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UK – English High Court Finds That Assignment Of Arbitration Clause By Operation Of Law Prohibited By Anti-assignment Clause.

March 7, 2023 by Rohin Pujari

The English High Court has concluded that an anti-assignment clause can prevent the assignment of an arbitration clause to an insurer pursuing subrogation rights by operation of law.

The  decision  in  Dassault Aviation SA v Mitsui Sumitomo Insurance Co Ltd  [2022] EWHC 3287 (Comm) concluded that the relevant test for whether an assignment is in breach of an anti-assignment clause depends on whether the purported assignment by law is the result of voluntary decisions of the assigning party.

In this case, the assignor acted voluntarily in bringing about the assignment by operation of law, resulting in a breach of the anti-assignment clause. Consequently, the insurer could not establish jurisdiction for the arbitral tribunal to hear the subrogated claim.

While the judgment was specific to the construction of the clause in the case, it has significant ramifications for arbitration practitioners and the insurance industry. We note that permission to appeal has been granted.

The case concerned an English law contract to sell aircraft from Dassault to Mitsui Bussan Aerospace Co Ltd ( “MBA” ), with both an anti-assignment clause and an arbitration clause.

Without notice to Dassault, MBA entered into a separate contract of insurance with Mitsui Sumitomo Insurance Co Ltd ( “MSI” ) to insure against delayed delivery to MBA’s end customer. Delivery was delayed resulting in an insured event. Japanese statute provided for an automatic subrogation of any claim arising from the insured event upon the payment of the insurance proceeds from MSI to MBA. MSI subsequently filed a Request for Arbitration against Dassault.

When considering its own jurisdiction, the arbitral tribunal found in favour of MSI, holding that the anti-assignment clause was not breached by an assignment by operation of law. The dissenting arbitrator found the operation of law to arise from voluntary acts of MBA (i.e. by entering into the insurance policy) and thus inconsistent with the anti-assignment clause. Dassault brought a jurisdictional challenge under s67 of the English Arbitration Act.

The High Court concluded that: (i) a purported assignment of contractual rights in breach of contract is void; (ii) there is no blanket rule that an anti-assignment clause cannot apply to assignments by operation of law; (iii) the question is essentially one of construction of the anti-assignment clause itself; and (iv) where there is a clear textual construction – as was considered to be the case here – this generally takes precedence over commercial purpose or public policy.

Cockerill J took a broader approach when assessing the assignment in question, by looking beyond just the immediate cause of the assignment (such as whether it was by operation of law or not), and instead examined the level of voluntariness displayed by the assignor. The judge acknowledged that there was some uncertainty regarding the required level of voluntariness, but determined that in this case, the threshold was met by MBA voluntarily entering into the insurance contract, which ultimately led to the possibility of Japanese-law subrogation (i.e. the assignment by operation of law). This approach was deemed the general rule in English law and consistent with the specific clause at issue in this case.

The judge also considered MSI’s argument that if this had been an English law subrogation, then the anti-assignment clause may not have been applicable, as subrogation under English law is generally not seen as requiring a transfer or assignment. The judge accepted this potential divergence but did not consider it necessary to decide what the outcome would have been in that scenario. Cockerill J did however suggest that in certain cases, such as those with significant commercial or security concerns, even if the subrogation does not involve a legal transfer, the parties’ intentions and public policy may weigh more heavily against the assignability of the claim, including an arbitration clause, to a third party.

However, the assignment by operation of law in this case was prohibited by the anti-assignment clause and therefore the arbitral Tribunal possessed no jurisdiction to decide the dispute.  The tribunal’s arbitration award on jurisdiction (which was dealt with as a preliminary issue) was to be varied accordingly.

The endorsement of the ‘voluntariness’ test for anti-assignment clauses in the context of arbitration is significant, and parties should be encouraged to review their anti-assignment provisions to explicitly include or exclude assignments by operation of law (whether voluntary or not).

The impact of this decision on subrogation under English law is uncertain, as the judge did not fully address the effects of anti-assignment clauses on subrogation under English law. However, parties who anticipate subrogating rights (including to insurers) should take care in assessing how the mechanisms in their contract will enable those rights to take effect. Similarly, parties (such as insurers or indemnifying parties) who are looking to rely on subrogation rights need to assess how any anti-assignment provisions might impact upon such subrogation.

For further information, please contact:

Craig Tevendale , Partner, Herbert Smith Freehills

[email protected]

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UK – New Rates And Limits For Employment Claims Come Into Effect On 6 April 2024.

Major Extension To Redundancy Protection For Employees In The UK.

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English contract law cases of 2022

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In this briefing, we take a look at the important contract law cases from this year and consider what they mean for commercial parties.

