The Court of Appeal applied ordinary black letter contractual interpretation in construing a non-assignment clause in a contract for sale.
As the Court of Appeal stated:
"At its core, this appeal raises a single issue of contractual interpretation."
The appeal considered whether a party who entered into an insurance contract to protect against the late delivery of two planes which resulted by reason of Japanese law in the automatic assignment of its interest in the planes could be considered to have violated a non-assignment clause in the sale contract.
The Court of Appeal applying the usual rules of construction found that the non-assignment clause was only engaged where a party was responsible for the assignment and not where assignment occurred independently of the party, on the facts of this case by the operation of Japanese Law.
Dassault Aviation SA v Mitsui Sumitomo Insurance Co Ltd [2024] EWCA Civ 5
What are the practical implications of this case?
The case will be of general interest to those considering principles of contractual interpretation.
The more specific interest in this case will be those drafting and advising on non-assignment clauses. If a blanket prohibition on assignment is intended, then clear and express drafting will be required.
In Dassault Aviation, the Court of Appeal have made it clear that it is not sufficient to argue that a party ought to have known or even actually knew that assignment was a likely consequence of their actions where the act of assignment is not the party's act and instead arise by operation of law.
It is possible to characterize the Court of Appeal's approach as a strict black letter approach.
This black letter approach is particularly apparent when set against the purposive approach taken by the Judge at first instance who found that where the contracting party knew that assignment was a consequence of their action, come within the scope of the clause.
What was the background?
The clause to be construed by the Court on the appeal was a non-assignment clause in a contract dated 6 March 2015 for the sale of two Falcon maritime surveillance aircraft and spares (the "Aircraft") from Dassault in France to Mitsui Bussan Aerospace Co. Ltd. ("MBA") in Japan (the "Sale Contract").
The Sale Contract was governed by English law.
The Aircraft were, however, to be sold on by MBA to the Japanese Coast Guard under a purchase contract of the same date governed by Japanese law (the "Sub-Sale Contract").
Article 15 in the Sale Contract (article 15) was headed "assignment – transfer" and provided as follows:
"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" [emphasis added].
The proper interpretation of article 15 arose because Dassault challenged the jurisdiction of the English arbitrators.
MBA had entered into a contract of insurance with MSI on 30 September 2017 (the "Insurance Contract") to insure the risk of MBA being held liable to the Japanese Coast Guard for late delivery of the aircraft. The aircraft were indeed delivered late.
MBA duly claimed against MSI under the Insurance Contract and MSI duly paid agreed liquidated damages due under the Sub-Sale Contract to the Japanese Coast Guard.
The arbitrators decided, and it was common ground before the Court of Appeal, that, as a result of the payment made by MBA's insurers (MSI), MBA's claims against Dassault were transferred to MSI by operation of law under article 25 of the (Japanese) Insurance Act (Act No. 56 of 2008) (article 25).
The insurance contract also provided (by article 35) for the transfer of third-party damages claims from MBA to MSI, but the arbitrators also decided that the transfer of rights in this case had not taken place under that provision.
The arbitrators (by a majority) decided that, because the transfer of the third-party claims from MBA to MSI was by operation of law under article 25, Dassault's consent was not necessary under the prohibition of assignment in article 15. Accordingly, the majority held that the arbitral tribunal had jurisdiction to deal with MSI's direct claim against Dassault.
One arbitrator dissented on a single point, holding that any transfer of rights from MBA to MSI under the Insurance Contract "would be the consequence of the voluntary decisions of MBA and MSI to enter into [the Insurance Contract]"
Dassault appealed to the High Court under section 67 of the Arbitration Act 1996 .
The judge at first instance (Cockerill J) allowed the appeal, deciding that the arbitrators had no jurisdiction to decide the dispute between MSI and Dassault.
As the Court of Appeal noted the Judge expressly reached that conclusion with an unusual degree of hesitation [121]. The Court of Appeal summarised the Judge's conclusions in these terms (with square bracket references to the paragraph numbers in her Judgment):
- A series of old authorities delineated, in relation to non-assignment clauses, a distinction between willing/voluntary and unwilling/ involuntary transfers [112].
- The wording of article 15 pointed towards its general application, subject only to what was saved by the words "by any party", which could perfectly well accommodate "[t]he same degree of voluntariness indicated in the authorities" [113].
