In the familiar, lies the unseen

We like to look at boilerplate language with fresh eyes and so taking the recent case of Dassault Aviation SA v Mitsui Sumitomo Insurance Co Ltd [2024] EWCA Civ 5¹ as a jumping off point, we consider the potential tensions, hidden to some extent in plain sight, between anti-assignment and subrogation rights and the take aways for those drafting insurance policy wordings. 

Background 

Standard provisions and boilerplate language within the general conditions of policy wordings, by definition, don’t tend to attract significant scrutiny when reviews are conducted, or new products designed. The logic being, understandably, that the thinking has already been done. 

Once in a while a case comes along that gives us reason to reflect on what these clauses do, and how they might interact with other aspects of the policy. The case of Dassault has made us look with fresh appreciation at anti-assignment conditions and the potential for them to interact with the operation of subrogation, a central tenet of insurance law and one that it is fundamental to the nature of the gift of indemnifying loss. 

Subrogation is a form of assignment. It operates at law, rather than by someone having to do something. It could be characterised as an involuntary assignment. 

Hold that thought… let us explain the facts of Dassault. 

The facts of the Dassault case

In March 2015, Dassault Aviation SA ("Dassault"), contracted with Mitsui Bussan Aerospace ("MBA"), to supply two aircraft, for use by the Japanese Coast Guard. That contract stipulated that any disputes would be arbitrated in London and further, that the contract was not to be “assigned or transferred in whole or in part” by either party without the consent of the other. 

To mitigate the risk of late delivery, MBA took out insurance cover with Mitsui Sumitomo Insurance Co Ltd ("Mitsui"), which, under Japanese law, allowed Mitsui to step into MBA's shoes and pursue third-party claims upon making a payout under the policy. This automatic transfer of rights, or subrogation, later became the crux of the dispute when delivery delays propelled Mitsui into arbitration against Dassault.

When the aircraft delivery was delayed, Mitsui paid MBA's loss claim and, standing in the shoes of their insured, initiated arbitration proceedings against Dassault in London under the sale contract. 

The tribunal held that the non-assignment clause in the sale contract did not apply to involuntary assignments or those operating at law, and that the transfer of rights from MBA to MSI was an example of the latter. The tribunal determined it had jurisdiction over the claim and it went on to make an award against Dassault.  Dassault subsequently sought to set aside the tribunal decision. 

High Court Decision

The High Court was tasked with determining the jurisdiction of the arbitral tribunal, by considering the scope of the anti-assignment clause. Cockerill J commented, "instinctively, there is a feeling that a transfer in the context of insurance should not be caught by such a proviso."²

Some commentators expressed surprise when they got to the end of the judgment, because rather than making a finding that statutory assignments would not be caught by an anti-assignment clause (giving teeth to the instinct articulated by Cockerill J) instead, the finding that there was no such arbitral jurisdiction was based instead upon the finding that the transfer of rights from MBA to MSI was a voluntary one, and thereby not an "operation of law.

Cockerill J found a key distinction should be drawn between a voluntary and an involuntary transfer of rights, with the anti-assignment clause in the contract as precluding the former, but not the latter.  It was held that the transfer was voluntary, with the reasoning that MBA might have chosen not to insure; MBA might have chosen a policy not governed by Japanese law which conferred a right of action on Mitsui in its own name; MBA might have required the removal of the policy provisions conferring a subrogation right upon Mitsui; and MBA might have chosen not to make a claim against Mitsui. Any one of those acts, it was held, would have prevented a subrogation action and therefore means that the subrogation was a prohibited form of assignment.³

Court of Appeal decision

The Court of Appeal, in overturning the High Court and determining that the arbitral tribunal did have jurisdiction, rejected the binary analysis of voluntary versus involuntary transfer, focusing instead on the essence of the assignment mechanism. 

Sir Geoffrey Vos stated that "(Cockerill J) thought it was an admissible interpretation …. to regard a transfer effected by operation of law under article 25 as a transfer by MBA". The question to ask was not the degree of voluntariness in bringing about an assignment, but rather the mechanism of the assignment itself. The Court of Appeal determined that the transfer was not made by MBA, but by an operation of law as per Article 25 of the Japanese Insurance Act.  