In another year of economic and political uncertainty, contract law has remained stable. Not much has changed. We’ve seen the English courts uphold basic principles of contract law, providing some useful reminders along the way, and deliver some welcome clarity in relation to implied duties of good faith.

Despite some novel arguments, the difficulty of claiming relief for pandemic-related disruption (without an express contractual provision to rely on) remains clear. Whether a party can exercise a right under a contract always depends on the facts, the commercial context and, most importantly, the terms of the contract itself. The court will not re-write contracts in light of the circumstances which later arise.

Read more below...

Force majeure

Common sense prevails in sanctions dispute.

A force majeure clause did not allow a shipowner to get out of a contract that had become disadvantageous to it. The shipowner invoked the force majeure clause when the charterer’s parent company was sanctioned by the US, maintaining that the sanctions would prevent payment in US$ (which was required under the contract). The clause provided that force majeure could only be relied upon if the “ event or state of affairs ” could not be “ overcome by reasonable endeavours from the Party affected ”. The charterer had offered to make payment in euros instead and cover all currency conversion costs, but the shipowner refused to accept that.

By a majority, the Court of Appeal allowed an appeal from the High Court. The majority accepted that although the contract required payment in US$, the purpose of that payment obligation was to provide the shipowner with the right quantity of dollars in its account at the right time. The charterer’s proposal would have achieved that objective with no detriment to the owner, so that would have “overcome” the state of affairs caused by the imposition of sanctions.

Lord Justice Arnold, dissenting, agreed with the High Court that the owner was entitled to insist on strict performance – payment in US$ – and that an event or state of affairs was not overcome by the offer of non-contractual performance without express provision to that effect.

We see a difference of judicial approach here between those judges who are of the view that parties should be entitled to insist on strict performance of the terms of the contract and those who are more prepared to take a “common sense” approach by looking at the purpose of a provision, where the wording of a provision is sufficiently broad to do so. The latter approach prevailed (subject to any further appeal). 

What does this mean for you?

It is clear from the judgment that the courts will focus on the words of a specific force majeure clause and that should always be the starting point for any analysis.

Where can you read more?

See MUR Shipping BV v RTI Ltd [2022] EWCA Civ 1406.

“ Terms such as “state of affairs” and “overcome” are broad and non-technical terms and clause 36 should be applied in a common sense way which achieves the purpose underlying the parties’ obligations...It is an ordinary and acceptable use of language to say that a problem or state of affairs is overcome if its adverse consequences are completely avoided. ” Lord Justice Males, paragraph 56

No penalties for football matches without fans, but a successful try for rugby 

2021 saw a number of decisions where arguments for relief from the effects of the pandemic failed across a range of different types of contracts (as we reported last year ). We kicked off 2022 with two more disputes about the impact of Covid-19.

In the first , the Premier League applied for summary judgment for payment of several instalments under two contracts by which it had granted PPLive rights to broadcast its football matches over three seasons in China. Covid-19 seriously disrupted the 2019/20 season, which was suspended, and when it resumed the matches were played later in the day with empty stadiums.

After PPLive failed to pay the licence fee for the upcoming season, the Premier League terminated the contracts.

The High Court held that the Premier League had been entitled to terminate. In its defence, PPLive tried to rely on a right to re-negotiate the licence fees if the “format” of the competition changed. However, since the “format”, as defined in the contracts, did not include kick-off times, the days when matches were played, nor whether there were fans present, the Covid-related changes instituted by the Premier League hadn’t actually changed the “format” (which was limited to the way that the competition was undertaken between the 20 member clubs).

PPLive’s argument that the obligation to pay the licence fee for the upcoming season was, in effect, a penalty and so unenforceable was also rejected on the basis that the rule on penalties applies only to a secondary obligation that applies on breach. A further argument that the fees were to be apportioned by reference to seasons or matches actually broadcast – and therefore that the Premier League would be unjustly enriched if entitled to full payment – also failed as that was in contradiction to the express terms of the contracts. This could not be supported by any implied term for the same reason – conflict with express terms is an “ overwhelming obstacle ” to an implied term.

What does this mean for you? 

This decision highlights how difficult it can be for parties to claim relief under commercial contracts in the light of the pandemic in the absence of a clear and express contractual right to do so.

It’s a useful reminder too of the law on penalties (only triggered by a secondary obligation applying on breach which is wholly disproportionate to the innocent party’s legitimate interests in performance) and the conditions for terms implied by fact (they must be reasonable and equitable, necessary to give business efficacy to the contract, so obvious it goes without saying, capable of clear expression and not contradict any express term).

See The Football Association Premier League Ltd v PPLive Sports International Ltd  [2022] EWHC 38 (Comm) and our SportingLinks blog post .

