The recent decision of the Commercial Court in Dassault Aviation SA v Mitsui Sumitomo Insurance Co Ltd  EWHC 3287 (Comm) concerned a contractual prohibition against assignment and whether this applied to an assignment of rights to an insurer under the assignor’s insurance policy. The decision raises questions on the effect of prohibitions against assignment generally, the concept of involuntary assignments (including assignments by operation of law), and the impact of anti-assignment clauses on a transfer of rights to an insurer.
Dassault Aviation SA (“Dassault”) and Mitsui Dussan Aerospace Co Ltd (“MBA”) entered into an agreement for the manufacturing and sale by Dassault to MBA of two aircraft and related supplies (the “Sale Contract”). The Sale Contract contained a prohibition on assignment:
“…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…”
Dassault was in breach of the Sale Contract due to the late delivery of the two aircraft, giving rise to a claim by MBA for damages. MBA decided not to pursue a claim against Dassault for damages, as it had obtained insurance cover with Mitsui Sumitomo Insurance Co (“MSI”), including cover for late delivery. This insurance policy was governed by Japanese law. The claim by MBA under the insurance policy for late delivery was accepted and paid by MSI.
It is a principle of Japanese insurance law that an insurer who has made an insurance proceeds payment shall, by operation of law, have assigned to it the right to recover such costs against third parties relating to the claim as the assured would have. Having paid out on the insurance claim to MBA, MSI commenced International Chamber of Commerce (“ICC”) arbitration proceedings against Dassault to recover the cost.
Dassault challenged the jurisdiction of the arbitral tribunal on the grounds that the contractual prohibition on assignment in the Sale Contract made any assignment to MSI ineffective. The jurisdictional challenge by Dassault failed before the (experienced) arbitrators (who included Lord Collins). Dassault brought a claim to the Commercial Court under s.67 of the Arbitration Act 1996 to review the decision of the arbitral tribunal.
The Commercial Court bore in mind the well-established principle that "an attempted assignment of contractual rights in breach of a contractual prohibition is ineffective to transfer such contractual rights" (Lord Browne-Wilkinson in Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd  1 AC 85, 108).
The Commercial Court decided that the assignment to MSI was ineffective and, as such, the arbitral tribunal did not have jurisdiction to hear the dispute.
In making its decision, the Commercial Court considered the construction of the contractual prohibition of assignment in the Sale Contract. This involved two key questions: (i) whether the prohibition on assignment applied to automatic and involuntary assignments; and (ii) whether an assignment of rights to an insurer is akin to a subrogation. There was also a potential question of public policy.
1. Automatic and involuntary assignments
In its analysis, the Commercial Court was clear that a contractual prohibition on assignment would not apply to a truly involuntary assignment. Dassault contended that the assignment to MSI was not involuntary as it was a direct result of voluntary actions by MBA, including taking out the insurance policy with MSI and/or making a claim to MSI under the policy for the late delivery of the aircrafts. The Commercial Court’s view was that the contractual prohibition contained in the Sale Contract would be applicable to assignments, whether such assignment occurred by operation of law or not, if it was caused by a voluntary act.
Cockerill J noted that “[i]t was … in the power of MBA to comply with the provision. It chose – acted voluntarily or consented – to take a step which on a certain contingency would put it in breach of that provision”.
In effect, MBA chose not to prevent the transfer and, as such, Dassault’s contention was correct; the assignment was caused by a voluntary act and so was not covered by the “involuntary” safe harbour.
The Commercial Court then considered this view within the broader context of an assignment to an insurer being ‘akin’ to a subrogation. MSI contented that it would have been able to bring a subrogated claim in MBA’s name had Japanese law provided for subrogation and, as such, the contractual prohibition on assignment should not prevent an assignment to an insurer akin to a subrogation.
The Commercial Court accepted the force of MSI’s argument, finding an instinctive difficulty with saying that subrogation under English law is acceptable, whereas the subrogation equivalent of another legal system is not.
However, ultimately, the Commercial Court concluded that this was insufficient at displacing the effect of the wording of the contractual prohibition in the Sale Contract, namely, to prohibit any assignment with the consent of MBA.
3. Public Policy
As a fall-back position, MSI argued that the assignment clause should not apply to insurance at all (even for voluntary assignments). The argument was that English contract law took the view that it was sensible for parties to seek insurance and that applying a no assignment clause to transfers to insurers would have the effect of limiting access to the insurance market.
This was given short shrift by the Commercial Court, which held that it was fairly plain that one could not imply into the clause a blanket exception for insurance – both because it would be contrary to the express words of the contract and because it would fail the business efficacy test (insurance was not necessary, the relevant party could, via the terms of the contract, seek consent, and it was possible to contract out of transfer under Japanese law).
(i) Clarification Provided
Cockerill J admitted to reaching her conclusion “with an unusual degree of hesitation” and it was certainly the case that the authorities established no clearly applicable principle (it may be the first case to have considered the area in nearly 100 years).
What the authorities did do was to delineate a distinction between willing/voluntary and unwilling/involuntary transfers (subject to any refinements required by wording or commercial purpose or context). There was room to argue about exactly where that line would be placed.
The decision clarifies that where a transfer takes place at law in apparent breach of an anti-assignment clause, the emphasis is not on the mechanism of the transfer (“by operation of law” is not in and of itself the end of the analysis), but rather whether there is a sufficient “degree” or “taint” of voluntariness in the transfer (and there were indications in the case law that any degree or “taint” of voluntariness could be caught by an anti-assignment clause).
The subrogation issues raised in the case will be of relevance beyond the context of insurance. For example, under English law a surety who discharges the obligations of a debtor will take over the creditor’s rights.
The decision may be seen as casting doubt on an area many may have thought was settled and uncontroversial. The decision will present a problem for insurance policies governed by laws that require a transfer of rights to an insurer after a pay-out, as opposed to a subrogation of those rights.
Nor is subrogation itself left unscathed: there remains a question whether it could ever be caught by an anti-assignment clause. The Commercial Court noted that there may be circumstances where subrogation could be caught, particularly where the subrogation permitted an insurer to pursue claims in the name of the insured (especially where confidentiality is important).
Academically, Professor Goode in “Contractual Prohibitions Against Assignment”  LMCLQ 300, only went so far as to say that “prima facie” an anti-assignment clause was limited to contractual assignments and would not encompass rights of subrogation.
Whether subrogation and assignment are “always” distinct is also questionable. For example, Lord Hoffmann once said: “it is customary for the assured, on payment of the loss, to provide the insurer with a letter of subrogation, being no more nor less than an express assignment of his rights of recovery against any third party” (Banque Financière de la Cite SA v Parc (Battersea) Ltd  1 AC 221, 231F-G) (our emphasis).
(iii) The Continuing Importance of the Text of the Anti-Assignment Clause
Ultimately, the nature of assignment or subrogation was seen by the Commercial Court as relevant to establishing whether the anti-assignment clause was engaged. That must be considered alongside the actual text of the clause in question:
“…the right course is to give effect to the contractual wording and not strain to reach a result which is essentially one of public policy – and which does in truth rewrite the parties’ agreement.”
Therefore, the case provides the familiar lesson on ‘boilerplate’ clauses – there is no such thing! Careful thought should be given to the impact of anti-assignment clauses in the context of the business model (including insurance and/or financing) relevant to the parties.