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You are here: BAILII >> Databases >> England and Wales High Court (Technology and Construction Court) Decisions >> Northrop Grumman Mission Systems Europe Ltd v BAE Systems (Al Diriyah C4I) Ltd [2014] EWHC 2955 (TCC) (08 September 2014)
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Cite as: [2014] EWHC 2955 (TCC)

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Neutral Citation Number: [2014] EWHC 2955 (TCC)
Case No: HT-13-388

IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
TECHNOLOGY AND CONSTRUCTION COURT

Royal Courts of Justice
Strand, London, WC2A 2LL
8 September 2014

B e f o r e :

THE HON MR JUSTICE RAMSEY
____________________

Between:
NORTHROP GRUMMAN MISSION SYSTEMS EUROPE LIMITED
Claimant
- and -

BAE SYSTEMS (AL DIRIYAH C4I) LIMITED
Defendant

____________________

Alex Charlton QC (instructed by King & Spalding LLP) for the Claimant
Marcus Taverner QC (instructed by Herbert Smith Freehills LLP) for the Defendant

____________________

HTML VERSION OF JUDGMENT
____________________

Crown Copyright ©

    Mr Justice Ramsey:

    Introduction

  1. In this Part 8 Claim the Claimant ("NGM") seeks declarations as to the entitlement of the Defendant ("BAE") to terminate an "Agreement for Deployment Licences and associated Software Support" dated December 2010 ("the Licence Agreement").
  2. BAE contends that by Clause 5.1 of the Licence Agreement the terms of an "Enabling Agreement For Design Services and Task Work" dated 3 March 2010 ("the Enabling Agreement") governed the Licence Agreement so that Clause 10.4 of the Enabling Agreement which provided for termination for convenience entitled BAE to terminate the Licence Agreement on that basis with effect from 19 December 2011.
  3. NGM contends that Clause 10.4 of the Enabling Agreement was not a term which applied to the Licence Agreement so as to allow BAE to terminate the Licence Agreement for convenience. As a result, NGM says that BAE's purported termination was ineffective and that BAE is obliged to pay NGM further sums under the Licence Agreement.
  4. Background

  5. 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.
  6. 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.
  7. 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.
  8. In order to deploy the software on computers as part of BAE's obligations to provide the system to the Ministry of Defence in Saudi Arabia, it was necessary for BAE to obtain licences for that software from NGM. This led to Insyte issuing a Request for Proposal (RFP) for software support and deployment licences to NGM on 13 October 2010. At the bottom of the first page reference was made to the fact that physical purchase of the deployment licences within Saudi Arabia would be "administrated by BAE Systems (Saudi Arabia)". Terms and conditions were said to been "subject to further discussion."
  9. On 18 November 2010 NGM provided a quotation to "BAE Systems". It, in turn, contained terms and conditions. The parties then entered into negotiations which culminated in the Licence Agreement which was signed on behalf of BAE on 17 December 2010 and on behalf of NGM on 20 December 2010.
  10. The Licence Agreement contained the following term at Clause 5.1:
  11. "This Agreement shall be governed by the terms contained within the 'Enabling Agreement for Design Services and Task Work, Version 2 dated the 3rd March 2010."

  12. The initial issue in this case relates to the effect of that clause and, in particular, the scope and extent to which terms of the Enabling Agreement became terms of the Licence Agreement. The main question is whether Clause 10.4 of the Enabling Agreement applies under the Licence Agreement so as to entitle BAE to terminate the Licensing Agreement for convenience. It provides as follows:
  13. "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 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."

  14. On 29 November 2011 Insyte and BAE sent a Notice of Termination to NGM in the following terms:
  15. "1. We refer to the Agreement for Deployment Licences and Associated Software Support dated 15 December 2010, Reference C4I/RMD/10039/15120, between BAE Systems (Al Diriyah C4I) Limited and Northrop Grumman Mission Systems Europe Limited ("Northrop Grumman"), hereafter the "the Agreement".

    2. By Clause 5.1 of the Agreement, the terms contained within the Enabling Agreement For Design Services and Task Work, Version 2, dated 3 March 2010 entered into between BAE Systems Integrated System Technologies Limited and Northrop Grumman Mission Systems Europe Limited, govern the Agreement. These include, at Clause 10.4, the express right for the Purchaser to terminate for convenience at any time by serving 20 calendar days notice of termination on the Contractor.

    3. BAE Systems Integrated System Technologies Limited and BAE Systems (Al Diriyah C4I) Limited hereby give notice to Northrop Grumman that the Agreement is terminated for convenience pursuant to Clause 10.4, such termination becoming effective upon the expiry of 20 calendar days. The effective date of termination will therefore be 19 December 2011.

    4. In accordance with Clause 10.4, Northrop Grumman is to forthwith arrange the economical cessation of all work under the Agreement pending receipt of disposal instructions from BAE Systems. For the avoidance of doubt, the cessation of all work is to include the cessation of all work in relation to the delivery of the balance of licences as referred to at clause 2.1.3 of the Agreement."

  16. On the same date Insyte sent NGM a Notice of Termination terminating the Enabling Agreement under Clause 10.4.
  17. In response, on 1 December 2011, NGM wrote to BAE, with a copy to Insyte, saying that it did not agree that Clause 5.1 of the Licence Agreement had the effect of incorporating the terms of the Enabling Agreement including Clause 10.4 into the Licence Agreement. NGM continued:
  18. "Northrop Grumman Mission Systems Europe Limited (NGMSEL) therefore interprets BAE Systems (Al Diriyah C4I) Limited's termination of the Licence Agreement as a repudiatory breach of contract which repudiation it hereby rejects. NGMSEL will therefore continue to perform the Licence Agreement, such performance itself incurring no additional costs as it will merely amount to the placing of the licence keys at BAe Systems (Al Diriyah C4I) Limited's disposal."

