The Court of Appeal has ruled that a non-assignment clause within a commercial contract would not prevent an assignment arising by operation of law. In his judgment, Sir Geoffrey Vos MR overturned the High Court’s decision regarding a non-assignment clause. The case has important implications for commercial contract drafting, which we will summarise here.
Before discussing the aforementioned case, it is worth briefly considering the concept of assignment more generally. In short, an assignment takes place when one person transfers an existing legal right to another person. With contracts, only the benefit of such contract may be assigned (but not the burden). This is the critical difference between an assignment and a novation. With a formal novation, the entire contract is transferred outright (and, therefore, both the benefit and the burden can be transferred).
“Non-assignment” provisions seek to curtail a party’s ability to assign its contractual rights and benefits to another. If well-drafted, such clauses can even survive a counterparty’s insolvency (where transfers may sometimes occur by operation of law). Nonetheless, contracting parties may be able to counter the effect of a non-assignment clause, such as by requesting the counterparty’s consent to assign, or (as further described below) by relying on assignment by operation of law.
Facts of the case – Dassault Aviation SA v Mitsui Sumitomo Insurance Co Ltd (2024) EWCA Civ 5.
Dassault Aviation SA (“Dassault”) and Mitsui Busan Aerospace Co Ltd (“MBA”) entered into a contract governed by English law for the sale of aircraft from Dassault to MBA (the “Contract”). MBA would then supply the aircraft to the Japanese Coast Guard. Article 15 of the Contract stated:
“…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…”
Sometime after conclusion of the Contract, MBA procured an insurance policy from the appellant (the “Policy”), Mitsui Sumitomo Insurance Co Ltd (“MSI”), which was governed by Japanese law and covered the risk of MBA being liable towards the Japanese Coast Guard for late delivery of the aircraft.
The aircraft were delivered late, and the Japanese Coast Guard claimed liquidated damages from MBA, which, respectively, made a successful claim against MSI under the Policy.
MSI launched arbitration proceedings to exercise its right of subrogation under the Policy against Dassault (in effect allowing MSI to step into the shoes of MBA), thus seeking damages from Dassault for late delivery under the Contract. The arbitral tribunal dismissed Dassault’s contention that the assignment of rights from MBA to MSI was precluded by Article 15, such assignment instead having occurred by operation of law (under article 25 of the (Japanese) Insurance Act (Act No. 56 of 2008)). In other words, the assignment to MSI by operation of law was not caught by the prohibition on assignment in Article 15.
Dassault applied to have the arbitral award (made in favour of MSI) set aside by the court under s.67 of the Arbitration Act 1996 on the grounds that the tribunal lacked jurisdiction.
The High Court ruled in Dassault’s favour: it took the view that Article 15 caught and prohibited the transfer of MBA’s claims to MSI under the relevant Insurance Act. As such, the tribunal had lacked jurisdiction to hear the proceedings.
Court of Appeal
Rather than deferring to the High Court’s emphasis on MBA’s voluntary act in having procured the Policy, Sir Geoffrey Vos MR deemed the central question to be “…whether the transfer of MBA’s claims against Dassault…was a transfer by MBA, not whether the transfer was caused as a consequence of certain actions taken by MBA”.
He found that the transfer of MBA’s rights under the Contract arose by virtue of the established legal principle of subrogation – a universally accepted entitlement of insurers after they have indemnified an insured under a policy. There was no action taken by MBA which could have supplanted this. Sir Geoffrey Vos MR held that the objective meaning of the language which the parties chose to use in Article 15 meant that it did not invalidate a transfer by operation of Japanese law (and that he reached that conclusion taking into account the Contract as a whole and its wider context).
At Edwin Coe LLP, we are well-placed to advise on, and draft, commercial contracts, as well as the extent to which non-assignment clauses may require tailoring to prevent any type of circumvention. Please contact Greg Horsford or another member of the Corporate team should you require assistance.
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