“ In many commercial contracts events may transpire other than as anticipated by one, or even both, contracting parties. That does not mean that the court will re-write the parties’ bargain and impose different terms upon them to suit those later events. That is not the function of the law of contract. ” Mr Justice Fraser, paragraph 148

In the second decision , RDA had been granted rights to broadcast live rugby matches in the European Champions Cup and Challenge Cup for four seasons. Again, the outbreak of Covid-19 had a serious impact on these competitions and, in March 2020, European Professional Club Rugby announced the postponement of the competitions’ quarter-finals, semi-finals and finals. RDA relied on the force majeure clause in the contract to first suspend payment, and later terminate the contract.

The High Court held that RDA was entitled to terminate under the force majeure clause. First, the Court decided that Covid-19 was a “ Force Majeure Event ” under the contract. The definition expressly included an “ epidemic ”, which would include a pandemic such as Covid-19. In any event, Covid-19 would have been a force majeure event because it was due to “ circumstances beyond the reasonable control of a party ”.

Secondly, the contract stated that if a “ Force Majeure Event prevents, hinders or delays a party’s performance of its obligations for a continuous period of more than 60 days, the party not affected by the Force Majeure Event may terminate this Agreement ”. The Court concluded that those conditions were met. RDA’s underlying motive for terminating the contract was not relevant. There was no allegation that the clause was subject to a Braganza duty of rationality so all that mattered was whether, as a matter of construction, RDA was entitled to terminate the agreement using the machinery of the force majeure clause.

This is a rare example of successful reliance on a force majeure clause to terminate a contract. In construing the provisions, the judge made it clear that motivations for terminating didn’t matter – it was simply a question of whether the entitlement had arisen in the circumstances and the conditions in the clause had been fulfilled. Careful attention to the terms of any contract is required both when negotiating its terms and when exercising rights under it.

See European Professional Club Rugby v RDA Television LLP [2022] EWHC 50 (Comm) and our SportingLinks blog post .

“ The only question is whether as a matter of construction and in the events that have happened a party seeking to rely on the Force Majeure clause was entitled to terminate the contract concerned using that machinery. ” HH Judge Pelling QC, paragraph 31

A two-stage test for implied duties of good faith?

The law on implied duties of good faith had been in danger of falling into disarray, with the courts taking disparate positions on this contentious topic. Clarity comes from a firm of solicitors who sued their client for settling a dispute on terms that meant the solicitors had no express entitlement to their costs. The firm alleged this was a breach by the client of an implied obligation of good faith. 

These unpromising facts provided the Court of Appeal with the opportunity to review this area of law. The judgment suggests a two-stage test:

• Can such an implied duty be implied in fact under the strict test in Marks & Spencer v BNPP [2015] UKSC 72? 1  In practice, this means that an implied duty based on good faith is only likely to arise where the contract would lack commercial or practical coherence without it.
• Is the contract “relational” such that a duty arises in fact or in law? Bates v Post Office (No.3) [2019] EWHC 606 set out nine criteria which are helpful to identify “relational contracts” but these are a sense check, not a series of statutory requirements. 

Unsurprisingly, this approach did not impose an implied duty of good faith on the client in relation to their dealings with their solicitors.

The basis for this duty has been clarified but the practical outcome is the same – implied duties of good faith are only likely to arise under a limited class of “relational” contracts.

See Candey Ltd v Bosheh & Anor [2022] EWCA Civ 1103 and our note on good faith on Practical Law.

“ The elusive concept of good faith should not be used to avoid orthodox and clear principles of English contract law. ” Lord Justice Coulson, paragraph 32

No cookie cutter approach for express duties of good faith

The Court of Appeal considered if an express duty of good faith in a shareholders’ agreement created a “ constitutional settlement ” under which two directors were entrenched in office and could not be removed by the majority shareholders. Unsurprisingly, the Court rejected this broad interpretation. Given the wider company law framework, if this had been the parties’ intention it would “inevitably” have been subject to express provisions.

More generally, it is wrong to apply broad concepts of good faith from other cases in a formulaic manner. Instead, an express duty of good faith consists of a “ core ” duty to act honestly and, depending on the contractual context, a duty not to engage in conduct that could be characterised as bad faith. Any further obligation must be capable of being derived as a matter of contractual interpretation or implication from the contract in question. This means express duties are likely to be limited in professionally drafted contracts; though might be more expansive in some commercial arrangements given they are sometimes more loosely defined.

Express duties of good faith should be used with care given the uncertainty about their meaning. If you want to apply such a duty, consider defining what it means.

Where can you read more? 

See Re Compound Photonics Group Ltd [2022] EWCA Civ 1371 and our note on good faith on Practical Law.

“ When considering the interpretation and meaning of an express good faith clause in context, cases from other areas of law or commerce, which turn upon their own particular facts, may be of limited value and must be treated with considerable caution. ” Lord Justice Snowden, paragraph 148

Exclusion and limitation clauses

Exclusion of loss of profit doesn’t exclude clean-up costs.