  19. Subsequently NGM commenced the Part 8 Proceedings against BAE and in Particulars of Claim sought the following relief:
  20. "7.1 A declaration that on a true construction of the Licence Agreement [BAE] was not entitled to terminate the Licence Agreement for convenience on 20 calendar days notice;

    7.2 A declaration that [NGM's] invoice dated 20 December 2011 in the sum of 2,664,139 plus VAT of 532,827.80 (total 3,196,966.80) is due and owing together with interest thereon to be determined pursuant to S35A Senior Courts Act 1981;

    7.3 A declaration that [BAE] is liable to pay the Claimant a minimum of 300,000 (excluding VAT) in relation to support services; and

    7.4 Consequential relief and costs."

    8. Alternatively, insofar as it is found that the meaning and effect of clause 5.1 is vague and uncertain so as to be incapable of enforcement, [NGM] seeks further a declaration to that effect."

  21. Directions were given leading to a two-day hearing of that Part 8 Claim.
  22. Evidence

  23. In support of the Part 8 Proceedings NGM served witness statements from Colin Richard Fieldgate and from Kevin Michael Squibb both dated 21 October 2013. In response BAE served witness statements from Danielle Larter and Sean Cross both dated 22 November 2013.
  24. By an Application dated 23 January 2014 BAE sought permission to cross examine Mr. Squibb and Mr. Fieldgate and on 27 January 2014 NGM also issued an application seeking permission to cross-examine Mrs. Larter and Mr. Cross. Those Applications followed correspondence between the parties in which BAE challenged the admissibility and/or relevance of evidence contained in the witness statements of Mr. Squibb and Mr. Fieldgate. BAE sought permission to cross- examine because it challenged various matters contained in those witness statements. NGM's application was for permission to cross examine if BAE's Applications succeeded. The parties exchanged submissions on this issue.
  25. At the start of the hearing in the light of the submissions exchanged between the parties on the substantive issues it became clear that the extent to which there were disputes as to the evidence rather than what was admissible as relevant factual background was much reduced. As a result, on the basis that NGM's reliance on factual evidence was limited to what was set out under the heading "relevant factual matrix-commercial background" in paragraphs 23 to 64 of NGM's opening and submissions for trial, BAE did not pursue its application to cross-examine Mr. Squibb and Mr. Fieldgate and NGM's application to cross-examine Mrs. Larter and Mr. Cross therefore was not pursued either.
  26. As set out below there were certain issues on what was admissible factual evidence in relation to issue of construction of the Licence Agreement and/or the Enabling Agreement. I therefore proceeded on the basis that any admissible evidence was in the witness statements of the four witnesses upon which the parties made comments and submissions.
  27. Factual Matrix

  28. In relation to the admissibility of evidence Mr. Alex Charlton QC, who appeared on behalf of NGM, relied on the following four propositions derived from the authorities which I gratefully adopt:
  29. 1. The admissible background includes absolutely everything which a reasonable person would have regarded as relevant and which would have affected the way in which that person would have understood the language of the document, and which would reasonably have been available to the parties: see The Interpretation of Contracts, Lewison, 5th Ed at 1-04 relying upon Lord Hoffmann's second principle in Investors Compensation Scheme v West Bromwich BS [1998] 1 WLR 896 as explained in BCCI v Ali [2002] 1 AC 251 at paragraph 39.

    2. 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: see The Interpretation of Contracts, Lewison, 5th Ed at 3-09 relying upon Chartbrook Homes Ltd v Persimmon Homes Ltd [2009] 1 AC 1101, Lord Hoffman; and Scottish Widows v BGC International [2011] EWHC 729 (Ch) Norris J.

    3. The line between what is extrinsic to an agreement and what is intrinsic is not always easy to identify. Before taking extrinsic evidence into account it is important to consider precisely why it is said to assist in deciding the meaning of what was subsequently agreed and to consider whether its relevance is sufficiently cogent to the determination of the joint intention of the parties to have regard to it: see MSC Mediterranean Shipping Co SA v Owners of the Ship "Tychy" [2001] 2 Lloyds Rep 403, per Lord Phillips MR in at 409.

    4. The real question is not admissibility but weight: "...what is admissible as a matter of the rules of evidence.., is what is arguably relevant. But admissibility is not the decisive matter. The real question is what evidence of surrounding circumstances may ultimately be allowed to influence the question of interpretation. That depends on what meanings the language read against the objective contextual scene will let in.": see Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] AC 749 per Lord Steyn at 768; cited with approval in Cherry Tree Investments Ltd v Landmain Ltd [2013] Ch 305 (CA) at paragraph 104."

  30. I was also referred to passages in the speech of Lord Hoffmann in Chartbrook Limited v Persimmon Homes Limited [2009] UKHL 38 at [38] where he distinguished between objective facts and statements made in the course of negotiations:
  31. "Whereas the surrounding circumstances are, by definition, objective facts, which will usually be uncontroversial, statements in the course of pre-contractual negotiations will be drenched in subjectivity and may, if oral, be very much in dispute."

  32. In addition at [31] in Chartbrook Lord Hoffmann cited what Lord Wilberforce said in Prenn v Simmonds [1971] 1 WLR 1381 at 1384 to 1385, as follows:
  33. " Far more, and indeed totally dangerous is it to admit evidence of one party's objective-even if this is known to the other party. However strongly pursued this may be, the other party may only be willing to give it partial recognition, and in a world of give and take, men often have to be satisfied with less than they want. So again, it would be a matter of speculation how far the common intention was that the particular objective should be realized."

