual property rights. It was in my judgment to those provisions that clause A.2.7, in its proper place at the end of that section of Annex A, was directed.

The result is that, for all those reasons, clause A.2.7 does not trump or cut down what would otherwise be the effect clause 5.1 as set out above.

Those are the reasons why, if my Lords agree, this appeal should be dismissed.

I agree.

I also agree.