The Court of Appeal has decided that an exclusion of loss of profit, etc. (see the clause) in an IT development agreement does not exclude a claim for wasted costs – i.e. a claim for expenditure on the contract based on the rebuttable presumption that the contractual benefit is at least equal to that expenditure. 

Three key points support this welcome judgment on an important point:

• The exclusion clause did not expressly refer to wasted costs and was not apt to cover them. If the supplier wanted to exclude wasted costs, it could have expressly said so.
• The more valuable the right excluded, the clearer the wording of the exclusion clause must be (under the so-called Gilbert-Ash test ). The exclusion clause did not “ come anywhere close ” to the level of clarity needed to exclude wasted costs. 
• There is a fundamental difference between loss of profits, revenue or savings, on the one hand, and wasted expenditure, on the other. The former relies on a series of hypothetical alternative scenarios meaning the claims are “ notoriously open ended ” so are routinely excluded. A wasted cost claim is a “ different animal ”, being precisely ascertainable.

If your contracts exclude claims for loss of profits this case suggests this will exclude claims of future loss of profit or revenue but does not exclude a claim for the cost of cleaning up the mess when things go wrong. To exclude claims for wasted costs you should add express language to that effect.

See Soteria Insurance Ltd v IBM United Kingdom Ltd [2022] EWCA Civ 440 .

The clause: “ neither party shall be liable to the other or any third party for … loss of profit, revenue, savings …, data …, goodwill, reputation (in all cases whether direct or indirect) … ”

“Sole and exclusive” remedy excluded termination rights

A clause in a logistics contract contained an ordering mechanism, with a minimum volume commitment. The contract provided that the “ sole and exclusive remedy ” for breach of that clause was a rather low surcharge. The purchaser said it would not accept any future orders (in breach of the minimum volume commitment) and the supplier sought to terminate and claim damages.

The High Court concluded that the supplier was not entitled to terminate the contract. The “ sole and exclusive ” remedy clause ousted any contractual termination right and there may have been no right to terminate at common law for anticipatory breach (as by offering to pay the surcharge in lieu of performance, the purchaser demonstrated it wanted to comply with the agreement). There was another exclusive remedy clause in the contract (where the supplier failed to perform a significant number of the jobs that it accepted or was deemed to accept), which did allow for termination in some instances.

Both clauses were written in clear and unambiguous terms in a professionally drawn contract between legally represented parties. It was clear that when entering into the contract the parties had focused on the consequences of the purchaser failing to provide a minimum number of jobs, or the supplier failing to perform a significant number of jobs, and chose to manage those risks in different ways. The parties were “ fully entitled to approach each risk differently and having agreed to that approach should be held to their bargain ”.

This decision is a cautionary tale for commercial lawyers of the dangers of agreeing “sole and exclusive” remedies. It highlights the danger of looking at a clause in isolation and not considering the effect it may have on other provisions of the contract, such as termination rights.

See James Kemball Ltd v “K” Line (Europe) Ltd [2022] EWHC 2239 (Comm) .

“ The parties have chosen to manage the risk that the defendant would not provide the guaranteed minimum number of Jobs by a contractual compensation mechanism and have done so in clear and unambiguous terms. They might have formulated clause 3.3 in similar terms to those adopted in clause 4.4 but they chose not to do so. There is no basis for the phrase “… sole and exclusive remedy …” to be ignored or for concluding that it should not take effect in accordance with its terms. ” HH Judge Pelling KC, paragraph 33

Novation and assignment

Novation is possible through course of conduct.

Novation usually occurs when a contract is terminated and replaced by a new one between one of the original parties and a new party – so, A and B bring their contract to an end and A contracts instead with C. A, B and C must all consent to this. 

While this is often done expressly (and some contracts provide in advance for novation to happen on certain trigger events occurring), novation can be inferred from conduct. A decision of the High Court this year makes it clear that a unilateral contractual right to terminate (available to one or both of A or B) will not prevent the courts from finding that novation has taken place if in fact that is what has happened.

International Jet Club (“IJC”) originally entered into an operation and management services contract with the owner of an aircraft. When two things happened subsequently – 1) a reorganisation of the IJC group; and 2) the aircraft was moved to another jurisdiction – another company, Gama, (which was part of the same group as IJC), provided the services instead. Gama invoiced the owner and was paid by it. Gama was also the entity with sole regulatory approval in the new jurisdiction. 

When the owner then stopped paying, Gama brought a claim for summary judgment for recovery of the unpaid sums.

The High Court held that there had been an implied novation of the contract to Gama (so that Gama was entitled to the sums claimed). A clause providing that either party could terminate on three months’ notice did not prevent the novation. Similarly, there was no express provision preventing, or applying formalities to, the ability of the parties to terminate by agreement, which indicated there should be no bar to termination by novation through a course of conduct.

