Privity of contract – non-signatory and not defined “Party” has rights as a “party” to the agreement

Canon Medical Systems Limited v The Imaging Centre Assets Limited & Ors [2023] EWHC 3007 (Comm)

The question

Can a company, set up to be a joint venture vehicle under a contract, which has not signed the contract and is not a defined party, be privy to that contract?

The key takeaway

Companies can have rights under and enforce a contract to which they are not a signatory or a direct “Party” if it is determined that the contract was formed for them and on their behalf. In these circumstances the company can be deemed a “party” to a contract even if they are not a “Party”.

The background

Canon Medical Systems (Canon) and the first defendant, The Imaging Centre Assets Limited (ICA), entered into a written contract in 2017 for a joint venture involving the sale and rental of transportable medical diagnostic MRI and CT scanners (the Contract). 

There was a dispute over the interpretation of several terms in the Contract as well as the alleged existence of a further hire purchase agreement modifying the Contract. Eventually Canon issued proceedings against the defendants for determination of the various obligations. The defendants (a group of related companies) brought various counterclaims.

A key aspect of the dispute was whether the third defendant, The Imaging Centre Mobile Limited (TICM), could enforce the Contract, despite not being a signatory or direct “Party” to it. TICM was the joint venture vehicle set up under the Contract to acquire the MRI and CT scanners. 
TICM claimed that it could enforce the contract on any one of three alternative bases: (i) it was privy to the Contract on the proper construction of the Contract; (ii) by operation of the Contracts (Rights of Third Parties) Act 1999; or (iii) losses it had suffered could be claimed for by ICA under the principle of transferred loss.

The decision

In construing the contract, the judge acknowledged that the Contract was not well drafted “therefore, the process of construing the document must be more alive than might be appropriate if the drafting were more tightly constructed and polished.” A further complication in determining the content of the parties’ agreement was that the Contract did not set out the whole of the agreement (a hire purchase agreement was referred to as a document “to be agreed”), despite it containing an entire agreement clause.

Agreeing with TICM on its first claim, the Court concluded that TICM was privy to the Contract. TICM was not a third party for the purpose of a third party rights clause of the Contract that would preclude it from having rights under, or rights to enforce, the terms of the Contract. Its rights did not derive from the Contracts (Rights of Third Parties) Act 1999, rather they derived from the fact that, properly construed, the Contract was a contract between ICA, contracting for itself and also for and on behalf of entities that included TICM.

Proper analysis of the terms of the Contract showed that the parties intended TICM to be privy to it. Although TICM was not a defined party, the contract made repeated references to TICM as being the joint venture vehicle by which Canon and ICA planned to carry out the business. TICM was included in an expanded definition of “ICA” (TICM was listed as a subsidiary of one of the defined parties) which was used in the Contract for certain purposes. TICM was also mentioned in the recitals. 

The signatories to the contract were contracting on behalf of TICM, even though this was expressed clumsily and using bad grammar in the drafting. The judge invoked commercial reality to show that several of the key commitments in the contract would, in practice, be undertaken by TICM. ICA, in entering the Contract, was acting in its own right but also for and on behalf of TICM.

The judge dealt briefly with the alternative arguments, on which TICM did not need to rely. The Contracts (Rights of Third Parties) Act could not apply: although TICM was not a defined “Party”, it was a still a “party” to the Contract and therefore could not be a third party capable of benefitting from the Act.

Finally, ICA could not bring a claim for losses suffered by TICM under the principle of transferred loss. ICA’s claim should be brought as a claim for the consequent reduction in value of ICA’s shareholding in TICM, the joint venture vehicle.

Why is this important?

Parties want certainty as to who does and does not accrue rights and obligations under a contract. This decision shows that it is not always the case that contractual rights are limited to the signatories or defined parties. Where a contract creates a contractual relationship between various related companies, there is a risk that parties other than the signatories and defined parties may have rights under and be able to enforce the contract. 

Any Practical Tips?

In scenarios where subsidiaries, parent companies and/or affiliates are involved in a transaction or business venture, consider whether the parties intended to have rights under and to be able to enforce the contract are clearly identified and are signatories to the contract. 

Check that any parent companies, subsidiaries, or affiliates who are expected to have rights or obligations are unambiguously and consistently described and referenced throughout the contract and in any associated agreements. If a party is entering into an agreement on behalf of itself and others, this should be made expressly clear. 

Clear language should be used to make sure that the intended parties, and no more, are granted and able to enforce their rights.

Spring 2024