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When the shoe won't fit: subrogation and non-assignment clauses

Posted on 12 January 2023

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The English Commercial Court has found that a non-assignment clause in an English aircraft sale contract precluded the insurer's operation of a power of subrogation under Japanese law. This is a decision1 which may come as something of a surprise to insurers and insureds alike, and which raises complex questions as to the nature of the doctrine of subrogation. In reaching this decision, the Commercial Court also considered whether English law subrogation principles might similarly interact with standard non-assignment provisions, casting some doubt over an area which many practitioners might have otherwise assumed to be uncontroversial.

Background

In 2015, the claimant, Dassault, agreed to manufacture and deliver two aircraft to Mitsui Bussan Aerospace Co Ltd (MBA) for supply to the Japanese Coast Guard. The sale contract was governed by English law and contained a non-assignment clause which provided that:

…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 and void without the prior written consent of the other Party.

The sale contract also contained an arbitration agreement providing for disputes to be referred to London-seated ICC arbitration.

In 2017, MBA entered into an insurance policy with the defendant, Mitsui Sumitomo Insurance Co (MSI), which covered the risk of MBA being held liable to the Japanese Coast Guard for late delivery of the aircraft. MBA did not seek Dassault's consent to do so. Delivery was indeed delayed, the Japanese Coast Guard claimed liquidated damages and MBA claimed that sum from MSI. 

Under Japanese insurance law, an insurer who pays out on an insurance claim shall "by operation of law, be subrogated with regard to any claim acquired by the insured due to the occurrence of any damages arising from an insured event". It was common ground between the parties that, unlike the operation of subrogation under English law, this mechanism of subrogation involves a transfer of rights – the insurer acquires the right to sue in its own name, including the right to initiate proceedings.

Accordingly, and having paid out, MSI submitted a request for arbitration under the arbitration agreement in the sale contract. However, Dassault challenged the tribunal's jurisdiction, contending that because any transfer of rights from MBA to MSI was precluded by the non-assignment clause in the sale contract (and was therefore ineffective), MSI had not acquired any rights under the sale contract, and was not a party to the arbitration agreement. A majority of the tribunal disagreed, and so Dassault challenged their jurisdiction under section 67 Arbitration Act 1996. Accordingly, the English Commercial Court was tasked with deciding whether the effect of the non-assignment clause in the English law governed sale contract precluded the right of subrogation under Japanese law.

The decision

MSI contended that the authorities on non-assignment clauses established a clearly applicable principle that, absent specific language, contractual prohibitions on assignment should be taken to carve out transfers which occur "by operation of law". However, Mrs Justice Cockerill disagreed.  In her view the authorities, which arose in a rather different context to this case, did not go that far. However, she did accept there was a presumption that the court should not be prevented from giving effect to a non-assignment clause when the transfer is one which is voluntary (as opposed to unwilling or involuntary). Further, the cases suggested that any degree or "taint" of voluntariness will be caught – voluntariness is not necessarily limited to immediate and free action, but is instead anything which does not qualify as contrary to the assigning party's will. 

On its own, the wording of the non-assignment clause in the sale contract harmonised with that approach. The judge noted that the words used were very broad, pointing to a general application, and on the face of it were apt to cover transfer to an insurer. A limitation was imposed by the wording "by any Party … to any third party", but this again required consideration of whether the transfer was voluntary or not, and in this case the judge concluded that the steps taken by MBA clearly fell on the voluntary side of the line. While the assignment from MBA to MSI occurred "by operation of law" once MSI paid out under the policy pursuant to the Japanese Insurance Act, MBA could have taken any number of steps to comply with the non-assignment clause by, for example, choosing not to insure, choosing a policy governed by another system of law, excluding the operation of the subrogation power, or not making a claim at all. Instead, MBA voluntarily chose to take steps which, on a certain contingency, would put it in breach of the non-assignment clause.

The question was therefore whether an alternative reading of the non-assignment clause was required by reference to the commercial purpose of the clause and commercial common sense. The judge observed that general reasons for using a non-assignment clause include the fact that commercial parties prefer to deal with known and chosen counterparties and the undesirability of having to deal with increased numbers of people, which can risk undermining confidentiality. These reasons applied equally to insurers as to any other unknown counterparty, and gave a basis of commercial purpose to the clause in this case. 

The judge had more sympathy for MSI's argument that, if subrogation under English law would not be prevented by the non-assignment clause, it was inherently unlikely that the parties would have intended the non-assignment clause in this case to prevent subrogation under Japanese law. However, noting that the submission raised questions as to whether subrogation in English law would indeed be unaffected by the non-assignment clause, and observing that while there is a valid conceptual distinction between subrogation and assignment, "there may come a point where an equitable subrogation incorporates a contractual subrogation and thus elides into an assignment properly so called", she did not consider that this was a strong commercial purpose argument.  MSI also  argued that public policy, which supports parties obtaining insurance, meant that the non-assignment clause should not be construed as applying to insurance at all. However, Mrs Justice Cockerill concluded that neither this, nor the context/commercial purpose indications, were sufficiently clear or weighty to displace the position indicated by a consideration of the words.

Dassault's section 67 challenge therefore succeeded. 

Conclusion

At the outset, Mrs Justice Cockerill commented that she instinctively felt that, notwithstanding the non-assignment clause, the transfer should be permitted simply because it arose in the context of insurance. In ultimately determining otherwise ("with an unusual degree of hesitation"), her judgment emphasises the primacy that English law places upon the parties' contractual intentions, and perhaps offers a cautionary tale on the dangers of insuring against contractual liabilities arising under a different governing law. The judgment also provides useful consideration of the circumstances in which a non-assignment clause may be found not to operate, and in particular when an assignment by operation of law will nevertheless be regarded as voluntary.

Further, in her discussion on the application of non-assignment clauses in the context of English law subrogation, the judge also raised interesting questions as to the nature of English law subrogation and how it actually works. The judge cast some doubt on the assumption that, because English law permits an insurer to bring a claim in the insured's legal name rather than by way of an assignment, English law subrogation would not fall foul of a non-assignment clause. As Lord Hoffman once noted, subrogation is "bedevilled by problems of terminology and classification which are calculated to cause confusion. For example, it is often said that subrogation may arise either from the express or implied agreement of the parties or by operation of law in a number of different situations…The fact that contractual subrogation and subrogation to prevent unjust enrichment both involve transfers of rights or something resembling transfers of rights should not be allowed to obscure the fact that one is dealing with radically different institutions."2 Ultimately Mrs Justice Cockerill declined to determine the issue, although she commented that she could see how an argument as to the permissibility of English law subrogation pursuant to a non-assignment clause could arise. 

It has been reported that permission to appeal in this case has been granted, and any appeal is expected to be heard during this year. We wait to see if the appeal court has any further comment on how English law subrogation operates and interacts with standard contractual non-assignment wording.

1Dassault Aviation SA v Mitsui Sumitomo Insurance Co Ltd [2022] EWHC 3287 (Comm)
2Banque Financiére de la Cite SA v Parc (Battersea) Ltd [1999] 1 AC 221

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