Dassault Aviation SA v Mitsui Sumitomo Insurance Co Ltd  EWHC 3287 (Comm) involved the effect of an anti-assignment clause in a contract on statutory rights of subrogation under an insurance policy subject to Japanese law taken out by one of the parties. Mitsui Bussan Aerospace Co Ltd (“MBA”) and Dassault entered into a sale contract governed by English law under which Dassault would manufacture and deliver to MBA two aircraft and certain related supplies and services for supply to the Japanese Coast Guard. Article 15 of the Sale Contract, titled “Assignment-Transfer”, provided:
“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 and void without the prior written consent of the other Party.
Notwithstanding the above and subject to a Seller’s prior notice to Buyer, Seller shall have the right to enter into subcontracting arrangements with any third party, for the purpose of the performance of this Contract”
The Sale Contract contained an arbitration agreement providing for arbitration under the ICC rules and for the seat of arbitration to be London.
MBA entered into a contract of insurance with MSI, governed by Japanese law, without seeking Dassault’s consent. The Policy covered the risk of MBA being held liable to the Japanese Coast Guard for late delivery under the Sale Contract. In fact, delivery was delayed and the Japanese Coast Guard claimed liquidated damages for late delivery. MBA claimed that sum from MSI (less a deductible) under the Policy, and MSI accepted that claim and paid MBA in turn.
Article 25 of the Japanese Insurance Law provides:
“An insurer, when the insurer has made an insurance proceeds payment, 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 (under a non-life insurance policy which covers claims arising due to default or any other reason, such claims shall be included; hereinafter referred to as the ‘insured’s claim’ in this Article), up to the smaller of the amounts listed below:
(i) the amount of the insurance proceeds payment made by the insurer; or
(ii) the amount of the insured’s claim (if the amount set forth in the preceding item falls short of the amount of damages to be compensated, the amount that remains after deducting the amount of the shortfall from the amount of the insured’s claim).”
Article 26 of the Japanese Insurance Law provides: “A contractual provision that is incompatible with the provisions of […] [Article 25] that is unfavourable to an insured shall be void.” However it permits of agreement that an insurer would not be subrogated, as not being “unfavourable to the insured”.
The mechanism of subrogation under Japanese Law is the transfer of rights: the insurer acquires the right to sue in its own name, including the right to initiate proceedings. This was reinforced by Article 35 (1) of the Policy which essentially reproduced Article 25 of the Japanese Insurance Law and provide:
“In the event that the Insured acquires a right to claim for damages or other claim […] as a result of the occurrence of Losses, such claims shall be transferred to [MSI] when [MSI] pays the insurance benefits for said Losses..”
30 April 2021, MSI submitted a request for arbitration under the arbitration agreement in the Sale Contract against Dassault. The Tribunal considered the jurisdictional issue as a preliminary issue. In its Partial Award on jurisdiction by a majority decision, the Tribunal dismissed Dassault’s jurisdictional objection. The Tribunal held that: (i) Article 15 of the Sale Contract did not apply to involuntary assignments and/or assignments by operation of law; (ii) as a matter of Japanese law, the transfer of rights from MBA to MSI occurred by operation to law pursuant to Article 25 of the Japanese Insurance Act. The majority found that, since the transfer occurred by operation of law, Article 15 did not apply to it
On appeal under s.67 of the Arbitration Act 1996 Cockerill J that the effect of Article 15 was that the subrogation to MSI was of no effect and the Tribunal had no jurisdiction to hear its claim against Dassault. So far as the authorities went, there was a presumption that the court should not be prevented from giving effect to such a clause when the transfer is one which is voluntary (in the sense of consented to). The authorities did not justify a conclusion that prohibitions on assignment should not be taken to carve out transfers which occur “by operation of law” in a broad sense. The relevant test was whether the transfer was voluntary in that it was in the power of MBA to prevent the transfer. The answer was that it was. MBA might have chosen not to insure or might have chosen a policy governed by another system of law. It might have excluded the operation of Article 25 instead positively reinforcing it with Article 35 of the Policy. It might have chosen not to make a claim. It was therefore in the power of MBA to comply with the provision. It acted voluntarily or consented to take a step which on a certain contingency would put it in breach of that provision.
MSI pointed out that it was difficult to say that subrogation under English law was acceptable, whereas the subrogation equivalent of another legal system was not. Dassault replied that an English law subrogation does not involve a transfer and there simply is a relevant difference for the purposes of a clause such as this. Secondly, the assumption that there is no problem with English law subrogation might not be a safe one.
This required a consideration of the nature of subrogation in English law. Would the third rule of English law subrogation, that an insurer can pursue a claim in the name of the insured, but not pursuant to a transfer of right, be affected by Article 15 or a clause like it? Cockerill J was not prepared to decide that Dassault’s argument would probably gain traction based on a fairly slight and somewhat abstract argument and its case must therefore (for present purposes) stand or fall on the basis that English law subrogation would not fall foul of Article 15.
MSI argued that “a question of public policy arises… because the general view of English contractual law is that it’s sensible for parties to obtain insurance and they should not be penalised for doing so“. Cockerill J rejected this because one could not imply into the clause a blanket exception for insurance: it would be contrary to the express words of the contract and it would fail the business efficacy test.
The moral of this tale is that if your contract contains a ban on assignment, you need to take care with taking out insurance under a policy subject to a foreign law. If subrogation under that system of law operates by a direct transfer of rights to the insurer, it will be caught by the ban on assignment in your contract.