The decision is a reminder that novation can arise through a course of conduct.

See Gama Aviation (UK) Ltd v MWWMMWM Ltd [2022] 4 WLUK 364 (29 April 2022) and its addendum Gama Aviation (UK) Ltd v MWWMMWM Ltd [2022] EWHC 1191 (Comm) (4 May 2022) .

The relevant test: “ whether that inference is necessary to give business efficacy to what actually happened .”  Evans and SMG Television Limited [2003] EWHC 1423 Ch

Did an assignee’s loss fall into a legal black hole? Not remotely…

The High Court held that the loss claimed by an assignee was not too remote and, even if it had been, a particular provision got round that.

The assignee was the management company for a block of flats who had been assigned the benefit of a warranty from the contractor who built the flats. The original beneficiary of the warranty was the lender to the development.

When the assignee brought an action against the contractor under the warranty for the cost of remedial works, the contractor argued that the losses suffered were too remote. 

The Court had to decide whether the loss in question (cost of remedial work) was of a kind which was in the reasonable contemplation of the contractor as a serious possibility at the time of entering into the warranty with the lender. It found that it was. The possibility of assignment was expressly provided for under the warranty without restriction so that the contractor knew that losses might be claimed by an assignee who was not a substitute lender and/or who had suffered types of loss other than those which a substitute lender might suffer. It was reasonably foreseeable that someone with an interest in the property, like the assignee, would end up with the warranty and need to carry out the remedial works. The claim did not fall into a “ legal black hole ” by virtue of a “ no loss ” argument. 

In any event, the following provision would have come to the rescue: “ The Contractor agrees with the Beneficiary not to contend…that any person to whom the benefit of this Deed is assigned shall be precluded or prevented from recovering under this Deed…by reason of the fact that such person is an assignee only or otherwise is not the original beneficiary or because the loss or damage suffered has been suffered by such person only and not by the original beneficiary, or because such loss is different to that which would have been suffered by the original beneficiary. ”

It’s good to see the courts once again refusing to entertain a “ no loss ” argument or allow a real loss to fall into a so-called “ legal black hole ”.

See Orchard Plaza Management Company Ltd v Balfour Beatty Regional Construction Ltd [2022] EWHC 1490 (TCC) .

“ The overriding policy of the law is to provide a real remedy to the person who has suffered real loss arising from the breach of contract. ” Mr Justice Morris, paragraph 55(5)

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Prohibition of assignment clause did not prevent a transfer of rights by operation of law

What happened, what did the court of appeal say, what does this mean for me.

Dassault Aviation SA v Mitsui Sumitomo Insurance Co. Ltd [2024] EWCA Civ 5 involved a contract for the sale of two aircraft and spare parts.

Under the contract, which was governed by English law, Dassault Aviation would sell the aircraft to Mitsui Bussan Aerospace (MBA). Under a separate contract (governed by Japanese law), MBA would subsequently on-sell the aircraft to the Japanese Coastguard.

MBA was concerned that, if Dassault delivered the aircraft late to MBA, this would affect delivery times under MBA’s contract with the Coastguard and MBA could be liable for late delivery to the Coastguard.

To protect itself against this risk, MBA took out an insurance policy from Mitsui Sumitomo Insurance (MSI) (which, despite the name, was not connected in any way with MBA). The insurance policy was governed by Japanese law.

As it happened, the aircraft were delivered late. MBA claimed under the insurance policy, and MSI duly paid the claim.

Under article 25 of the Japanese Insurance Act (No. 56 of 2008), where an insurer pays out under a Japanese policy of insurance, the insurer is automatically subrogated to any claim the policyholder may have in connection with the event that led to the pay-out. In other words, the policyholder’s right to claim damages passes automatically to the insurer.

Essentially, the same position applies in England and Wales under the common law. See the box “ What is subrogation? ” for more information.

In this scenario, this would mean that MBA’s right to claim against Dassault for breach of contract (due to the late delivery by Dassault) would pass to MSI, so that MSI could claim directly against Dassault.

However, the sale contract between Dassault and MBA contained the following clause (the assignment prohibition):

“[T]his 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.”

Dassault argued that the prohibition prevailed and prevented MBA’s rights under the contract from transferring to MSI under the Insurance Act. If correct, this would mean that MSI would have no right to claim against Dassault to recover the amount it had paid out to MBA.

Subrogation is a broad doctrine which essentially states that, if a person (X) pays or discharges a debt or obligation of someone else (Y), then X steps into Y’s shoes and acquires Y’s rights.

Under English law, subrogation applies in a wide range of circumstances, including the following.

