Framework agreements are commonly used to facilitate similar transactions on consistent terms. In a recent decision, the Court of Appeal considered the principles that apply where terms from a framework agreement are incorporated into a subsequent agreement. While all will depend on the specific provisions, even very wide terms of incorporation will not bring in terms of a framework agreement which are “flatly inconsistent” with the terms of the subsequent agreement: Northrop Grumman Mission Systems Europe Limited v BAE Systems (Al Diriyah C4I) Limited [2015] EWCA Civ 844.

On the facts of this case, the Court of Appeal found there was nothing inconsistent in incorporating a termination provision from a framework agreement into a subsequent agreement, which meant that BAE had been entitled to terminate early for convenience. The decision provides useful comments on the incorporation of terms from framework agreements, and highlights the need for care when incorporating terms from one document into another.

Tim Parkes and Meriel Buxton, a partner and senior associate in our dispute resolution team who acted in the case for BAE Systems, consider the decision further below.

Background

The parties entered into a Licence Agreement for the appellant to supply two tranches of software licences, together with training and support, for use in a large project in Saudi Arabia. The respondent received and paid for the first tranche of licences. Subsequently, and before the date on which the second tranche of licences were to be delivered, the respondent terminated the agreement “for convenience”, ie without cause.

The Licence Agreement was short and devoid of most common boilerplate terms. It stated (at clause 5.1) that it was “governed by the terms contained within” a separate framework agreement, referred to as an Enabling Agreement, to which a different group entity of the respondent’s corporate group was a party, but the respondent itself was not.

The Enabling Agreement provided (at clause 10.4) for early termination “for convenience at any time” on 20 days’ notice.

The issue for the Court of Appeal was whether clause 10.4 of the Enabling Agreement applied by reason of clause 5.1 of the Licence Agreement, so that the respondent had been entitled to terminate for convenience.

Decision

The Court of Appeal held unanimously that it did, with Lord Justice Briggs delivering the lead judgment.

Briggs LJ looked to the leading case of Skips A/S Nordheim v Syrian Petroleum Co Limited [1984] 1 QB 599 for the law on the incorporation of provisions into an agreement by reference to another agreement. In that case the court observed that, where the words of incorporation are general and wide, they may have the effect of incorporating more than can make any sense in the context of the agreement. In those circumstances, any “surplus”, “insensible” or “inconsistent” terms will be rejected, but the starting point must always be the provisions of the agreement producing the initial incorporation.

In the present case, the court said clause 5.1 of the Licence Agreement was plainly couched in both wide and general terms. Literally construed, the reference to “the terms contained within the Enabling Agreement” prima facie meant all of them. But the concept of one agreement being “governed by” the other would have to give way where a clause in one was flatly inconsistent with the other. In those circumstances, the general (the Enabling Agreement) had to give way to the particular (the Licence Agreement) – though minor modifications to the language of the Enabling Agreement were permissible to ensure that its provisions worked as intended in the Licence Agreement.

Here the Court of Appeal found that there was nothing inconsistent about incorporating clause 10.4. It rejected the appellant’s argument that the Licence Agreement was a single indivisible agreement which was inherently unsuitable for early termination for convenience. The Licence Agreement provided for supply in two tranches, and the terms as to software support contemplated a substantial period before commencement, thereby providing space for early termination if the respondent chose to do so.

The court also rejected the appellant’s attempt to introduce evidence of the parties’ pre-contractual negotiations, so as to show that the appellant was only prepared to agree a discounted price if there was a firm commitment by the respondent to purchase a particular number of licences. Briggs LJ referred to the well-known principle that evidence of pre-contractual negotiations is not admissible for the purpose of contractual interpretation, save in so far as it is used to establish that a fact was known to both parties and to elucidate the general object of the contract. Briggs LJ said it was clear that “a fact known to the parties” meant some objective part of the background matrix of fact, other than a mere negotiating position taken by one of the parties.