Court considers whether contractual provision prohibiting assignment can prevent insurer’s subrogation rights

In Dassault Aviation SA v Mitsui Sumitomo Insurance Co Ltd [2022] EWHC 3287 (Comm) the court considered whether a contractual prohibition on assignment of a contract encompassed a transfer of subrogation rights to an insurer by operation of Japanese insurance law. The judge reached her conclusions with “an unusual degree of hesitation” and noted that the case gave rise to an “interesting point“. Ultimately the court found that the broadly drafted contractual prohibition in a sale contract did render ineffective the transfer of subrogation rights to an insurer.

BACKGROUND

The Claimant agreed to manufacture and deliver two aircraft (and related supplies and services) to a Japanese aerospace company (MBA) for onward supply to the Japanese Coast Guard (the Sale Contract). The Sale Contract was governed by English law and included a prohibition against assignment in the following terms:

“Except for the Warranties defined in Exhibit 4 that shall be transferable to Customer, this Contract shall not be assigned or transferred in whole or in part by any Party to any third party, for any reason whatsoever, without the prior written consent of the other Party and any such assignment, transfer or attempt to assign or transfer any interest or right hereunder shall be null …”  (the Non-Assignment Clause)

The Sale Contract also contained an arbitration agreement providing for arbitration under the ICC rules and for the seat of arbitration to be London.

Policy & Japanese insurance law

Subsequently, MBA entered into a contract of insurance (the Policy) with the Defendant insurer, governed by Japanese law. The Policy covered the risk of MBA being held liable to the Japanese Coast Guard for late delivery under the Sale Contract.

It was accepted that:

Japanese insurance law provides for an insurer to be subrogated to an insured’s claim following payment of an indemnity;
Unlike under English law, the mechanism of subrogation under Japanese law is a transfer of rights. The insurer acquires the right to sue in its own name, including the right to initiate proceedings; and
Japanese insurance law permits contracting out of such transfer in certain circumstances.

The Policy also contained a subrogation clause in terms that resembled Japanese insurance law.

Delivery by the Claimant under the Sale Contract was delayed and the Japanese Coast Guard claimed liquidated damages from MBA for late delivery. MBA in turn received an indemnity in respect of that sum from the Defendant pursuant to the Policy.

Subrogated claim

In April 2021, the Defendant submitted a request for arbitration under the arbitration agreement in the Sale Contract against the Claimant to exercise its subrogation rights. The Claimant contended that the arbitral tribunal did not have jurisdiction on the basis that any transfer of rights from MBA to the Defendant was precluded by the Sale Contract’s Non-Assignment Clause and was, therefore, ineffective.

The Defendant argued that the prohibition on assignment created by the Non-Assignment Clause did not on its proper construction (under English law) apply to an assignment by operation of law (in this case, Japanese law). The tribunal concluded by majority decision that it did have jurisdiction because:

the Non-Assignment Clause did not apply to involuntary assignments and/or assignments by operation of (Japanese) law; and
as a matter of Japanese law, the transfer of rights from MBA to the Defendant insurer occurred by operation of Japanese insurance law (as opposed to pursuant to the subrogation clause in the Policy).

The Claimant subsequently made an application under Section 67 of the Arbitration Act 1996 to set aside the tribunal’s award which was considered by the High Court.

DECISION

Can contractual non-assignment clauses prevent transfers of rights made “by operation of law”?

The court found that there was no general rule or presumption in the case law that a prohibition on assignments would generally be interpreted as not applying to those which occur “by operation of law“. However, the court did accept that, so far as the authorities go, there is a presumption that the court should not be prevented from giving effect to a non-assignment clause when the attempted transfer is one which is voluntary (in the sense of consented to). The key question is whether the transfer occurs truly outside the voluntary control of the transferring party. For example, it had been held that a covenant in a lease of a pub, which provided that the tenant and his “assigns” would not assign the lease, was not effective to prevent the assignment of that lease by order of the court following the tenant’s bankruptcy (Doe d Goodbehere v Bevan (1805)). Such a transfer was not effected by a voluntary act of the lessee but rather by operation of law.