• When an insurer pays out to a policyholder . The insurer is subrogated to the policyholder’s rights and can take action in place of the policyholder. For example, an individual might take out buildings and contents insurance on their property and, at some point during the policy term, a leak develops, flooding the property and causing damage. The damage is caused by faulty workmanship by a plumber. The individual may be able to claim against the plumber in negligence but instead claims under their insurance policy. The insurer is subrogated to the claim in negligence against the plumber in place of the individual.
• When a guarantor pays out under a guarantee . For example, a person (X) borrows a sum of money from a lender. Another person (Y) gives a guarantee for X’s obligation to repay the sum. The lender calls on the guarantee and Y repays the sum instead of X. By way of subrogation, Y can bring proceedings against X to claim back the amount Y has paid out to the lender. (This is also described as a right of reimbursement, rather than subrogation.)
• Where a person pays someone else’s secured debt . For example, a person (K) takes out a mortgage loan from a bank, which is secured by a mortgage over K’s property. The mortgage becomes payable, but K’s colleague (L) pays the mortgage off instead of K. Until K reimburses L, L is subrogated to the mortgage security over the property. If K does not reimburse L, L can enforce the mortgage and take possession of the property (and sell it).
• Where an agent pays out for their principal . For example, an individual appoints an agent to negotiate a purchase of land on the individual’s behalf. The purchase contract is settled and the individual is required to pay the purchase price. However, for whatever reason (perhaps for ease), the agent pays the purchase price. The seller transfers the land to the individual. By virtue of subrogation, until the agent is paid back, the agent has all the rights over the land which the seller had before the sale.

Subrogation can be complicated and how it works in practice varies greatly depending on the legal and factual circumstances. In many respects, subrogation is less a doctrine and more a form of remedy which a person who has discharged someone else’s obligations can seek in an appropriate form. The principal point of subrogation is that the person whose obligations have been discharged should not be unjustly enriched by failing to perform those obligations themselves.

However, one common factor to all types of subrogation is that it involves an automatic transfer of rights , which occurs by operation of law and does not require a specific assignment by anyone.

Initially, the dispute was referred to arbitration at the ICC in London. The arbitration panel held (by a majority) that MBA’s rights under the sale contract had transferred to MSI under the Insurance Act.

Dassault appealed to the High Court of England and Wales. The High Court overturned the arbitrators’ decision, finding that the prohibition was wide enough to capture a transfer by operation of law.

The High Court noted the words “by any Party” in the assignment prohibition were ambiguous and needed to be interpreted. It therefore embarked on the traditional process of contractual interpretation that applies when the wording of a contract is unclear. See the box “ How will the court interpret a contract? ” for more information.

It held that the words indicated an element of action or willingness by a Party, and that this was what was required for the prohibition to apply. A transfer would fall outside the prohibition only if it were outside the voluntary control of the transferring party (here, MBA).

In this case, although MBA had not directly assigned its rights to MSI, it had entered willingly into the insurance policy and made a claim under it, with the direct and predictable result that its rights would be transferred to MSI under the Insurance Act. In the High Court’s view, this amounted to an assignment by MBA and was caught by the prohibition.

MSI appealed to the Court of Appeal of England and Wales.

The court re-examined the words “by any Party” and found that they were unambiguous and clear. They covered a transfer effected by a party to the sale contract, but that did not include a transfer that occurred automatically by operation of law (as was the case under the Insurance Act).

The judges disagreed with the High Court’s approach that the key question was whether the transfer was outside MBA’s voluntary control. Rather, it was a simple case of reading the contract to decide whether the transfer had been made by MBA.

It had not. The transfer had taken place automatically under the Insurance Act and so was not prohibited by the assignment prohibition.

In reaching its decision, the court noted that the sale contract between Dassault and MBA contained provisions that specifically contemplated the parties taking out insurance (Dassault insurance against loss or damage to certain specific equipment, and MBA insurance in connection with ferry flight delivering the aircraft).

Although these specific provisions did not cover the insurance policy that MBA had placed with MSI, they did indicate that the parties were happy for insurance to cover the arrangements, suggesting in turn that they understood that rights under the contract might transfer to an insurer.

The court found, therefore, that MBA’s rights had transferred to MSI and the assignment prohibition did not apply.

If the wording of an agreement is clear, the courts will assume that it reflects the parties’ intentions and enforce the literal word of the contract. This will be the case even if the result is unusual or uncommercial.

The only exception to this is where the parties’ agreement is in some way restricted by law. For example, the court may find that a clause is unenforceable as a restraint of trade, a contractual penalty, and unreasonable exclusion or limitation of liability, or an attempt to carry out unlawful acts. In these cases, the courts may be able to strike parts of the contract out to make it work.

However, if the wording of a contract is ambiguous and could have more than one meaning, the court must embark on a process of contractual interpretation (also called construction).