  34. In his oral submissions Mr Charlton summarized the extent to which he relied on matters of factual background. He referred to the matters:
  35. (1) The Al Diriyah project started in 2007. It was a highly sensitive project for the development and implementation of Command, Control, Communications, Computer and Intelligence systems for the Ministry of Defence of the Kingdom of Saudi Arabia with whom BAE had contracted. These systems are used to conduct war and counter-terrorism.

    (2) The software which NGM had already supplied under a development subcontract with LM (who was a supplier to the Al Diriyah project) and in respect of which deployment licences and support was required, was NGM's proprietary Command and Control for Personal Computers software called "C2PC". NGM had developed and granted licences for its Arabic version of its C2PC software, along with two other of its products.

    (3) NGM's proprietary software represented significant and valuable intellectual property. As part of the agreement to purchase the licences, the Licence Agreement contained the mechanisms by which NGM's intellectual property rights were protected and enforced and set out how the software could be used.

    (4) There had been discussions about the granting of deployment licences in 2008. Prices and licence quantities had been discussed but no deal resulted. BAE was keen to secure those 2008 prices two years later when prices had increased. Quantities of licences had also been discussed in 2008 but were revised in 2010.

    (5) The commercial basis for the agreement between NGM and BAE was as follows:

    (a) That the RFP required prices for a fixed quantity of licences;

    (b) That the quotation prices were referenced to the specific quantities of licences that Insyte had put in their RFP and that they were given both 2008 and 2010 prices on the terms set out in the quotation;

    (c) That both NGM and BAE knew and understood at the point they entered into the Licence Agreement that whether or not the 2008 prices or the 2010 prices applied was dependent upon the following factors:

    (i) The purchase of the quantity of licences which the defendant had said it required;
    (ii) The completion of the purchase of those quantities by 20 December 2010;
    (iii) Payment for 25 per cent by value of those licences by 20 December 2010;
    (iv) Payment for the balance by 20 December 2011;
    (v) Taking one year of support for a minimum commitment of 300,000; and
    (vi) Bringing existing rig licences back under support.

  36. Mr. Marcus Taverner QC, who appeared on behalf of BAE, identified admissible and relevant evidence in his opening submissions. He referred essentially to similar matters to those relied on by Mr Charlton, with some exceptions. Having reviewed the matters relied on, I consider that the fact of the RFP and whether 2008 or 2010 prices applied can form part of the factual matrix. However I consider that other matters, in particular the final sentence of paragraph 23(3) and parts of paragraph 23(5)(c), are not so much factual matrix but refer to the terms which formed part of the Licence Agreement. It is therefore those terms of the Licence Agreement which have to be construed against the admissible background. If the Licence Agreement contained terms which differed from the terms set out in the last sentence of paragraph 23(3) or the matters set out in paragraphs 23(5)(c)(i) to (vi), then it is the terms of the Licence Agreement which fall to be construed against the admissible background, rather than the wording of the terms as expressed in those paragraphs. Otherwise those matters can and do form part of the admissible background.
  37. Mr Taverner also relied on the evidence of Mr Cross that, although BAE entered into the Licence Agreement determined that the Project would reach the deployment stage, neither the timing of deployment nor the success of the project was guaranteed. He also said that the members of NGM's commercial team who negotiated the Licence Agreement knew about the uncertainty surrounding the Project and the number of licences that would ultimately be required. I have not found it easy to understand what uncertainty Mr Cross was referring to. I do not consider that his evidence is sufficient to establish any clear matters which were known to both parties at the time of entering into the Licence Agreement so as to assist in the construction of the agreement.
  38. With those matters of factual matrix in mind, I now turn to summarise the relevant applicable principles of construction.
  39. Principles of Construction

  40. In relation to the approach to construing contracts I was referred to the well- known passage in the speech of Lord Hoffmann in Investors Compensation Scheme v West Bromwich Building Society [1998] 1 WLR 896 and the decision of the Supreme Court in Rainy Sky SA v Kookmin Bank [2011] 1 WLR 2900 per Lord Clarke at [14] and [21].
  41. I was also referred to the following summary derived from Lord Clarke's judgment by Gross LJ in Al Sanea v. Saad Investments Co Ltd [2012] EWCA Civ 313 at [31]:
  42. " i) The ultimate aim of contractual construction is to determine what the parties meant by the language used, which involves ascertaining what a reasonable person would have understood the parties to have meant. The reasonable person is taken to have all the background knowledge which would reasonably have been available to the parties in the situation in which they were in at the time of the contract.

    ii) The Court has to start somewhere and the starting point is the wording used by the parties in the contract.

    iii) It is not for the Court to rewrite the parties' bargain. If the language is unambiguous, the Court must apply it.

    iv) Where a term of a contract is open to more than one interpretation, it is generally appropriate for the Court to adopt the interpretation which is most consistent with business common sense. A Court should always keep in mind the consequences of a particular construction and should be guided throughout by the context in which the contractual provision is located.

    v) The contract is to be read as a whole and an "iterative process" (at [28]) is called for: " involving checking each of the rival meanings against other provisions of the document and investigating its commercial consequences." "

  43. In addition I was referred to the decision in Re Sigma Finance Corporation (In Administrative Receivership) [2010] BCC 40 where the Supreme Court emphasised the importance of the overall scheme in which the relevant provision is to be found, Lord Mance saying as follows at [12]:
  44. "Of much greater importance in my view, in the ascertainment of the meaning that the Deed would convey to a reasonable person with the relevant background knowledge, is an understanding of its overall scheme and a reading of its individual sentences and phrases which places them in the context of that overall scheme."

