M&A Diligence: where multiple agreements govern an arrangement, which terms prevail?
In Northrop Grumman Mission Systems Europe Ltd v BAE Systems (Al Diriyah C4I) Ltd  EWHC 2955 (TCC), BAE was engaged by the Ministry of Defence in… Read more
In Northrop Grumman Mission Systems Europe Ltd v BAE Systems (Al Diriyah C4I) Ltd  EWHC 2955 (TCC), BAE was engaged by the Ministry of Defence in Saudi Arabia (MoDSA) to provide it with a computer system. As part of the project, Northrop was sub-contracted to supply software products and to supply licences. Northrop also entered into a related “enabling agreement” with BAE’s sister company.
To enable BAE to include the software as part of the computer system it was supplying to the MoDSA, it entered into a separate license agreement with Northrop. Clause 5 of the license agreement stated that it was to be governed by the terms of the enabling agreement. Clause 10 of the enabling agreement contained a right to terminate for convenience.
BAE purported to terminate the license agreement for convenience, pursuant to clause 10 of the enabling agreement, arguing that clause 5 of the license agreement entitled it to rely on the provisions of the enabling agreement. Northrop argued that clause 10 of the enabling agreement did not form part of the license agreement, and therefore BAE was not permitted to terminate the agreement for convenience. Northrop therefore argued that the termination was invalid and that BAE was obliged to pay further sums under the license agreement. The main question for the High Court was whether clause 10 of the enabling agreement formed part of the contract between the parties and allowed BAE to terminate for convenience.
The Court held that, where the terms of one agreement were said to govern another agreement, those terms ruled or regulated that other agreement. Such terms would be incorporated into the other agreement and, depending on the facts of the case, prevail over the terms of the other agreement. The Court construed the contract by applying the test set out in Investors Compensation Scheme v West Bromwich BS  1 WLR 896 and related cases; what would a reasonable person, with all background knowledge available to the parties at the time of the contract, understood the parties to have meant? On this basis, the license agreement incorporated clause 10 of the enabling agreement, giving BAE the right to terminate for convenience. BAE was not liable to pay Northrop any further sums under the licensing agreement.
This is one of many cases demonstrating why it is important, where there is a series of documents governing the agreement between the parties, to fully understand the interaction between those documents. Otherwise, unintended and unforeseen consequences may result.
Where the terms of an earlier agreement are said to govern a subsequent agreement, the terms of the earlier agreement are likely to prevail.
For more information, please contact Adam Kuan, Corporate Associate