Having made that finding, the Court of Appeal then took an objective view of the language in the clause and found it to be clear and unambiguous in only prohibiting assignments made by a party to the sale contract. Simply put, the assignment did not breach the no-assignment clause, because it was not one that fell within the ambit of that clause as a transfer of rights by a party to the contract.

Given this line of reasoning, the Court did not have to (but neither did it take the opportunity) to affirm the existence of any general principle on the interaction of subrogation and anti-assignment clauses. Readers may point to a further missed opportunity, with the court opting to not consider the effect on the case were the subrogation under English law, as opposed to Japanese.  

However, the Court was not entirely silent on the point as it rejected the existence of any general principle applicable to the interpretation of non-assignment clauses – "the old insolvency cases did not enunciate a general principle applicable to the interpretation of non-assignment clauses in commercial contracts"⁴ - and emphasised that this is a matter of contractual interpretation⁵.  

The judgment turned on the key words, "by any party" as qualifying the type of assignment to which the clause applied. Where an assignment was not by a party, ostensibly, they didn’t need to go any further. There is real elegance in the simplicity of this reasoning. Of course, this leaves the door ajar for a different finding, where the underlying contract expressly prohibits any kind of assignment, including at law.  

Lessons learned for policy drafting

It is worth highlighting that the anti-assignment provision at the heart of this litigation was contained within a third party commercial contract, not an insurance policy (although insurance was part of the story). 

When drafting any provision that prohibits a particular thing, the temptation is to do a copper-bottomed job and we need to be cognisant of that entirely relatable bias when drafting but also, reviewing contracts. This is amplified particularly in the context of boiler plate language, which, because of its very nature, doesn’t routinely get looked at with 'fresh eyes'.  Accordingly, it is highly likely that there will be boilerplate conditions that are drafted in a wider way (perhaps silent as to who or how the assignment is affected, or otherwise expressly providing that any means of assignment is subject), that could give rise to a different outcome.

Where the anti-assignment provision is in a contract to which insurers are not a party (like in the facts of Dassault), the levers insurers can pull to protect their rights are restricted to those that contractually limit the behaviour that could give rise to a waiver of, or prejudice to, an insurer's rights of subrogation and to provide a remedy (and crucially, an alternative means of recovery), should subrogation constitute an impermissible assignment. As such, aside from underwriting due diligence at proposal stage, the subrogation conditions within the policy will be important. Because subrogation is something that happens at law, it is not always expressly articulated. 

Daydreaming for a moment upon an alternative set of facts - one where the anti-assignment provision is contained within an insurance wording - there is more that can be done. Where the competing provisions are in the same document, the Court would look to find a commercially sensible interpretation that accommodates both provisions, taking into account the contract as a whole. Accordingly, the push-pull of subrogation provisions (silent or express) verses any contractual overrides of anti-assignment, will be the battleground.  That exercise wasn’t necessary in Dassault, precisely because the focus was on the interpretation of the anti-assignment language only.

Where a policy contains a condition that purports to prohibit the operation of subrogation every effort would likely be made to give effect to any express subrogation provisions, given the assumption that that language is included for a reason. This is a good reason to include these rights.

However, where a policy is silent on subrogation (and the Court has to fall back on this being 'as of right', operating, at law) a widely drafted anti-assignment condition could interfere with that. Ideally, any anti-assignment should be limited to assignments by the parties, or to third parties without permission of the insurer, or otherwise expressly carve out that operating at law, including subrogation.

So, as is often the case with wordings, and a theme we often return to, an issue with drafting is rarely limited to one provision and an omission can be just as potent. Context is key. There are various points of reference within a wording where different clauses need to speak to each other, and the art of good drafting is making this happen. The interaction of subrogation and anti-assignment conditions may just be a new one, to add to the ever-evolving checklist. 

For any queries please contact Tamsin Hyland. 

1. Dassault Aviation SA v Mitsui Sumitomo Insurance Co Ltd [2024] EWCA Civ 5
2. Dassault Aviation SA V Mitsui Sumitomo Insurance Co Ltd [2022] EWHC 3287
3. Ibid. 
4. Dassault Aviation SA V Mitsui Sumitomo Insurance Co Ltd [2022] EWHC 3287 (paragraph 20)
5. Quadrant Chambers article