The law on contractual interpretation is now settled, following three landmark cases ( Rainy Sky SA v Kookmin Bank [2011] UKSC 50; Arnold v Britton [2015] UKSC 36; and Wood v Capita Insurance Services Ltd [2017] UKSC 24).

In short, the court will examine the wording of the contract and ascertain what a reasonable person with all the relevant background knowledge at the time of the contract would have understood.

The court will look not only at the text of the contract, but also the surrounding context at the time. This is a single exercise, and the court will not automatically prefer the wording (textualism) over the surrounding circumstances (contextualism) or vice versa. However, the weight the court will give the text and the context will vary depending on the nature and formality of the contract.

If, after doing this, the court finds there is still more than one plausible interpretation of the contract, it will prefer the interpretation that is most consistent with business common sense.

The case shows the importance of formulating any prohibition of assignment provisions properly.

Here, the court felt that the wording of the sale contract was clear. By using the words “by any Party”, the prohibition extended only to direct attempts by a party to assign their rights.

Had those words not appeared (e.g. “ [T]his Contract shall not be assigned or transferred in whole or in part to any third party… ”), the court may have been required to embark on a deeper analysis of the clause to understand whether it would have prohibited transfers by operation of law. Indeed, the court might have concluded that it would have done so.

The case revolved around automatic transfers under Japanese law. The position might well be different under English law. This point was not argued – both Dassault and MSI appear to have accepted that, had the contract been governed by English law, the transfer of rights to MSI would have taken place – and so the court did not need to decide the issue.

But that does not mean that it is impossible to exclude the right to subrogation through a prohibition of assignment, and contract parties may wish to ensure any contractual prohibitions are worded broadly enough that they at least make an attempt to do so.

However, whether this is appropriate will need to be judged on a case-by-case basis, and may be more obviously covered by agreeing a subrogation waiver. For example, it is very common for a buyer of a business to deploy warranty and indemnity (W&I) insurance and for the seller(s) to require the W&I insurer to expressly waive any rights of subrogation.

Conversely, most liability insurance policies contain an express obligation on the insured party not to enter into any agreement with a third party that might restrict the insurer’s right of recovery. A prohibition of assignment that excludes a right of subrogation may do exactly that and could, in theory, invalidate the insurance policy itself.

Where insurance arrangements are contemplated under a contract, the parties should have a mind to the potential implications from an insurance-law perspective, including any potential subrogation following a claim under an insurance policy.

Any contractual provisions that do contemplate insurance are unlikely to stipulate a particular governing law for the insurance, so it may not be possible to make an informed assessment. In addition, the party taking out insurance may well not inform the other party that they are doing so and/or might take out insurance of a type not contemplated by the contract.

In each case, this could lead to a contract party facing legal proceedings under the contract by a third party whose identity is not known at the date of the contract.

Ultimately, where a contract party intends in advance to procure insurance in relation to the subject matter of the contract, it is important to seek legal advice to ensure that the policy and the contract operate smoothly and clearly alongside each other.

Access the court’s decision on whether a contract prohibited an assignment by operation of law ( Dassault Aviation SA v Mitsui Sumitomo Insurance Co. Ltd [2024] EWCA Civ 5)

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English law assignments of part of a debt: Practical considerations

United Kingdom |  Publication |  December 2019

Enforcing partially assigned debts against the debtor

The increase of supply chain finance has driven an increased interest in parties considering the sale and purchase of parts of debts (as opposed to purchasing debts in their entirety).

While under English law part of a debt can be assigned, there is a general requirement that the relevant assignee joins the assignor to any proceedings against the debtor, which potentially impedes the assignee’s ability to enforce against the debtor efficiently.

This note considers whether this requirement may be dispensed with in certain circumstances.

Can you assign part of a debt?

Under English law, the beneficial ownership of part of a debt can be assigned, although the legal ownership cannot. 1  This means that an assignment of part of a debt will take effect as an equitable assignment instead of a legal assignment.

Joining the assignor to proceedings against the debtor

While both equitable and legal assignments are capable of removing the assigned asset from the insolvency estate of the assignor, failure to obtain a legal assignment and relying solely on an equitable assignment may require the assignee to join the relevant assignor as a party to any enforcement action against the debtor.

An assignee of part of a debt will want to be able to sue a debtor in its own name and, if it is required to join the assignor to proceedings against the debtor, this could add additional costs and delays if the assignor was unwilling to cooperate. 2

Kapoor v National Westminster Bank plc

English courts have, in recent years, been pragmatic in allowing an assignee of part of a debt to sue the debtor in its own name without the cooperation of the assignor.

In Charnesh Kapoor v National Westminster Bank plc, Kian Seng Tan 3 the court held that an equitable assignee of part of a debt is entitled in its own right and name to bring proceedings for the assigned debt. The equitable assignee will usually be required to join the assignor to the proceedings in order to ensure that the debtor is not exposed to double recovery, but the requirement is a procedural one that can be dispensed with by the court.