Did the wording of the Non-Assignment Clause in this case prevent the transfer of rights to the Defendant insurer?

The drafting of the Non-Assignment Clause was clear, covering both specific exceptions (not relevant to this case) to the prohibition on assignment and the consequences of attempted assignments. It was also clear from the wording that only assignments or transfers “by any Party …  to any third party” (emphasis added) were ineffective.

Mrs Justice Cockerill agreed with the Claimant that the assignment had been made “by” MBA insofar as the transfer of MBA’s rights to the Defendant was “voluntary in that it was in the power of MBA to prevent the transfer“. While (it was agreed that) it was a provision of Japanese law which ultimately effected the transfer, the transfer was consented to by MBA and occurred as a result of various of its voluntary actions: (i) the decision to insure its obligations under the Sale Contract; (ii) the decision to choose a policy governed by Japanese law; (iii) the decision not to exclude, in the Policy, the relevant provisions of Japanese law which provided for the Defendant’s right of subrogation; and (iv) the decision by MBA to make a claim under the Policy. It was within the power of MBA to comply with the Non-Assignment Clause and prevent the transfer of rights to the Defendant by not taking any of the steps outlined above.

As a “matter of pure language” the wording of the Non-Assignment Clause supported the Claimant’s argument that the transfer of rights to the Defendant was within the scope of the Non-Assignment Clause and therefore ineffective.

Wider context, commercial purpose and public policy

The Defendant also contended that as a matter of public policy, it was considered sensible for contractual counterparties to obtain insurance. Therefore, where possible within the bounds of interpretation, non-assignment clauses should be read as not penalising or preventing assignment to insurers.

The Defendant also posited that an English law subrogation (which it was argued does not involve a transfer of rights) would not have fallen foul of the Non-Assignment Clause. There was therefore no reason to think that the parties would have intended the Non-Assignment Clause to restrict the Japanese law equivalent of English law subrogation, where the only relevant difference is that the former happens to involve a transfer of rights while the latter doesn’t.

Mrs Justice Cockerill examined the mechanisms behind English law subrogation, ultimately agreeing with the Defendant that, for the purposes of the present case at least, an English law subrogation should be treated as being outside of the scope of the Non-Assignment Clause. Nevertheless, this was not a “strong commercial purpose argument” but only a “factual matrix point“. Neither the ‘subrogation argument’ nor the ‘public policy argument’ were strong enough to override the plain meaning of the wording of the Non-Assignment Clause.

Accordingly, the court found in favour of the Claimant that the tribunal had no jurisdiction to decide the dispute between the Claimant and the Defendant that had been referred (save potentially as regards consequential orders).

COMMENT

Much of the judgment’s interest is its discussion of the law of subrogation. Mrs Justice Cockerill ultimately concluded that, for the purposes of the present case at least, English law subrogation should be treated as not falling foul of the contractual prohibition on assignment. Nevertheless, the judgment grapples at some length with what Mrs Justice Cockerill called the “origin dilemma“: whether English law subrogation is “quasi-contractual” (in which case it could be caught by contractual non-assignment clauses) or is “equitable” (in which case contractual non-assignment clauses would have no relevance to subrogation).

Pushing the door for further debate slightly ajar, Mrs Justice Cockerill commented that the dilemma had “illuminated possibilities for debate outside the bounds of this judgment” and she “can see how an argument as to the permissibility of subrogation could arise“.

The judge reached her conclusions with “an unusual degree of hesitation” and it is perhaps not surprising that permission to appeal to the Court of Appeal has been granted in this case.  In the meantime, parties should be mindful to ensure that non-assignment clauses are drafted in as clear terms as possible, with both the inclusive and exclusive scope of the prohibition set out definitively and clearly.  Where insurers seek to rely on subrogation rights, it would be prudent to understand the mechanism that gives effect to those rights under the relevant applicable law and how that mechanism interacts with any contractual agreements that the insured may have entered into.

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