In December 2010, BAE entered into an agreement with NGM whereby NGM would supply software licences together with associated training and support to BAE, in two tranches, on 20 December 2010 and 20 December 2011 (the “Licence Agreement”).The Licence Agreement was very brief and did not include the usual boiler plate clauses providing, for instance, for dispute resolution, limitation of liability and as to the matter in dispute, termination. There was, however, an apparent intention to incorporate these provisions by reference, and sub-clause 5.1 stated that:

“5.1 This Agreement shall be governed by the terms contained within the ‘Enabling Agreement…”

The Enabling Agreement was in effect a framework agreement between NGM and a company connected with BAE, “BAESI”, which set out the terms upon which NGM would provide products and services to BAESI, on behalf of and for BAE. The Enabling Agreement included the usual boiler plate provisions which were lacking from the Licence Agreement. These included a termination provision which at sub-clause 10.4 entitled BAESI to terminate “for convenience at any time”. BAE subsequently terminated the Licence Agreement for convenience in November 2011. NGM disputed the termination and commenced proceedings, seeking a declaration that sub-clause 10.4 did not apply to the Licence Agreement. At first instance (Dispatch Issue 172) the issue was decided in favour of BAE. NGM appealed.

The principal issue before the CA was whether sub-clause 10.4 of the Enabling Agreement was incorporated by reference into the Licence Agreement by sub-clause 5.1 so as to entitle BAE to terminate for convenience. The CA framed the issue as being “purely about contractual construction”, namely: if sub-clause 10.4 of the Enabling Agreement was found to apply to the Licence Agreement then “it is common ground that the Licence Agreement has been terminated”. The CA then went on to apply the principles on the “incorporation of provisions into a contract by reference to another contract, between the same or different parties”, set out in Skips A/S Nordheim v Syrian Petroleum Co Ltd [1984] 1 QB 599. Here LJ Oliver set out a two-stage test:

“[1] whether the terms are so clearly inconsistent with the contract… that they have to be rejected or [2] 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…”

Following this approach, the CA found as follows:

  1. the words “governed by” in sub-clause 5.1 clearly demonstrated an intention that the terms of the Enabling Agreement be incorporated into the Licence Agreement;
  2. termination for convenience under sub-clause 10.4 was not “flatly inconsistent” with any clause in the Licence Agreement on the same subject matter;
  3. while not inconsistent, differences between the two agreements such as the parties and certain phrases meant sub-clause 10.4 could not be incorporated unamended;
  4. it was therefore necessary to carry out an “appropriate manipulation” of the language of sub-clause 10.4 to overcome these differences; and
  5. the solution needed to strike a balance between giving effect to the words “governed by” in sub-clause 5.1 and allowing “a level of domination by the Enabling Agreement which would be “surplus, insensible, or inconsistent” with the provisions of the Licence Agreement.”

Accordingly, sub-clause 10.4 was incorporated and the Licence Agreement had been validly terminated. In reaching this decision, the CA was dismissive of the use of technical arguments, raised by NGM. LJ Briggs noted that the parties had chosen the word “governed”, and it was a word with a sufficiently clear meaning.

Further, NGM sought to bolster their arguments by reference to what was 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. This was a fact that could only be ascertained from the email negotiations of the Licence Agreement. NGM submitted that this was the type of fact which it was legitimate to ascertain by reference to the party’s negotiations. This was despite the usual rule as expressed in the Chartbrook v Persimmon Homes Ltd [2009] AC 1101, case where Lord Hoffmann said:

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

LJ Briggs agreed with Lord Hoffman saying that 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.”