In Dassault Aviation SA v Mitsui Sumitomo Insurance coverage Co Ltd [2024] EWCA Civ 5, the Court docket of Enchantment has overturned a primary occasion judgment and located {that a} contractual prohibition on task in a sale contract didn’t stop the switch of subrogation rights to an insurer the place that switch arose by operation of legislation.
BACKGROUND
The Claimant and a Japanese aerospace firm (MBA) entered into an English legislation contract (the Sale Contract) for the manufacture and supply of two plane (and associated provides and companies) to MBA for onward provide to the Japanese Coast Guard.
The Sale Contract
The Sale Contract included a prohibition towards task 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 partly by any Get together to any third celebration, for any motive by any means, with out the prior written consent of the opposite Get together and any such task, 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 below the ICC guidelines and for the seat of arbitration to be London.
The Coverage & Japanese insurance coverage legislation
Subsequently, MBA entered right into a contract of insurance coverage (the Coverage) with the Defendant insurer, ruled by Japanese legislation. It didn’t search the Claimant’s consent. The Coverage lined the danger of MBA being held liable to the Japanese Coast Guard for late supply below the Sale Contract.
It was accepted that:
- Japanese insurance coverage legislation offers for an insurer to be subrogated to an insured’s declare following cost of an indemnity;
- In contrast to below English legislation, the mechanism of subrogation below Japanese legislation is a switch of rights. The insurer acquires the suitable to sue in its personal title, together with the suitable to provoke proceedings; and
- Japanese insurance coverage legislation permits contracting out of such switch in sure circumstances.
The Coverage additionally contained a subrogation clause in phrases that resembled Japanese insurance coverage legislation.
Supply by the Claimant below 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 insurer submitted a request for arbitration below the arbitration settlement within the Sale Contract towards the Claimant to train its subrogation rights. The Claimant contended that the Arbitral Tribunal didn’t have jurisdiction on the premise 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 task created by the Non-Project Clause didn’t on its correct building (below English legislation) apply to an task by operation of legislation (on this case, Japanese legislation). The Tribunal concluded by majority resolution that it did have jurisdiction as a result of:
- the Non-Project Clause didn’t apply to involuntary assignments and/or assignments by operation of (Japanese) legislation; and
- as a matter of Japanese legislation, the switch of rights from MBA to the Defendant insurer occurred by operation of Japanese insurance coverage legislation (versus pursuant to the subrogation clause within the Coverage).
The Claimant subsequently made an software below Part 67 of the Arbitration Act 1996 to put aside the Tribunal’s award which was thought-about by the Excessive Court docket.
FIRST INSTANCE DECISION
Cockerill J gave judgment within the first occasion in favour of the Claimant, albeit with ‘an uncommon diploma of hesitation‘. For a full overview see our article on the primary occasion resolution right here on our Insurance coverage Weblog.
Cockerill J discovered that the Tribunal had no jurisdiction to resolve any dispute between the Claimant and the Defendant insurer, as a result of, having analysed the case legislation and the wording of the Sale Contract, her conclusion was that the switch of rights to the Defendant insurer was inside the scope of the Non-Project Clause and subsequently ineffective.
The related case legislation was not supportive of a common rule or presumption {that a} prohibition on task wouldn’t be interpreted to use to an task ‘by operation of legislation’. Nevertheless, the choose did settle for that, as far as the authorities go, there’s a presumption that the courtroom 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). Cockerill J made clear that ‘voluntary’ didn’t imply free motion however was quite the correlate of opposite to the assigning celebration’s will, that means that any switch with the ‘taint of voluntariness’ could be adequate to return inside the scope of the Non-Project Clause.
On these info, Cockerill J agreed with the Claimant that the task 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 legislation which finally effected the switch, the switch was consented to by MBA and occurred because of varied of its voluntary actions: (i) the choice to insure its obligations below the Sale Contract; (ii) the choice to decide on a coverage ruled by Japanese legislation; (iii) the choice to not exclude, within the Coverage, the related provisions of Japanese legislation which supplied for the Defendant’s proper of subrogation; and (iv) the choice by MBA to make a declare below the Coverage. It was inside the energy of MBA to 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 inside the scope of the Non-Project Clause and subsequently ineffective.
