In Dassault Aviation SA v Mitsui Sumitomo Insurance Co Ltd[1], the Court of Appeal found that the transfer of rights to an insurer by operation of Japanese law following the settlement of a claim by the insurer was not invalidated by a prohibition on assignment contained in a sale contract.

Background

On 6 March 2015, Dassault Aviation SA ("DA") and Mitsui Bussan Aerospace Co. Ltd. ("MBA") entered into a sale contract relating to two Falcon maritime surveillance aircraft and certain related supplies and services (the "Sale Contract"). The Sale Contract was governed by English law. MBA entered into a sale contract for these aircraft to be onward sold to the Japanese Coast Guard on the same date, which was governed by Japanese law (the "Sub-Sale Contract").

The Sale Contract

Article 15 of the Sale Contract had the heading “Assignment-Transfer” (the "No Assignment Clause") and 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.”[2]

The Sale Contract required DA to deliver (i) the first aircraft; (ii) the second aircraft; and (iii) the spares by 31 March, 31 July and during the month of June 2018, respectively, and contained an arbitration clause providing for arbitration under ICC rules with London as the seat.

Japanese insurance law and the Policy

Article 25 of the Japanese Insurance Act (Act No. 56 of 2008) (the "Japanese Insurance Act") provides the insured’s claim to be transferred to the insurer following settlement of a claim by operation of law once it has made a payment to the insured[3].

This provision is effectively made automatic (unless unfavourable to an insured) by Article 26 of the Japanese Insurance Act, which states that contractual provisions that are incompatible with Article 25 shall be void[4].

MBA and Mitsui Sumitomo Insurance Co Ltd ("MSI") entered into an insurance policy governed by Japanese law (the "Policy") insuring MBA’s liability for delay under the Sub-Sale Contract.

Arbitral decision

The aircraft were not delivered until April and May 2019 and the spares were not delivered until February 2020. The Japanese Coast Guard then claimed liquidated damages against MBA for late delivery under the Sub-Sale Contract. Accordingly, MBA claimed under the Policy and MSI accepted the claim and paid out the insurance proceeds to MSI.

In April 2021, MSI issued a request for arbitration against DA under the arbitration clause in the Sale Contract on the basis that MSI’s rights under the Sale Contract had transferred to MSI by operation of Japanese law. In response, DA challenged the tribunal’s jurisdiction arguing that the No Assignment Clause made any transfer of rights from MBA to MSI void. MSI argued that the No Assignment Clause (as a matter of construction under English law) did not apply to a transfer by operation of law.

The majority of the tribunal found in its partial award on jurisdiction that:

1. the No Assignment Clause did not apply to involuntary assignments and/or assignments by operation of law; and
2. under Japanese law, the transfer of rights from MBA to MSI occurred by operation of law pursuant to Article 25 of the Japanese Insurance Act.

DA then submitted a claim to set aside the tribunal’s partial award under section 67 of the Arbitration Act 1996 which was heard by the High Court (Commercial Court) in November 2022.

Commercial Court decision

In November 2022, Cockerill J considered DA’s application in the Commercial Court.

DA’s position was that the No Assignment Clause invalidated and rendered ineffective Article 25 of the Japanese Insurance Act on the basis that:

1. the No Assignment Clause was broadly worded and contained specific and express exceptions. The rationale behind the clause was based on the parties’ concerns regarding confidentiality and therefore only wanting to work with persons known to and chosen by them; and
2. under the circumstances, including MBA’s choice to purchase insurance which no one required and that MBA did not seek permission from DA, the transfer was a voluntary transfer by MBA rather than by operation of law.

Cockerill J allowed DA’s challenge, finding in DA’s favour on the two key issues:

1. Authorities – the case authorities did not establish a general rule regarding all transfers by way of operation of law and were therefore confined to their facts. However, Cockerill J did find the authorities drew a key distinction between involuntary/voluntary transfers and found that, with the multiple options open to MBA to avoid the transfer, the triggering of Article 25 of the Japanese Insurance Act was caused by voluntary acts by MBA.
2. Interpretation of the No Assignment Clause – Cockerill J saw this as a “more important”[5] issue and found that the wording of the No Assignment Clause was broad and pointed to a general application. She took into account the public policy issue that an English law subrogation would not have fallen foul of the No Assignment Clause but a transfer under the law of another jurisdiction did as well as considering the commercial context. Despite this, Cockerill J was most heavily convinced by the strict interpretation of the provision and that the transfer shouldn’t be permissible simply because it arises in the context of insurance.

Court of Appeal Decision

In December 2023, Vos MR’s judgment (supported by Coulson LJ and Phillips LJ) reversed the Commercial Court ruling and reinstated the tribunal’s partial award.

Vos MR found that the wording in the No Assignment Clause was clear and there was no need to rely on the detailed process of interpretation despite agreeing with Cockerill J that the commercial context was important and noted that the Sale Contract (at Articles 23.1.5 and 25.3) envisaged the parties taking out insurance and that presumably it was envisaged that (notwithstanding their confidentiality obligations) parties would satisfy their disclosure obligations to their insurers. Vos MR concluded that it was “far from clear”[6] that the No Assignment Clause was intended to apply to transfers arising from insurance payouts regardless of the governing law of such insurance contracts.

Instead, the interpretation hinged on the wording “by any Party” in the No Assignment Clause and whether the transfer of MBA’s claims against DA to MSI was by MBA, finding that the transfer was instead by an operation of law and occurred outside the voluntary control of MBA.

Next steps

This Court of Appeal judgment provides some useful considerations for parties when drafting “no assignment clauses” in contracts. The importance of clear and unambiguous drafting cannot be understated. Vos MR’s judgment is based primarily on the “clear”[7] wording in the No Assignment Clause, with the judge explaining it was an “essential point”[8] that he did not think the words of the No Assignment Clause were “ambiguous or unclear”[9].

The Court of Appeal ultimately did not determine if an English law subrogation would have been caught by the No Assignment Clause.

This decision should be considered to have a narrow application where the judgment was based primarily on a clearly drafted “no assignment clause” which was not able to nullify a transfer strictly by an operation of law, which was in this case under the Japanese Insurance Act.