In Dassault Aviation SA v Mitsui Sumitomo Insurance coverage Co Ltd [2022] EWHC 3287 (Comm) the court docket thought-about whether or not a contractual prohibition on project of a contract encompassed a switch of subrogation rights to an insurer by operation of Japanese insurance coverage regulation. The choose reached her conclusions with “an uncommon diploma of hesitation” and famous that the case gave rise to an “fascinating level“. Finally the court docket discovered that the broadly drafted contractual prohibition in a sale contract did render ineffective the switch of subrogation rights to an insurer.

BACKGROUND

The Claimant agreed to fabricate and ship two plane (and associated provides and companies) to a Japanese aerospace firm (MBA) for onward provide to the Japanese Coast Guard (the Sale Contract). The Sale Contract was ruled by English regulation and included a prohibition in opposition to project within the following phrases:

“Apart from the Warranties outlined in Exhibit 4 that shall be transferable to Buyer, this Contract shall not be assigned or transferred in entire or partially by any Celebration to any third social gathering, for any purpose in any way, with out the prior written consent of the opposite Celebration and any such project, switch or try and assign or switch any curiosity or proper hereunder shall be null …”  (the Non-Project Clause)

The Sale Contract additionally contained an arbitration settlement offering for arbitration underneath the ICC guidelines and for the seat of arbitration to be London.

Coverage & Japanese insurance coverage regulation

Subsequently, MBA entered right into a contract of insurance coverage (the Coverage) with the Defendant insurer, ruled by Japanese regulation. The Coverage lined the danger of MBA being held liable to the Japanese Coast Guard for late supply underneath the Sale Contract.

It was accepted that:

• Japanese insurance coverage regulation supplies for an insurer to be subrogated to an insured’s declare following cost of an indemnity;
• Not like underneath English regulation, the mechanism of subrogation underneath Japanese regulation is a switch of rights. The insurer acquires the fitting to sue in its personal title, together with the fitting to provoke proceedings; and
• Japanese insurance coverage regulation permits contracting out of such switch in sure circumstances.

The Coverage additionally contained a subrogation clause in phrases that resembled Japanese insurance coverage regulation.

Supply by the Claimant underneath the Sale Contract was delayed and the Japanese Coast Guard claimed liquidated damages from MBA for late supply. MBA in flip obtained an indemnity in respect of that sum from the Defendant pursuant to the Coverage.

Subrogated declare

In April 2021, the Defendant submitted a request for arbitration underneath the arbitration settlement within the Sale Contract in opposition to the Claimant to train its subrogation rights. The Claimant contended that the arbitral tribunal didn’t have jurisdiction on the idea that any switch of rights from MBA to the Defendant was precluded by the Sale Contract’s Non-Project Clause and was, subsequently, ineffective.

The Defendant argued that the prohibition on project created by the Non-Project Clause didn’t on its correct building (underneath English regulation) apply to an project by operation of regulation (on this case, Japanese regulation). The tribunal concluded by majority resolution that it did have jurisdiction as a result of:

1. the Non-Project Clause didn’t apply to involuntary assignments and/or assignments by operation of (Japanese) regulation; and
2. as a matter of Japanese regulation, the switch of rights from MBA to the Defendant insurer occurred by operation of Japanese insurance coverage regulation (versus pursuant to the subrogation clause within the Coverage).

The Claimant subsequently made an utility underneath Part 67 of the Arbitration Act 1996 to put aside the tribunal’s award which was thought-about by the Excessive Court docket.

DECISION

Can contractual non-assignment clauses stop transfers of rights made “by operation of regulation”?

The court docket discovered that there was no basic rule or presumption within the case regulation {that a} prohibition on assignments would usually be interpreted as not making use of to these which happen “by operation of regulation“. Nevertheless, the court docket did settle for that, as far as the authorities go, there’s a presumption that the court docket shouldn’t be prevented from giving impact to a non-assignment clause when the tried switch is one which is voluntary (within the sense of consented to). The important thing query is whether or not the switch happens actually outdoors the voluntary management of the transferring social gathering. For instance, it had been held {that a} covenant in a lease of a pub, which supplied that the tenant and his “assigns” wouldn’t assign the lease, was not efficient to forestall the project of that lease by order of the court docket following the tenant’s chapter (Doe d Goodbehere v Bevan (1805)). Such a switch was not effected by a voluntary act of the lessee however reasonably by operation of regulation.

