Incorporation of terms from framework agreement
NORTHROP GRUMMAN v BAE SYSTEMS (CA) [2015]
The Court of Appeal (CA) in this case decided that a buyer was entitled to end a software licence without reason due to a termination clause in a framework agreement whose terms were incorporated into the licence.
Facts:
- Northrop Grumman (N) entered into a licence agreement (Licence) to supply two tranches of software licences, together with support, to BAE Systems (B). B received and paid for the first tranche of licences. The second tranche was due a year later.
- The Licence document itself was comparatively short without many of the typical boiler-plate provisions dealing with jurisdiction, dispute resolution, limitation of liability, force majeure, termination etc. However, clause 5.1 of the Licence (Clause 5.1) stated that it was to be “governed by” the terms of an agreement made between N and a group company connected with B (Framework Agreement).
- The Framework Agreement contained the boilerplate provisions that were missing from the Licence including a clause which provided for early termination “for convenience at any time”, both of the Framework Agreement itself and of any purchase orders made under it, on 20 days’ notice (Clause 10.4).
- B gave notice to terminate in accordance with clause 10.4 before the second tranche of licences was delivered. N rejected this notice.
- The case was first heard in the Technology and Construction Court (TCC) where it was decided that due to Clause 5.1, the terms of the Framework Agreement were incorporated by reference into the Licence. Consequently, Clause 10.4 had given B the right to terminate the Licence on giving the notice period specified.
- N appealed to the CA.
Decision:
- In agreeing with the TCC, the CA found that B did have the right to terminate under Clause 10.4.
- The CA referred to the established principles to incorporate provisions into a contract by reference to another agreement between the same or different parties:
- where the words intended to make a provision part of a contract are general and wide, they may encompass more than makes sense in the context of the agreement into which the clauses are to be incorporated. In such circumstances, provisions which could be described as “surplus, insensible or inconsistent” should be rejected or ignored;
- there are two stages to determine the meaning and effect of the incorporated clauses. In this context, it was necessary to see whether:
- the terms of the Framework Agreement were so clearly inconsistent with the Licence that they had to be rejected; or
- the parties’ intention to incorporate Clause 10.4 was so clearly expressed that it would be implied that some amendment to the wording of that clause was required to adapt it to the Licence.
- N argued that the Licence was a ‘single indivisible agreement’ for the supply of a specified aggregate number and type of software licences at a specified aggregate price. It maintained this meant the Licence was therefore inherently unsuitable for early termination by B without a reason.
- Was there any inconsistency?
- The CA’s view was that there was nothing inconsistent with, on the one hand, an agreement for the supply of products spaced over time and, on the other hand, a provision for early termination before the second tranche of products became deliverable. The only question then was whether that provision was in fact agreed to form part of the contract. The judge considered that the effect of Clause 5.1 and Clause 10.4 meant that it was agreed as “governed by” had a clear meaning.
- The judge went on to say that where a clause in the Framework Agreement was “flatly inconsistent” with a provision in the Licence dealing with the same subject matter, in such a case, “the general [ie the Framework Agreement] would give way to the particular [ie the Licence]”.
- Was an amendment to the wording of Clause 10.4 required?
- The Framework Agreement and the Licence respectively were not between precisely the same parties – the ‘Purchaser’ referred to in the Framework Agreement was another company in B’s group whereas the ‘Purchaser’ in the Licence was B.
- It would be absurd, the CA said, if the right of termination of the Licence was accordingly conferred upon the other company in the group rather than upon B, merely because the word ‘Purchaser’ in the Framework Agreement meant the former, rather than the latter. The CA decided that the reference to ‘Purchaser’ in the Framework Agreement should be construed as covering B.
- The Framework Agreement also referred to the termination of “purchase orders”. The CA considered that the Licence was effectively to be treated as a ‘purchase order’ as described in the Framework Agreement.
- The CA had therefore concluded that minor changes to the language of the Framework Agreement were permitted to ensure that its provisions worked as intended in the context of and when applied to the Licence.
Points to note:
- The decision is a good example of how terms from one document (even where it is between other legal entities) can be incorporated by reference into another and that the Courts will allow some flexibility in applying the terminology to give effect to what is perceived to be the intention of the parties.
- N sought to argue that the Licence was inherently unsuitable for early termination without cause by reference to the fact that it was only prepared to charge discounted prices for the software licences if B made a commitment to buy a specified number by a certain date, failing which B would have had to pay a substantially higher price. There was no mention of this in the Licence itself and it could only be ascertained from an exchange of emails which took place as part of the negotiations before the parties entered into the Licence. Evidence of pre-contractual negotiations is not generally allowed to aid the interpretation of a concluded written agreement (such evidence is normally only permitted to support a claim for correction based on a ‘mistake’ and to establish the factual background known to the parties at the time they entered into the contract). The CA rejected this argument saying this ‘fact’ was a mere negotiating position which was not part of the ‘relevant matrix of fact’ to be considered in interpreting the Licence. If a commercial offer is therefore made on a particular basis (ie a commitment to take a particular minimum volume), then this must be clearly stated in the contract document itself but even then it would be wise to check whether a termination for convenience clause exists in the ‘framework agreement’ and clarify what the intention is in relation to such a clause being exercised.
- What this case highlights is that rights to terminate on notice without cause can be either extremely dangerous/extremely useful (delete as appropriate depending upon which position is more favourable at the particular time). Such rights do seem to be increasingly popular with purchasers as they enable a contract to be terminated at any time without having to prove breach. However, what they also mean is that the supplier has to treat the contract on the basis that the option could be exercised at the earliest opportunity and the price should perhaps be adjusted accordingly.