Court of Appeal overturns first instance judgment which held a contractual provision prohibiting assignment could prevent insurer’s subrogation rights

In Dassault Aviation SA v Mitsui Sumitomo Insurance Co Ltd [2024] EWCA Civ 5, the Court of Appeal has overturned a first instance judgment and found that a contractual prohibition on assignment in a sale contract did not prevent the transfer of subrogation rights to an insurer where that transfer arose by operation of law.

BACKGROUND

The Claimant and a Japanese aerospace company (MBA) entered into an English law contract (the Sale Contract) for the manufacture and delivery of two aircraft (and related supplies and services) to MBA for onward supply to the Japanese Coast Guard.

The Sale Contract

The Sale Contract 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.

The Policy & Japanese insurance law

Subsequently, MBA entered into a contract of insurance (the Policy) with the Defendant insurer, governed by Japanese law. It did not seek the Claimant’s consent. 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 insurer 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.

FIRST INSTANCE DECISION

Cockerill J gave judgment in the first instance in favour of the Claimant, albeit with ‘an unusual degree of hesitation‘. For a full overview see our article on the first instance decision here on our Insurance Blog.

Cockerill J found that the Tribunal had no jurisdiction to decide any dispute between the Claimant and the Defendant insurer, because, having analysed the case law and the wording of the Sale Contract, her conclusion was that the transfer of rights to the Defendant insurer was within the scope of the Non-Assignment Clause and therefore ineffective.

The relevant case law was not supportive of a general rule or presumption that a prohibition on assignment would not be interpreted to apply to an assignment ‘by operation of law’. However, the judge 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). Cockerill J made clear that ‘voluntary’ did not mean free action but was rather the correlate of contrary to the assigning party’s will, meaning that any transfer with the ‘taint of voluntariness’ would be sufficient to come within the scope of the Non-Assignment Clause.

On these facts, Cockerill J 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 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.

Cockerill J took into account in her analysis various arguments put forward by the Defendant regarding both the wider context of the Sale Contract and the Policy and matters of public policy. This included consideration of the commercial purpose of the Non-Assignment Clause as well as the suggestion (seemingly accepted by both parties) 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. The Defendant argued that there is no reason why subrogation under English law is acceptable, whereas the subrogation equivalent of another legal system is not. Cockerill J recognised these “instinctive difficulties” but her view was that these were part of the relevant factual matrix and were not on these facts strong enough to override the plain meaning of the wording of the Non-Assignment Clause.

COURT OF APPEAL DECISION

Vos MR gave judgment allowing the appeal and reinstating the Tribunal’s award, with both Coulson LJ and Phillips LJ agreeing with his conclusion.

The essential point from Vos MR’s perspective was that the wording of the Non-Assignment Clause clearly prevented any transfer effected by a party to the Sale Contract, but not a transfer effected by operation of law. He reached this conclusion for the following reasons:

First, he disagreed with Cockerill J that there was any general principle that could be derived from the case law. The authorities which she had referred to at first instance (being mostly old insolvency cases) typically turned on the nature of the insolvency under which the relevant transfer took place. The correct approach was therefore to disregard those authorities and to apply the usual principles of contractual interpretation, which were set out in brief in his judgment.
Given that in his view the words of the Non-Assignment Clause were ‘not ambiguous or unclear‘, it was not necessary to undertake the detailed and iterative process of deciding between alternative interpretations as set out in Rainy Sky and Wood v Capita.
However, it was necessary to consider the wording in light of the commercial background, which meant acknowledging that both parties had expressly anticipated elsewhere within the Sale Contract that each party would obtain insurance and that meant the parties had envisaged that each would have satisfied their respective disclosure obligations to the relevant insurer, regardless of the strict confidentiality provisions of the Sale Contract. His conclusion was that it was “far from clear” that the Non-Assignment Clause was intended to apply to transfers arising from insurance pay-outs, regardless of the governing law of the relevant insurance contract.
He declined to consider whether an English law subrogation would be caught by the Non-Assignment Clause, given that was not in issue in this case.
With regards to the wording of the Non-Assignment Clause itself, the key words were “shall not be assigned or transferred in whole or in part by any Party to any third party” (emphasis added). The Tribunal had unanimously decided that MBA’s claims had been transferred to the Defendant by operation of law and Vos MR found that this clearly meant the transfer was not made by MBA. In reaching this conclusion Vos MR disagreed with Cockerill J that a transfer made “by MBA” included a transfer caused as a consequence of certain actions taken by MBA.

In conclusion, the objective meaning of Non-Assignment Clause, taking into account the Sale Contract as a whole and its wider context, did not invalidate a transfer by operation of Japanese law, and the prohibition therefore did not apply to the transfer of MBA’s claims to the Defendant insurer under the relevant clause of the Policy.

COMMENT

This decision provides some helpful clarification on the interaction of the transfer of rights to an insurer under an insurance policy with any contractual agreements that may have been entered into by an insured. In particular, Vos MJ made clear that the courts would not expect non-assignment provisions to prevent transfers arising from insurance pay-outs where it is expressly anticipated within the relevant contract that insurance will be obtained.

A degree of caution is needed, however, as the decision also makes clear that whether subrogation rights are caught by a non-assignment provision depends on the wording of the relevant clause, albeit with reference to the relevant contract as a whole, and the wider context. While the Court of Appeal clearly considered the wording of the Non-Assignment Clause here to be unambiguous, parties should still make sure that non-assignment provisions are drafted in as clear terms as possible to avoid disputes arising in the future, particularly where it is envisaged that parties will obtain their own insurance.

Insurers should also note that, while the Court of Appeal was not receptive to the idea that subrogation rights transferred by operation of law could be caught by a non-assignment clause simply because they were ‘tainted by voluntariness‘, Vos MJ’s judgment expressly confines the approach taken to circumstances where subrogation rights have arisen by operation of law. Although it was not relevant on these facts, the judgment makes clear that were subrogation rights to have arisen not by operation of law but by an alternative mechanism, the position “might well have been different“.