  45. I was also referred to what Lord Hoffmann said in Attorney General of Belize v Belize Telecoms Limited [2009] UKPC 10 at [16] as follows:
  46. "The court has no power to improve upon the instrument which it is called upon to construe, whether it be a contact, a statute or articles of association. It cannot introduce terms to make it fairer or more reasonable. It is concerned only to discover what the instrument means. However, that meaning is not necessarily or always what the parties intended. It is the meaning which the instrument would convey to a reasonable person having all the background knowledge which would reasonably be available to the audience to whom the instrument is addressed."

    Incorporation of terms into an agreement

  47. In considering the extent to which terms are incorporated by reference I was referred to the decision of Moore-Bick J, as he then was, in AIG Europe SA v QBE International Insurance Limited [2001] 2 Lloyd's Rep 268 where he considered whether a jurisdiction clause had been incorporated by a reference to a related contract between different parties. At [26] he said this:
  48. "The incorporation of the terms of one contract into another related contract between different parties raises rather different questions from those which arise when one party to a contract seeks to incorporate by reference a set of standard trading terms. In the former case most, but not all, of the terms of the original contract are likely to be directly relevant to the substance of the contract into which they are to be incorporated. In these circumstances it becomes necessary to decide which terms the parties intended to incorporate and which they did not. In many cases the answer will be that in the absence of specific language the Court will not be able to infer with confidence that the parties did intend to incorporate any terms other than those which are germane to their own contract: see the comments of Mr. Justice Colman in AIG Europe (U.K.) Ltd v The Ethniki at pp. 309f-310e. In the latter case this question rarely arises and the result is that all or none of the terms in question are incorporated. In each case the Court must construe the language of the contract in the context of its commercial background and ask itself whether a consensus on the subject matter of the jurisdiction clauses is clearly and precisely demonstrated."

  49. I was also referred to the judgment of Christopher Clarke J, as he then was, in Habas Sinai v Sometal [2010] EWHC 29 where he had to consider an agreement which contained terms and then included the words "all the rest will be same as our previous contracts". The question was whether that was sufficient to incorporate an Arbitration Clause. At [13] he identified the following categories of incorporation.
  50. "13. Parties are free to incorporate (or seek to incorporate) whatever terms they choose by whatever method they choose. In those circumstances it is unwise to seek to formulate definitive categories. But, with that caveat, most attempts at incorporation of an arbitration (or jurisdiction) clause are likely to fall within one of the following broad categories (in which the terms referred to include an arbitration clause):

    (1). A and B make a contract in which they incorporate standard terms.
    These may be the standard terms of one party set out on the back of an offer letter or an order, or contained in another document to which reference is made; or terms embodied in the rules of an organisation of which A or B or both are members; or they may be terms standard in a particular trade or industry.
    (2) A and B make a contract incorporating terms previously agreed between A and B in another contract or contracts to which they were both parties.
    (3) A and B make a contract incorporating terms agreed between A (or B) and C.
    Common examples are a bill of lading incorporating the terms of a charter to which A is a party; reinsurance contracts incorporating the terms of an underlying insurance; excess insurance contracts incorporating the terms of the primary layer of insurance; and building or engineering sub contracts incorporating the terms of a main contract or sub-sub contracts incorporating the terms of a sub contract
    (4) A and B make a contract incorporating terms agreed between C and D.
    Bills of lading, reinsurance and insurance contracts and building contracts may fall into this category."
  51. He then identified particular issues arising in Bill of Lading and other cases before setting out the following at [49] and [52]:
  52. "49. There is a particular need to be clear that the parties intended to incorporate the arbitration clause when the incorporation relied on is the incorporation of the terms of a contract made between different parties, even if one of them is a party to the contract in suit. In such a case it may not be evident that the parties intended not only to incorporate the substantive provisions of the other contract but also provisions as to the resolution of disputes between different parties, particularly if a degree of verbal manipulation is needed for the incorporated arbitration clause to work. These considerations do not, however, apply to a single contract case.

    52. I do not accept that the present case is to be regarded as a "two-contract" case. Whilst, literally speaking, there is more than one contract to be considered, being the June contract and whatever other contracts between the same parties are to have some of their terms incorporated, the relevant distinction is between incorporation of the terms of a contract made between (a) the same and (b) different parties. In short there is a material distinction between categories 1 and 2 on the one hand and categories 3 and 4 on the other. In relation to the latter two categories a more restrictive approach to incorporation is required. That should not, however, mean that a similarly restrictive approach should apply to cases in categories 1 and 2. I agree with Langley J that, if that were so, the exception would swallow up the rule. It is important that it should not do so given that the precise rationale of the rule is debatable; its retention is partly attributable to the desirability of not changing an approach established "for better or worse"; and that the rule is not easily congruent with ordinary principles of construction. Further there is good reason not to apply a more restrictive approach in relation to cases in category 2, where the parties have already contracted on the terms said to be incorporated, than to those in category 1, where the party resisting incorporation is either more or at least as likely to be unfamiliar with the standard term relied on as is the party resisting incorporation in category 2."

  53. In considering those cases on incorporation I bear in mind the particular context of those decisions and that the incorporation of arbitration or jurisdiction clauses into certain types of contract have historically raised difficulties separate from those raised in incorporating other terms into commercial contracts.
  54. Perpetual Licences

  55. In relation to perpetual licences I was referred to the decision of Sales J in BMS Computer Solutions Limited v AB Agri Limited [2010] EWHC 464 (Ch) at [17] to [18] where he said:
  56. 17. The word "perpetual" can carry different shades of meaning. It can, for example, mean "never ending" (in the sense of incapable of being brought to an end) or it can mean "operating without limit of time" (so as, in the context of Cl 4(a) of the Variation Agreement, to grant a licence of indefinite duration, but subject to any contractual provisions governing termination of the licence). I consider that this latter interpretation of the word "perpetual" in the context of Cl 4(a) of the Variation Agreement is the correct one. On that interpretation of Cl 4(a) there is no incompatibility between Cl 4(a) and Cl 5.2 of the Licence Agreement and, by virtue of Cl 11 of the Variation Agreement, Cl 5.2 of the Licence Agreement continues to have effect. Therefore, when the Defendant terminated the Support Agreement it also terminated the licence for it to use the MillMaster software.