Did the wording of the Non-Project Clause on this case stop the switch of rights to the Defendant insurer?

The drafting of the Non-Project Clause was clear, protecting each particular exceptions (not related to this case) to the prohibition on project and the implications of tried assignments. It was additionally clear from the wording that solely assignments or transfers “by any Celebration …  to any third social gathering” (emphasis added) have been ineffective.

Mrs Justice Cockerill agreed with the Claimant that the project had been made “by” MBA insofar because the switch of MBA’s rights to the Defendant was “voluntary in that it was within the energy of MBA to forestall the switch“. Whereas (it was agreed that) it was a provision of Japanese regulation which in the end effected the switch, the switch was consented to by MBA and occurred on account of numerous of its voluntary actions: (i) the choice to insure its obligations underneath the Sale Contract; (ii) the choice to decide on a coverage ruled by Japanese regulation; (iii) the choice to not exclude, within the Coverage, the related provisions of Japanese regulation which supplied for the Defendant’s proper of subrogation; and (iv) the choice by MBA to make a declare underneath the Coverage. It was throughout the energy of MBA to adjust to the Non-Project Clause and forestall the switch of rights to the Defendant by not taking any of the steps outlined above.

As a “matter of pure language” the wording of the Non-Project Clause supported the Claimant’s argument that the switch of rights to the Defendant was throughout the scope of the Non-Project Clause and subsequently ineffective.

Wider context, business objective and public coverage

The Defendant additionally contended that as a matter of public coverage, it was thought-about smart for contractual counterparties to acquire insurance coverage. Subsequently, the place doable throughout the bounds of interpretation, non-assignment clauses ought to be learn as not penalising or stopping project to insurers.

The Defendant additionally posited that an English regulation subrogation (which it was argued doesn’t contain a switch of rights) wouldn’t have fallen foul of the Non-Project Clause. There was subsequently no purpose to suppose that the events would have supposed the Non-Project Clause to limit the Japanese regulation equal of English regulation subrogation, the place the one related distinction is that the previous occurs to contain a switch of rights whereas the latter doesn’t.

Mrs Justice Cockerill examined the mechanisms behind English regulation subrogation, in the end agreeing with the Defendant that, for the needs of the current case no less than, an English regulation subrogation ought to be handled as being outdoors of the scope of the Non-Project Clause. However, this was not a “sturdy business objective argument” however solely a “factual matrix level“. Neither the ‘subrogation argument’ nor the ‘public coverage argument’ have been sturdy sufficient to override the plain which means of the wording of the Non-Project Clause.

Accordingly, the court docket present in favour of the Claimant that the tribunal had no jurisdiction to resolve the dispute between the Claimant and the Defendant that had been referred (save probably as regards consequential orders).

COMMENT

A lot of the judgment’s curiosity is its dialogue of the regulation of subrogation. Mrs Justice Cockerill in the end concluded that, for the needs of the current case no less than, English regulation subrogation ought to be handled as not falling foul of the contractual prohibition on project. However, the judgment grapples at some size with what Mrs Justice Cockerill referred to as the “origin dilemma“: whether or not English regulation subrogation is “quasi-contractual” (through which case it could possibly be caught by contractual non-assignment clauses) or is “equitable” (through which case contractual non-assignment clauses would haven’t any relevance to subrogation).

Pushing the door for additional debate barely ajar, Mrs Justice Cockerill commented that the dilemma had “illuminated potentialities for debate outdoors the bounds of this judgment” and she or he “can see how an argument as to the permissibility of subrogation might come up“.

The choose reached her conclusions with “an uncommon diploma of hesitation” and it’s maybe not shocking that permission to attraction to the Court docket of Enchantment has been granted on this case.  Within the meantime, events ought to be conscious to make sure that non-assignment clauses are drafted in as clear phrases as doable, with each the inclusive and unique scope of the prohibition set out definitively and clearly.  The place insurers search to depend on subrogation rights, it could be prudent to grasp the mechanism that offers impact to these rights underneath the related relevant regulation and the way that mechanism interacts with any contractual agreements that the insured might have entered into.

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