Issues with an assignment to an insurer (Dassault Aviation v Mitsui Sumitomo Insurance)
Commercial analysis: The court determined that an arbitral tribunal did not have jurisdiction due to the scope of a no-assignment clause in a sales contract.
An insured party had attempted to transfer contractual rights to recover to its insurer but this was ineffective because of a well-drafted no-assignment clause. This was despite the transfer occurring by operation of law (Japanese insurance law). The court did not agree that there was a general principle that assignments or transfers 'by operation of law' were not caught by restrictions on assignment. While assignments or transfers which were in fact involuntary would not be caught by a no assignment clause, this transfer to an insurer had a voluntary character. The wording of the clause prevented such transfers and there were sound commercial reasons why this should be so.
Dassault Aviation SA v Mitsui Sumitomo Insurance Co Ltd  EWHC 3287 (Comm)
What are the practical implications of this case?
The court ultimately upheld a well-drafted ban on assignments/transfers. This was even though the transfer was to an insurer and by operation of law. The judge admitted to being somewhat torn between: (i) the instinct not to find fault in the way that Japanese insurance law gave the insurer rights to recover from the counterparty and (ii) upholding the straightforward interpretation of the no‑assignment clause.
As a matter of principle, to the extent there was a rule identifiable from the authorities, it was that a restriction on assignment would not prevent truly unwilling/involuntary assignments or transfers, such as in a liquidation, or by order of the court. This was not such a case, as the party had embarked on an entirely voluntary decision to obtain insurance, without discussing it with its counterparty, or without carving out any assignments to the insurer.
There was some discussion as to whether a restriction on assignment may even go further and prevent an insurer's right to subrogation under English law. This point was not necessary to decide the case and so no conclusion was reached, but the Judge was at least willing to entertain arguments as to the permissibility of subrogation on a no-assignment clause.
Some practical drafting points arise from this case:
- the court was attracted to a broad, but precisely worded, prohibition on assignment, with the inclusion of specific carve-outs.This would suggest, at least in this context, that more detail is better than less; and
- if a party is considering insuring risks under a contract, then thought should be given to whether assignment to an insurer, or rights of subrogation, should be expressly preserved (or expressly excluded as the case may be)
What was the background?
The dispute concerned an English-law sale contract for the supply of two aircraft by Dassault (the applicant) to its customer, MBA, for use by the Japanese coast guard. This contract included a broad prohibition on assignment or transfer without prior written consent of the other party ('No-assignment clause').
MBA had insured its liabilities to the Japanese coast guard with the respondent insurer, MSI, under a policy governed by Japanese law.
As a result of late delivery, MBA incurred a liability to the coast guard. MBA made a recovery for that liability under the MSI policy. The policy, and Japanese insurance law, provided that the claim of the insured party (MBA) would be transferred to MSI. This was a transfer of rights enabling the insurer to commence proceedings in its own name.
MSI served a request for arbitration and Dassault challenged the tribunal's jurisdiction, on the basis that MSI had no rights under the sale contract, as assignments/transfers were prohibited. The tribunal was satisfied that it had jurisdiction because: (i) the No-assignment clause did not apply to involuntary assignments and/or assignments by operation of law, and (ii) the assignment of the claim to MSI occurred by operation of law.
Dassault applied under section 67 of the Arbitration Act 1996 to set aside the Partial Award. The central issues before the Commercial Court were two-fold:
- was there a rule that transfers by operation of law are not caught by a prohibition on assignment?
- the proper construction of the no-assignment clause.
What did the court decide?
The court found for Dassault and decided that the Tribunal did not have jurisdiction, as the transfer to MSI was in breach of the no-assignment clause.
To examine the proposition that transfers 'by operation of law' were not caught by clauses prohibiting assignment, the court primarily considered Doe d Goodbehere v Bevan (1805) 3 M&S 353, 105 ER 644, and Re Birkbeck Permanent Building Society  2 Ch 34. Both Goodbehere and Birkbeck concerned assignments of property interests in an insolvency context.
While further cases were considered, they were on broadly similar fact patterns to Goodbehere and Birkbeck. The court decided that they did not establish a broad principle of general application to transfers 'by operation of law', beyond the particular circumstances of those cases. The judge did find that the courts had upheld the effect of no-assignment clauses where the transfer was voluntary. The key issue to analysis was whether the transfer was voluntary or involuntary on the part of the transferring party.
The interpretation of the clause
On each of the following points, the court found for Dassault. First, the wording of the clause prevented the assignment/transfer of the claims. The words used were broad but precise drafting which prevented assignment by either party 'for any reason whatsoever', save for some small exceptions. The transfer to MSI was not an involuntary act, but an act which resulted from decisions voluntarily made by MBA, for example, to insure and to insure with a policy governed by Japanese law.
Second, the court closely regarded the commercial context. There were solid commercial reasons for a no-assignment clause preventing the transfer of rights to an insurer, such as the desire to deal solely with the known counterparty (MBA) or confidentiality concerns. It was permissible to draw a distinction between pure subrogation and a transfer of rights to an insurer. Third, MSI raised public policy as a factor and the need not to penalise parties who insured, or their insurers. The court held that there was no basis to rescue the transfer on public policy grounds alone.
- Court: King's Bench Division (Commercial Court)
- Court: Mrs Justice Cockerill
- Date of judgment: 20 December 2022
This article was first published by Lexis®PSL on 16/01/2023