Cockerill J took into consideration in her evaluation varied arguments put ahead by the Defendant concerning each the broader context of the Sale Contract and the Coverage and issues of public coverage. This included consideration of the industrial objective of the Non-Project Clause in addition to the suggestion (seemingly accepted by each events) that an English legislation subrogation, which it was argued doesn’t contain a switch of rights, wouldn’t have fallen foul of the Non-Project Clause. The Defendant argued that there isn’t a motive why subrogation below English legislation is appropriate, whereas the subrogation equal of one other authorized system isn’t. Cockerill J recognised these “instinctive difficulties” however her view was that these had been a part of the related factual matrix and weren’t on these info sturdy sufficient to override the plain that means of the wording of the Non-Project Clause.
COURT OF APPEAL DECISION
Vos MR gave judgment permitting the attraction and reinstating the Tribunal’s award, with each Coulson LJ and Phillips LJ agreeing together with his conclusion.
The important level from Vos MR’s perspective was that the wording of the Non-Project Clause clearly prevented any switch effected by a celebration to the Sale Contract, however not a switch effected by operation of legislation. He reached this conclusion for the next causes:
- First, he disagreed with Cockerill J that there was any common precept that might be derived from the case legislation. The authorities which she had referred to at first occasion (being principally previous insolvency circumstances) sometimes turned on the character of the insolvency below which the related switch occurred. The proper strategy was subsequently to ignore these authorities and to use the same old ideas of contractual interpretation, which had been set out briefly in his judgment.
- On condition that in his view the phrases of the Non-Project Clause had been ‘not ambiguous or unclear‘, it was not essential to undertake the detailed and iterative technique of deciding between various interpretations as set out in Wet Sky and Wooden v Capita.
- Nevertheless, it was vital to contemplate the wording in gentle of the industrial background, which meant acknowledging that each events had expressly anticipated elsewhere inside the Sale Contract that every celebration would acquire insurance coverage and that meant the events had envisaged that every would have glad their respective disclosure obligations to the related insurer, whatever the strict confidentiality provisions of the Sale Contract. His conclusion was that it was “removed from clear” that the Non-Project Clause was supposed to use to transfers arising from insurance coverage pay-outs, whatever the governing legislation of the related insurance coverage contract.
- He declined to contemplate whether or not an English legislation subrogation could be caught by the Non-Project Clause, on condition that was not in difficulty on this case.
- With reference to the wording of the Non-Project Clause itself, the important thing phrases had been “shall not be assigned or transferred in entire or partly by any Get together to any third celebration” (emphasis added). The Tribunal had unanimously determined that MBA’s claims had been transferred to the Defendant by operation of legislation and Vos MR discovered that this clearly meant the switch was not made by MBA. In reaching this conclusion Vos MR disagreed with Cockerill J {that a} switch made “by MBA” included a switch prompted as a consequence of sure actions taken by MBA.
In conclusion, the target that means of Non-Project Clause, taking into consideration the Sale Contract as a complete and its wider context, didn’t invalidate a switch by operation of Japanese legislation, and the prohibition subsequently didn’t apply to the switch of MBA’s claims to the Defendant insurer below the related clause of the Coverage.
COMMENT
This resolution offers some useful clarification on the interplay of the switch of rights to an insurer below an insurance coverage coverage with any contractual agreements that will have been entered into by an insured. Particularly, Vos MJ made clear that the courts wouldn’t count on non-assignment provisions to forestall transfers arising from insurance coverage pay-outs the place it’s expressly anticipated inside the related contract that insurance coverage shall be obtained.
A level of warning is required, nonetheless, as the choice additionally makes clear that whether or not subrogation rights are caught by a non-assignment provision is determined by the wording of the related clause, albeit with regards to the related contract as a complete, and the broader context. Whereas the Court docket of Enchantment clearly thought-about the wording of the Non-Project Clause right here to be unambiguous, events ought to nonetheless be sure that non-assignment provisions are drafted in as clear phrases as attainable to keep away from disputes arising sooner or later, notably the place it’s envisaged that events will acquire their very own insurance coverage.
Insurers must also word that, whereas the Court docket of Enchantment was not receptive to the concept subrogation rights transferred by operation of legislation might be caught by a non-assignment clause just because they had been ‘tainted by voluntariness‘, Vos MJ’s judgment expressly confines the strategy taken to circumstances the place subrogation rights have arisen by operation of legislation. Though it was not related on these info, the judgment makes clear that had been subrogation rights to have arisen not by operation of legislation however by an alternate mechanism, the place “may effectively have been totally different“.
