Non-assignment clauses, subrogation rights and transfers by operation of law

In a dispute arising out of an insurance claim for delayed delivery of aircraft, the Court of Appeal has held that the non-assignment clause in the sale contract did not apply to a transfer of the buyer’s rights to Japanese insurers by operation of Japanese insurance law. 

In doing so, it disagreed with the Commercial Court that there were two possible meanings of the non-assignment clause. In the Court of Appeal’s view, the wording of the clause was unambiguous and clear and the objective meaning of the language used was that it did not invalidate a transfer of rights by operation of law.

Whilst the parties seemed to agree that English law subrogated rights would not fall foul of the non-assignment clause in this case, the Court of Appeal did not need to decide the issue and declined to do so. Ultimately, in the case of other non-assignment clauses, the answer will likely depend on the particular wording of the clause, read in the context of the other contractual provisions and the wider commercial context.

The background facts

This was a sale contract for military surveillance aircraft that was governed by English law. The buyer was Japanese and entered into a sub-sale on the same day with the Japanese Coast Guard that was governed by Japanese law. 

Article 15 of the sale contract was a non-assignment/transfer clause in the following terms:

“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.”

Other provisions in the sale contract envisaged both parties taking out insurance.

The buyer took out insurance from Japanese insurers to insure against the risk of any liability to the Japanese Coast Guard in the event that the aircraft were delivered late. In fact, the delivery of the aircraft was delayed and the buyer made a claim under the insurance contract. 

The insurers paid out on the claim. It was not disputed that, pursuant to Japanese insurance law, the buyer’s claims against the seller were thereby transferred to the insurers by operation of law. In addition, article 35 of the sale contract provided expressly for the transfer of third party damage claims from the buyer to the insurers.

The seller refused to reimburse the insurers, arguing that the non-assignment clause prohibited any transfer of the buyer’s rights to the insurers without the seller’s prior written consent, which had not been obtained in this instance.

The ICC arbitration

The majority tribunal held that article 15 did not apply to involuntary transfers or assignments or those by operation of law. Here, the transfer to the insurers was by operation of Japanese law. Therefore, the non-assignment clause did not apply and the seller’s consent to the transfer was not necessary. Accordingly, the tribunal had jurisdiction to deal with the insurers’ direct claim against the seller. 

The dissenting arbitrator thought that the transfer of rights was a direct result of the buyer’s voluntary decision to enter into the insurance contract and the transfer was, therefore, voluntary.

The Commercial Court decision

The Court allowed the appeal from this decision, albeit reluctantly. The Court decided that the wording of clause 15 was wide enough to encompass the transfer of rights to insurers by operation of law.

The Court interpreted the authorities as making a distinction between voluntary and involuntary transfers and decided that there was a presumption that such a non-assignment clause would apply if the assignment was voluntary in the sense that it was consented to. 

In this case, in the Court’s opinion, the transfer of rights from the buyer to the insurers could be described as voluntary. Among other things: the buyer could have chosen a policy governed by a different system of law; or it could have excluded the operation of the relevant provision of Japanese insurance law; or it could have chosen not to make a claim.

An issue arose as to whether the non-assignment clause would have applied to subrogation under English law because that does not involve a transfer. Instead, a subrogated insurer that has indemnified its assured in respect of an insured claim can step into the assured’s shoes and pursue a claim in the assured’s name to recover the indemnity payment from a liable third party.

The Court did not need to decide the point so did not determine the issue. However, it did note that academic commentary inclined to the view that rights in subrogation were not caught by a non-assignment clause.

The Court of Appeal decision

The Court of Appeal has allowed the appeal and held that, on its true construction, article 15 did not invalidate the transfer of the buyer’s claims to the insurers. 

The Court of Appeal thought that the authorities relied on by the Commercial Court were not relevant to the issue in dispute and that there was no presumption that a non-assignment clause would apply to a ‘voluntary’ transfer. Rather, it was a question of interpreting the relevant wording of the non-assignment clause in question.

In this case, the words of article 15 were clear. The key words for present purposes were ‘by any Party’. The arbitrators had unanimously decided that the buyer’s claims against the seller were transferred to the insurers by operation of Japanese insurance law. The correct question was not whether the transfer was the consequence of the voluntary decision of the buyer and the insurers to enter into the insurance contract. The right question was whether the transfer was made by the buyer, not whether the transfer was a consequence of certain actions taken by the buyer. 

The Court of Appeal noted that while the sale contract did not envisage that the buyer would take out insurance against liability for delay under the sub-sale contract, it did envisage that both parties would take out other insurances. This was part of the commercial background to the sale contract.

Given that it was not in issue in this case, the Court of Appeal declined to consider whether English law subrogation would or would not be caught by the non-assignment clause. However, it noted that the parties had appeared to accept that article 15 would not have applied to such a subrogated claim.

Comment

It should not be assumed that subrogated rights will never offend against a non-assignment clause or similar exclusive provision. All will depend on the language used in the context of the other contractual provisions and the wider commercial background. In this case, the Court of Appeal thought the wording of the clause was unambiguous, in other cases the Court might conclude otherwise.

Such clauses should be worded carefully, therefore, when they are being incorporated into a contract in order that they achieve the intended result. They should also be considered in detail by any party that is looking to take out insurance and/or to make a claim under that insurance.