    18. There are four principal reasons why I take this view of the operation of the three agreements:

    ii) Since a possible meaning of "perpetual" is "of indefinite duration" and the choice of that word with that shade of meaning makes sense in the context of a move from a licence of limited duration (as defined in the Licence Agreement) to a licence of indefinite duration (in the Variation Agreement), I think that there is considerable force in the submission of Mr Flynn that in choosing which shade of meaning of the word "perpetual" the parties intended should apply the omission of the Variation Agreement to refer at all to the termination provisions in the Licence Agreement and the Support Agreement indicates that those terms were intended to continue in force. The termination provisions in both those agreements were very important terms of those agreements. They dealt with important commercial matters such as termination for breach of the agreement or in circumstances of insolvency of the other party. It is reasonable to think that any parties to licence and support agreements of this kind would wish such important commercial matters to be dealt with by such terms."

    The issues of construction in this case

  57. There are essentially three issues of construction that I have to consider:
  58. (1) The effect of Clause 5.1 of the Licence Agreement and, in particular, what was meant by the reference to the Licence Agreement being "governed by the terms contained within the [Enabling Agreement]"?

    (2) The effect of Clause A2.7 of the Enabling Agreement on what would otherwise be the effect of Clause 5.1 of the Licence Agreement.

    (3) Given the effect of Clause 5.1 of the Licence Agreement and any effect of Clause A2.7 of the Enabling Agreement, what terms of the Enabling Agreement applied to the Licence Agreement and did they give BAE an entitlement to terminate the Licence Agreement for convenience?

    The effect of Clause 5.1 of the Licence Agreement

  59. Mr. Charlton submits that the phrase "governed by" in Clause 5.1 does not mean "incorporated". He submits that, as a matter of plain and ordinary English, the word "governed" has a variety of meanings but none of them equate to "incorporated". He refers to the definition of the word "governed" in dictionaries. He submits that the word "governed" should be interpreted so that the terms of the Enabling Agreement have "a governing influence" over the Licence Agreement.
  60. Mr. Taverner submits that the meaning of "governed" construed in the context of Clause 5.1 is plain and obvious. It means "governed" in the sense that the terms of the Enabling Agreement "rule" and/or "regulate" the Licence Agreement and he also refers to those meanings in dictionary definitions. Further he submits that the word "governed" in the context of Clause 5.1 is more powerful that the phrase "incorporated into" since it suggests that, if there were any conflict between the terms, the terms of the ruling and regulating Enabling Agreement would prevail over the terms of the Licence Agreement.
  61. He says that, on the interpretation put forward by Mr. Charlton, the meaning and effect of a term having "influence" is not clear and the term "influence" cannot, he submits be equated to the term "governed".
  62. I consider that the submissions of Mr. Taverner are correct. Where terms of one agreement are said to govern another agreement, those terms rule or regulate that other agreement. Not only would those terms be incorporated but they would generally, depending on the particular context, prevail over the other terms of the other agreement. It is common for contracts to incorporate governing law clauses which evidently have that effect. In the present case the Enabling Agreement itself contains the following provision at Clause 1.1:
  63. "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."

  64. That, in my judgment well illustrates the meaning and effect of the word "governed" as having the effect of incorporating the terms and conditions in the Enabling Agreement into those Purchase Orders and, as Mr. Charlton accepts in terms of Clause 1.1 of the Enabling Agreement, the whole scheme of the Enabling Agreement would apply to those Purchase Orders.
  65. Clause A2.7

  66. Clause A2.7 provides as follows:
  67. "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 Aldiriyah Project outside of this Agreement."

  68. Mr. Charlton submits that this clause operates and is effective to exclude the application of anything in the Enabling Agreement that affects or amends the licensing arrangements in the Licence Agreement and that this would include Clause 10.4. He submits that, in context, Clause A2.7 is a sensible and necessary provision which prevents the terms of the Enabling Agreement having any application to licensing arrangements in relation to software and products outside the Enabling Agreement.
  69. He says that Clause A2.7 is effective to prevent any of the terms of the Enabling Agreement applying to the Licence Agreement. If it does not have that total effect, he submits that it applies at least to the licensing element of the Licence Agreement, if not to the support and training elements.
  70. He submits that Clause A2.7 is broadly worded so that "nothing" in the Enabling Agreement shall "affect or amend" the licensing arrangements. This, he says, is apt to cover a clause in the Enabling Agreement which has the effect of cancelling or suspending the Licence Agreement, as it is contended that Clause 10.4 would do. That would, he submits, cover all the licensing arrangements under that agreement in relation to quantity and use of the licences and in terms of associated support and training. He also submits that when the Licence Agreement is entered into there are then "licensing arrangements that exist" and which would therefore be covered by that Clause. He accepts that the products and software have to be "delivered" but says that, as is part of the factual matrix, the project started in 2007 and NGM provided the software to LM under the sub-contract. He therefore submits that the products and/or software were delivered to the Aldiriyah Project. Further he says that they were delivered outside of the Enabling Agreement as they were delivered under the agreement between LM and NGM.
  71. Finally Mr Charlton submits that nothing should be read into the fact that Clause A2.7 is to be found in Section A2 of the Enabling Agreement which refers to Intellectual Property Rights. He says that the Enabling Agreement is not a document where clauses are to be found where they would be expected.
  72. Mr Taverner says that Mr Charlton's submissions are based on an acceptance that the Licence Agreement incorporates all the terms of the Enabling Agreement, including Clause A2.7. On that basis, he submits that Mr Charlton's submissions would be commercially absurd as it would mean that the effect of Clause 5.1 of the Licence Agreement is only to incorporate Clause A2.7 in order to give Clause 5.1 no effect at all.
  73. He submits that Clause A2.7 does not have that effect. He says that the Licence Agreement did not exist prior to the Enabling Agreement so that it could not be "licensing arrangements that exist" so far as the Enabling Agreement is concerned. Further he says that the Enabling Agreement does not "affect or amend" the Licence Agreement as it governs it.
  74. He also points out that, as part of Annex A to the Enabling Agreement, Clause A2.7 only applies by reason of Clause 1.4 of that agreement which provides:
  75. "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."