- The context/commercial purpose indications were not sufficiently clear or weighty to displace the position indicated by a consideration of the words [119].
In essence, the Court of Appeal noted, the judge decided that article 15 of the Sale Contract caught and prohibited the transfer of MBA's claims to MSI under article 25 (of the Insurance Act).
The Appellant's position is well capture in a single paragraph by the Court of Appeal (paragraph 8):
"On this appeal, MSI contends that the plain meaning of article 15 is that the sale contract cannot be assigned or transferred "by any Party". MBA did not transfer its claims under the sale contract to MSI. Those claims were transferred to MSI by operation of law under article 25, as the arbitrators unanimously held and was not challenged by Dassault here or below. A transfer by operation of law is not one made "by any Party". Moreover, the authorities support the proposition that an assignment by operation of law does not violate a non-assignment provision." (emphasis added)
The Respondent supported the reasoning of the Judge at first instance.
What did the court decide?
The Court allowed the appeal and set out its summary finding (at paragraph 11) in these terms:
"I have decided that the arbitrators were right about the proper interpretation of article 15 for the reasons that follow. The essential point is that I do not think that the words of article 15 are ambiguous or unclear. They prevent any transfer that is effected by a party to the sale contract, but not a transfer that is effected by operation of law. It is not, therefore, necessary to consider whether the commercial matrix of fact points in favour of one of two possible meanings of article 15. But even if one could, it is far from clear that article 15 was intended to catch transfers arising from insurance payouts, by whatever law those insurance contracts might be governed."
On the applicable authorities applied by the judge at first instance, the Court of Appeal opined that (at paragraphs 19-20):
"19. The judge seems to have derived such a principle primarily from Rowlatt J's judgment in Cohen v. Popular Restaurants [1917] KB 480 . In that case, a lease contained a covenant not to assign without consent, such consent not to be unreasonably withheld to a respectable and responsible person. The question was whether an assignment by a liquidator appointed in a members' voluntary winding up of the tenant company to "a married woman of no financial position" was caught by the nonassignment clause. Rowlatt J distinguished the bankruptcy and compulsory winding up cases, holding that in those cases, an assignment was not a voluntary act. Conversely, in Cohen , "[t]he assignment was the act of a liquidator brought into existence by the voluntary act of the company, the passing of a special resolution to wind up the company voluntarily".
"20. It seems to me that the old insolvency cases do not enunciate a general principle applicable to the interpretation of nonassignment clauses in commercial contracts. Instead, they seem to me mostly to turn on the nature of the insolvency under which the transfer in question took place." (emphasis added)
The Court of Appeal then set out Supreme Court decisions Rainy Sky SA v. Kookmin Bank [2011] UKSC 50 (Rainy Sky) and Wood v. Capita Insurance Services Limited [2017] UKSC 24 which augur for objective interpretation based on the ordinary language deployed set against the full factual matrix and set in the contracts proper commercial context (and business common sense). The proper is unitary (the Court will strive for a single meaning) and iterative (each word depends on the fuller contract for its meaning).
Applying this approach to construing the Sale Contract, the Court of Appeal found that:
- The relevant assignment caught by Article 15 was an assignment "by any Party".
- The remainder of the clause maintained a reference to an assignment "by any Party" by referring to back to the first part of the clause by use of the words "any such assignment".
To come within the non-assignment clause, the assignment had to be made by MBA and it was not it was made by operation of law.
The Court of Appeal rejected the judge's finding that Article 15 allowed of two competing interpretations: see paragraphs 31-32.
Disposing of the question of whether the assignment was a direct "consequence of the voluntary decisions of MBA and MSI to enter into the insurance contract", the Court of Appeal stated (at paragraph 29):
"But that was not, in my judgment, the correct question. The correct question was whether the transfer was made by MBA, not whether the transfer was caused as a consequence of certain actions taken by MBA. The transfer was, as the arbitrators decided, not made by MBA. The transfer was made by operation of law." (emphasis added)
Case details
- Court: Court of Appeal
- Judge: Sir Geoffrey Vos , Master of the Rolls Lord Justice Coulson and Lord Justice Phillips
- Date of judgment: 12 January 2024
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