The reason for the requirement that an equitable assignee joins the assignor to proceedings against the debtor is not that the assignee has no right which it can assert independently, but that the debtor ought to be protected from the possibility of any further claim by the assignor who should therefore be bound by the judgment.

Application of Kapoor

It is a common feature of supply chain finance transactions that the assigned debt (or part of the debt) is supported by an independent payment undertaking. Such independent payment undertaking makes it clear that the debtor cannot raise defences and that it is required to pay the relevant debt (or part of a debt) without set-off or counterclaim. In respect of an assignee of part of an independent payment undertaking which is not disputed and has itself been equitably assigned to the assignee, we believe that there are good grounds that an English court would accept that the assignee is allowed to pursue an action directly against the debtor without needing the assignor to be joined, as this is likely to be a matter of procedure only, not substance.

This analysis is limited to English law and does not consider the laws of any other jurisdiction.

Notwithstanding the helpful clarifications summarised in Kapoor, as many receivables financing transactions involve a number of cross-border elements, assignees should continue to consider the effect of the laws (and, potentially court procedures) of any other relevant jurisdictions on the assignment of part of a debt even where the sale of such partial debt is completed under English law.

Legal title cannot be assigned in respect of part of a debt. A partial assignment would not satisfy the requirements for a legal assignment of section 136 of the Law of Property Act 1925.

If an assignor does not consent to being joined as a plaintiff in proceedings against the debtor it would be necessary to join the assignor as a co-defendant. However, where an assignor has gone into administration or liquidation, there may be a statutory prohibition on joining such assignor as a co-defendant (without the leave of the court or in certain circumstances the consent of the administrator).

[2011] EWCA Civ 1083

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Assignment—key cases

Published by a lexisnexis banking & finance expert.

This Practice Note sets out certain key cases and relevant content in relation to assignment. The cases are divided by topic area and include:

Assignment—general points

Assignment—legal (statutory) or equitable

Importance and advantages of giving notice to debtor

Standing to sue debtor where assignment is equitable

Impact of prohibition or restriction on assignment

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Assignment is a legal term whereby an individual, the “assignor,” transfers rights, property, or other benefits to another known as the “ assignee .”   This concept is used in both contract and property law.  The term can refer to either the act of transfer or the rights /property/benefits being transferred.

Contract Law   

Under contract law, assignment of a contract is both: (1) an assignment of rights; and (2) a delegation of duties , in the absence of evidence otherwise.  For example, if A contracts with B to teach B guitar for $50, A can assign this contract to C.  That is, this assignment is both: (1) an assignment of A’s rights under the contract to the $50; and (2) a delegation of A’s duty to teach guitar to C.  In this example, A is both the “assignor” and the “delegee” who d elegates the duties to another (C), C is known as the “ obligor ” who must perform the obligations to the assignee , and B is the “ assignee ” who is owed duties and is liable to the “ obligor ”.

(1) Assignment of Rights/Duties Under Contract Law

There are a few notable rules regarding assignments under contract law.  First, if an individual has not yet secured the contract to perform duties to another, he/she cannot assign his/her future right to an assignee .  That is, if A has not yet contracted with B to teach B guitar, A cannot assign his/her rights to C.  Second, rights cannot be assigned when they materially change the obligor ’s duty and rights.  Third, the obligor can sue the assignee directly if the assignee does not pay him/her.  Following the previous example, this means that C ( obligor ) can sue B ( assignee ) if C teaches guitar to B, but B does not pay C $50 in return.

            (2) Delegation of Duties

If the promised performance requires a rare genius or skill, then the delegee cannot delegate it to the obligor.  It can only be delegated if the promised performance is more commonplace.  Further, an obligee can sue if the assignee does not perform.  However, the delegee is secondarily liable unless there has been an express release of the delegee.  That is, if B does want C to teach guitar but C refuses to, then B can sue C.  If C still refuses to perform, then B can compel A to fulfill the duties under secondary liability.

Lastly, a related concept is novation , which is when a new obligor substitutes and releases an old obligor.  If novation occurs, then the original obligor’s duties are wiped out. However, novation requires an original obligee’s consent .  

Property Law

Under property law, assignment typically arises in landlord-tenant situations.  For example, A might be renting from landlord B but wants to another party (C) to take over the property.   In this scenario, A might be able to choose between assigning and subleasing the property to C.  If assigning , A would be giving C the entire balance of the term, with no reversion to anyone whereas if subleasing , A would be giving C for a limited period of the remaining term.  Significantly, under assignment C would have privity of estate with the landlord while under a sublease, C would not. 

[Last updated in May of 2020 by the Wex Definitions Team ]

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