  76. In this case he submits that the Licence Agreement is not the equivalent of a Purchase Order for Tasks. He refers to Clause 1.2 of the Enabling Agreement which deals with tasks, as follows:
  77. "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 Tasks."
  78. On this basis he submits that the Enabling Agreement envisaged that it would apply to purchase orders for a Task or Tasks or for additional design support so that Annex A would only apply to those which were for Tasks and not additional design support. It therefore applied to a limited category of purchase orders. In this case the Licence Agreement has not gone through the process envisaged in Clause 1.2, 1.3 and 1.4 and therefore he says that the second part of Clause 1.4 cannot apply but, in any event, the Licence Agreement cannot be categorized as a purchase order for Tasks as defined in Clause 1.4 which would be something such as producing software.
  79. Finally, he submits that, even if the terms in Annex A applied, the provision in Clause A2.7 has to be read in the context of the other provisions in Clause A2. He says that the issue would be what other terms of the Enabling Agreement would be capable of affecting any existing licensing arrangements. He says that it is the provisions internal to section A2 of Annex A which deal with Intellectual Property Rights. He refers to the clauses in that section which deal with licensing arrangements arising from Technical Information generated in the performance of the Purchase Order or which is proprietary to the Contractor. He therefore submits that Clause A2.7 is internal to Section A2 and does not affect the other terms of the Enabling Agreement.
  80. I have come to the conclusion that Clause A2.7 does not have the effect of depriving the Enabling Agreement of the governing effect over the Licence Agreement which Clause 5.1 of the Licence Agreement clearly states that it is to have. I consider that such a construction would be commercially absurd and would, as Mr Taverner submits, mean that the effect of Clause 5.1 would only be to incorporate the Enabling Agreement and Clause A2.7, in particular, in order to give Clause 5.1 no effect at all. I come to that conclusion for a number of reasons.
  81. First, I do not consider that the terms of the Licence Agreement can be brought within the category of purchase orders to which Annex A applies under Clause 1.4 of the Enabling Agreement. The Licence Agreement is an agreement for the supply of software licences with an element of training and support related to those licences. It is not a "task" of the type which is clearly envisaged under Clause 1.4 of the Enabling Agreement and to which the particular obligations in Annex A, in particular A1, A6, A8 and A12 would be expected to apply. There is some support for that construction in terms of Clause 4.3 of the Licence Agreement which says that payments for software support shall be made in accordance with Clause A5 of the Enabling Agreement. If all the terms of Annex A already governed the Licence Agreement then it would be unnecessary to add that provision.
  82. Even if Annex A did apply, then the context of Clause A2.7 within Clause A2 which deals with licensing arrangements makes it much more likely that Clause A2.7 was intended to apply to prevent the licensing arrangements in Clause A2 from applying to all products or software delivered to the project. The reference to "licensing arrangements that exist" strongly suggests that this is a reference to licensing arrangements which are already in existence outside the terms of the Enabling Agreement. Nothing then in Clause A2 affects or amends those licensing arrangements.
  83. Therefore, on that basis, I do not consider that Clause A2.7 of Annex A to the Enabling Agreement has the effect of preventing the clauses of the Enabling Agreement from governing the Licence Agreement.
  84. The effect of the Enabling Agreement on the Licence Agreement

