Stopping assignment to an insurer: Dassault Aviation SA v Mitsui Sumitomo Insurance Co Ltd

Commercial contracts often include provisions prohibiting or restricting the parties' ability to assign their rights under the contract. On 20 December 2022, the Commercial Court in Dassault Aviation SA v Mitsui Sumitomo Insurance Co Ltd [2022] EWHC 3287 (Comm) considered whether a contractual prohibition against assignment prevented an assignment of rights to an insurer under an insurance policy, where the insured's rights transferred automatically pursuant to Japanese law.

Background

The dispute arose from a sale contract (the "Sale Contract") between the buyer Mitsui Bussan Aerospace Co Ltd ("MBA") and the seller Dassault Aviation SA ("Dassault"). Pursuant to the Sale Contract, Dassault agreed with MBA to manufacture aircraft and certain related supplies, and to provide related services, which MBA had in turn agreed to provide to the Japanese Coast Guard. The Sale Contract contained a prohibition against assignment. Under the agreement between MBA and the Japanese Coast Guard, MBA would be responsible for liquidated damages for late delivery. Because of the perceived risk of delay, MBA obtained insurance for this type of risk from Mitsui Sumitomo Insurance ("MSI").

The delivery of the aircraft and spare parts was delayed. MBA duly received compensation under the insurance policy with MSI for the liquidated damages that MBA paid to the Japanese Coast Guard. As a matter of Japanese insurance law, an insurer who pays out on an insurance claim has automatically assigned to it such rights of recovery against third parties relating to the claim as the assured might have. Thus, MBA’s right to bring a claim against Dassault under the Sale Contract for late delivery was assigned to MSI by operation of Japanese law. MSI commenced ICC arbitration proceedings against Dassault.

Dassault challenged the ICC Tribunal's jurisdiction because of the prohibition against assignment in the Sale Contract, which, Dassault contended, precluded any transfer of rights from MBA to MSI notwithstanding Japanese law. By majority decision, the Tribunal dismissed Dassault's objection and concluded that the no-assignment clause in the Sale Agreement did not prohibit assignments that occurred through operation of law, so MSI had the right to bring a claim for late delivery. Dassault brought a claim to review the decision of the Tribunal under section 67 of the Arbitration Act 1996.

The High Court Decision

The High Court (Commercial Court) decided that the Tribunal had no jurisdiction to decide any dispute between Dassault and MSI, because the prohibition on assignment of the Sale Contract was effective, and consequently, MBA's rights under the Sale Contract had not transferred to MSI. However, the Judge, Mrs Justice Cockerill, stated that she had reached this conclusion with “an unusual degree of hesitation” and noted that the case gave rise to an interesting and difficult issue.

Cockerill J addressed two main issues in the decision: (i) the general question of whether a prohibition against assignment applies to transfers which occur "by operation of law" and (ii) the meaning of the specific clause in the Sale Contract (Article 15) that prohibited assignment of the Sale Contract.

Regarding the first issue, the Court concluded, based on an analysis of relevant caselaw, that there is no general principle which can be applied to all transfers that might occur "by operation of law". However, the Court did accept that a contractual prohibition against assignments will not apply to truly involuntary assignments, and the question in a particular transaction will therefore be the extent to which it can be categorised as "truly involuntary".

The second question for the Court was thus whether the assignment to MSI in the current case was truly outside the voluntary control of MBA. Article 15 was widely and deliberately drafted, with specific exceptions to the general prohibition on assignment or transfer (which did not include assignment to an insurer), and consequences if a party purported to assign its rights in breach of Article 15. The context and commercial purpose of the no-assignment provisions were also considered in detail by the Court, including the fact that the aircraft were ultimately intended for the Japanese Coast Guard and the parties to the Sale Contract attached great importance to the confidentiality provisions.

The Court considered that on the facts of this case, with multiple routes open to MBA to avoid the transfer (including the fact that initially taking out insurance with MSI was a purely voluntary act, not contemplated under the Sale Contract), the transfer was itself a consequence of MBA's voluntary acts. The fact that the transfer to MSI arose in the context of insurance did not, in itself, make it permissible.

In summary, it appears that the interaction of a contractual non-assignment provision and a statutory "automatic" or "mandatory" transfer will depend heavily on the exact circumstances, and will need to be considered on a case-by-case basis. However, any degree or "taint" of voluntariness is very likely to result in an assignment or transfer being no longer "truly involuntary", and potentially in breach of the contractual non-assignment clause.

The Court granted permission to appeal to the Court of Appeal, and the appeal is likely to be heard during 2023.