  85. Mr Charlton submits that, if contrary to his other submissions, Clause 5.1 of the Licence Agreement is effective to apply the terms of the Enabling Agreement to the Licence Agreement then difficulties apply in determining what terms are to apply. He submits, first, that the obligations of NGM as the CONTRACTOR under the Enabling Agreement and of Insyte as the PURCHASER under the Enabling Agreement cannot easily be applied to the relationship between NGM and BAE, a third party to the Enabling Agreement. He submits that difficulties arise in interpreting obligations expressed as arising between NGM and Insyte under the Enabling Agreement and under Purchase Orders between those parties to which the Enabling Agreement applies.
  86. Secondly, he submits that if any of the terms of the Enabling Agreement could apply to the obligations under the Licence Agreement then those terms would be limited. He identifies certain general or boilerplate clauses relating to confidentiality (Clause 5.1 to 5.14), Security Measures (Clause 6), Publicity (Clause 12), Remedies (Clause 15), Waiver (Clause 16), Relationship between the Parties (Clause 17), Assignment (Clause 18), Severability (Clause 22), Law and Jurisdiction (Clause 23), Dispute Resolution (Clause 24), Entire Agreement (Clause 25) and Agreement- Rights of Third Parties Act 1999 (Clause 26). He submits that all those clauses could, in principle, apply.
  87. He also identifies some clauses which might be relevant to the obligations in respect of support or training but not the licensing arrangements under the Licence Agreement. These are Control of Labour (Clause 8), Safety (Clause 9.1), Quality (Clause 13) and Insurance (Clause 14).
  88. He also identifies some provisions which are specific to the Enabling Agreement and are incapable of having any governing influence over the Licence Agreement. These are Clause 1.1 which sets out the object of the agreement, Clauses 1.2 to 1.4 which set out the mechanics of issuing Requests for Quotations, Clause 2.1 and 2.2 which deal with Consideration and Amendment, Clause 3.1 Terms and Conditions, Clause 4.1 Precedence, Clause 7 Notices. Clause 9.2 Safety, Clause 11 Purchaser Property and Clause 19 Duration Period.
  89. Thirdly, he submits that the right to terminate the Licence Agreement, in particular for convenience under Clause 10.4, could not apply to the obligations under the Licence Agreement. He says that the granting of licences and associated intellectual property rights over software on a perpetual and transferable basis are not amenable to a right to terminate for convenience. He says that, if the Licence Agreement could be terminated on 20 days' notice immediately after NGM had delivered the first tranche of perpetual and transferable licences, this would deprive NGM of the protection of the clauses of the Licence Agreement which governed how the software was to be used and the rights which were to be conferred upon it by the further agreements and licences which the Licence Agreement required BAE to put in place.
  90. He submits that, on the basis that the entire licence agreement was terminated, all of the licence terms set out in Clause 1.1.3 of the Licence Agreement which limit or control the use to which the software can be put, including signing of developer licences, and the requirement at Clause 5.6 of the Licence Agreement which requires BAE's end user in Saudi Arabia to sign NGM's Standard Licence Agreement, would fall away.
  91. Fourthly, he submits that the right to terminate for convenience is wholly inconsistent with the commercial basis of the Licensing Agreement where the cost of the licences and support payable under that agreement were based on NGM's 2008 prices. Those prices, he says, were conditional on the total quantity of licences purchased, the commitment to purchase being made by 20 December 2010, a minimum commitment of 300,000 for support and support services being renewed for licences already granted. He submits that the arrangement was an indivisible package of 2,126 licences and intellectual property rights at 2008 agreed with one year's support with a minimum value of 300,000 and that, by terminating for convenience after the first delivery, it could not have been intended that BAE was able to obtain a discount on the first tranche of licences which was never intended.
  92. Mr Taverner submits that Clause 10 is a term of the Enabling Agreement and therefore it governs the Licence Agreement and there is no reason why that Clause and, in particular, Clause 10.4 providing for termination for convenience should not apply. He submits that there is no reason in principle why there should not be a termination clause allowing a party to terminate the Licence Agreement. That could happen by a common law repudiation and there is nothing to prevent the parties agreeing to terminate for material breach (Clause 10.4), insolvency (Clause 10.2) or for convenience (Clause 10.4). He relies on what was said by Sales J in BMS Computer Solutions Limited v AB Agri Limited [2010] EWHC 464 (Ch) at [18(ii)] in the context of termination provisions in licensing agreements:
  93. "The termination provisions in both those agreements were very important terms of those agreements. They dealt with important commercial matters such as termination for breach of the agreement or in circumstances of insolvency of the other party. It is reasonable to think that any parties to licence and support agreements of this kind would wish such important commercial matters to be dealt with by such terms."
  94. Mr Taverner submits that there is no difficulty in construing the terms of the Enabling Agreement so that they are applicable to the relationship between NGM and BAE under the Licence Agreement. He says that, as commonly happens in construction sub-contracts which are made subject to the terms and conditions of the main contract, there has to be some substitution in relation to the references to the parties and the relevant contract. That substitution by reading the names and references to the contracts mutatis mutandis causes, he submits, no problems: BAE as the Purchaser under the Licence Agreement becomes the Purchaser under the Enabling Agreement and NGM as the Contractor under the Licence Agreement remains the Contractor under the Enabling Agreement. In relation to references to "this Agreement" or "Purchase Orders" Mr Taverner's primary submission is that both of these phrases should, where appropriate, be construed as being the Licence Agreement. On that basis he submits that Clause 10.4 plainly can and does apply to the relationship between BAE and NGM under the Licence Agreement.
  95. Given my interpretation of Clause 5.1 of the Licence Agreement and Clauses 10.4 and A2.7 of the Enabling Agreement, the question is whether, taking account of the admissible background, the terms of Clause 10.4 of the Enabling Agreement as to termination for convenience, when objectively construed with the terms of the Licence Agreement, were applicable to the Licence Agreement.
  96. Termination clauses are commonplace in commercial contracts and software licensing agreements are not an exception, as the BMS Computer Solutions case indicates. They are inserted to permit one or other or both parties to bring to an end the whole or part of the agreement in particular circumstances. In the absence of such clauses the parties' rights to terminate depend on rights existing at law, such as the common law right to terminate for repudiatory breach. Parties entering into an agreement include those terms to allow for termination in the agreed circumstances. If those circumstances happen then necessarily the parties will not complete the commercial transaction which they entered into on the basis of terms which otherwise assumed that there would be a completed commercial transaction.
  97. The issue in the present case is whether the nature of the commercial transaction, taking account of the admissible factual background, was capable of being terminated. For instance, if the Licence Agreement had expressly stated that it was not terminable or was only terminable after a certain date, then importing a clause which allowed for termination for convenience from another agreement would be inconsistent with that clause and the issue would be which terms, objectively construed, were to prevail. When construing the terms of the Licence Agreement against the admissible factual background, however, care has to be taken because that factual background deals with what has traditionally been described as the aims and genesis of the agreement which generally will assume that the commercial transaction will be completed.
  98. In the present case I do not consider that there is anything in the admissible factual background which shows that, in construing the terms of the Licence Agreement and Enabling Agreement, the Licence Agreement was an agreement which could not be terminated. Mr Charlton in the course of argument accepted that a software licensing agreement could be terminated but drew a distinction between termination for default of insolvency and termination for convenience. I do not consider that there is a distinction to be drawn, given that parties are free to agree the circumstances in which termination may occur. Nor do I consider that there is anything in the admissible factual background which affects the position if, otherwise, there is a term of the Licence Agreement which allows the parties to terminate for convenience. The fact that the parties negotiated the price, quantity and delivery dates of licences on the basis of 2008 prices and entered into an agreement at a particular date to avoid 2010 prices applying does not mean that the aims and genesis of the agreement show that the agreement could not be terminated for convenience. As set out above objectives of one party, even if communicated to the other party, are not matters which can affect the construction of the contract. Inevitably termination will mean that one party's objectives will not be met.
  99. The question then is whether construing the Licence Agreement and Enabling Agreement against the admissible factual background, Clause 10.4 can be construed to apply to allow the Licence Agreement to be terminated for convenience.
  100. I consider that to give effect to Clause 5.1 of the Licence Agreement there have to be some appropriate changes to the terms of the Enabling Agreement to make them applicable. That is no more than is necessary to give effect to the clear intention in Clause 5.1. Whether that is a matter of interpretation or manipulation, it is both necessary and appropriate. There is little difficulty in applying BAE as purchaser under the Licence Agreement to BAE as the Purchaser under the Enabling Agreement. Obviously NGM is the Contractor under both the Licence Agreement and the Enabling Agreement. Indeed to some extent, for instance in relation to Clause A5 of the Enabling Agreement which is expressly referred to in the Licence Agreement, Mr Charlton accepted this.
  101. The one difficulty which might arise in terms of substituting references to the Purchaser is Clause 7 of the Enabling Agreement which refers to Notices and says that the Contractor shall address all its correspondence to the Purchaser Insyte. The connection between Insyte and BAE can be seen from Recital A of the Enabling Agreement and I consider that notice required under the terms of the Licence Agreement could be given to the Purchaser, BAE, either at Insyte's address in accordance with Clause 7.3 of the Enabling Agreement or at the address in the Licence Agreement, in the absence of any provision showing to the contrary.
  102. The more difficult question is whether references both to "this Agreement" and to "Purchase Orders" under the Enabling Agreement are intended to be references to the Licence Agreement. On balance I consider that generally, unless the context suggest otherwise, only references to "Purchase Orders" should be construed as being references to the Licence Agreement. This was Mr Taverner's alternative submission. The fact that BAE and NGM have agreed that the Licence Agreement should be governed by the terms of the Enabling Agreement does not mean that BAE and NGM have thereby agreed to treat the Licence Agreement as the Enabling Agreement or enter into a separate Enabling Agreement. The Enabling Agreement is a framework agreement made between Insyte and BAE under which tasks and design support was to be carried out by a process which would lead to a Purchase Order between Insyte and BAE. The Purchase Order would then be governed by the terms and conditions of the Enabling Agreement: see Clause 1.1 of the Enabling Agreement. In particular in the light of the admissible background evidence as to how the Licence Agreement came about, I consider that the Licence Agreement was in the same position under Clause 5.1 of the Licence Agreement as a Purchase Order under Clause 1.1 of the Enabling Agreement. There is nothing to show that it was intended to make the Licence Agreement a framework agreement like the Enabling Agreement.
  103. This means that terms of the Enabling Agreement which deal with the way in which Purchase Orders are created (Clause 1.2 to 1.4) or consideration for the Enabling Agreement or amendment of the Enabling Agreement are not applicable to the Licence Agreement. Of course, quite separately, those terms of the Enabling Agreement applied to the relationship between Insyte and BAE.
  104. As Mr Taverner submits, for the purpose of the issues which I have to determine, I need only consider Clause 10 and, in particular Clause 10.4. It may at some stage be necessary to construe other terms of the Enabling Agreement which govern the Licence Agreement and the extent to which those terms are applicable to any or all of the obligations under the Licence Agreement which include licensing arrangements, training and support. Individual terms would have then to be reviewed but there is nothing in the analysis of either Mr Charlton or Mr Taverner of those terms to indicate that this would raise any particular difficulties other than those that always apply when construing any terms of agreements.
  105. Turning then to Clause 10.4, I consider that, treating the Licence Agreement as being the same as a Purchase Order, there is no difficulty in construing that clause governing the Licence Agreement and applying so as to give the Purchaser, BAE, the right to terminate the Licence Agreement for convenience. Clause 10.4, as construed to apply to the Licence Agreement, would be in the following terms in relation to termination for convenience:
  106. "[The Licensing Agreement] 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 Licensing Agreement] Purchase Order at its own premises and those of its subcontractors and shall await disposal instructions from the PURCHASER."

  107. As stated at the hearing, I do not deal with Mr Charlton's submissions to the effect that on the termination of the Licence Agreement all obligations would cease. That depends on accrued rights and which, if any terms of the Licence Agreement survive termination. Having determined the applicability of Clause 10.4 it may now be necessary to consider those other issues as well as the other consequences of termination under Clause 10.4.
  108. Conclusion

  109. For the reasons set out above, I propose to make a declaration that, on a true construction of the Licence Agreement, BAE was entitled to terminate the Licence Agreement for convenience on 20 calendar days' notice under the provisions of Clause 10.4 of the Enabling Agreement which governed the Licence Agreement.


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