In Stewart v McKenna [2014] IEHC 301, the Irish High Court considered whether a purported assignment of the benefit of an insurance policy, and an arbitration clause contained therein, was valid against the insurer.

Speedread

The Irish High Court has held that the assignment of the benefit of an insurance policy, including the arbitration clause, was valid against the insurer.

The court found that the assignees could elect to join in a pending arbitration but were not obliged to do so. They were also free to sue the insurers by way of court proceedings, if they did not proceed to arbitration, as they were not parties to the insurance policy and thus were not bound by its terms, including the arbitration clause. The court noted that the assignees were beneficiaries of an assignment agreement, rather than a novation agreement. Consequently, they were not precluded by the obligation (or burden) to arbitrate or the fact that there had been a valid referral to arbitration from suing the insurer by way of court proceedings.

The court held that an assignee does not automatically become a party to a pending arbitration on an assignment taking effect, as the tripartite nature of arbitration requires that notice be given to the other party and also to the arbitrator.

This decision serves as a warning to commercial parties that, in the absence of any contractual terms prohibiting or restricting the parties from assigning their rights pursuant to a contract, a party may assign the benefit of a contract to a third party. In such an instance, as the third party assignee is not a party to the contract, it will not take on any of the burden of that contract, including any arbitration clause.

Background

Section 62 of the Civil Liability Act 1961 provides for the application of monies under certain policies of insurance:

"Where a person (hereinafter referred to as the insured) who has effected a policy of insurance in respect of liability for a wrong, if an individual, becomes a bankrupt or dies or, if a corporate body, is wound up or, if a partnership or other unincorporated association, is dissolved, moneys payable to the insured under the policy shall be applicable only to discharging in full all valid claims against the insured in respect of which those moneys are payable, and no part of those moneys shall be assets of the insured or applicable to the payment of the debts (other than those claims) of the insured in the bankruptcy or in the administration of the estate of the insured or in the winding-up or dissolution, and no such claim shall be provable in the bankruptcy, administration, winding-up or dissolution."

Facts

The first and second defendants, Mr and Mrs McKenna, had building works carried out to their house by the third defendant, Kapada Ltd t/a Homebuilder (a company of which Mr McKenna was a director and shareholder). Mr and Mrs McKenna, and Kapada, were insured by Allianz plc: Mr and Mrs McKenna pursuant to a standard household policy and Kapada pursuant to a standard building contractor's policy.

In July 2009, the plaintiff, Mrs Stewart, the next-door neighbour of the McKennas, commenced proceedings against all of the defendants. She alleged that Kapada had caused damage to her property in the course of carrying out the building works.

On 26 March 2010, Allianz advised the McKennas and Kapada, then in liquidation, that they were not entitled to an indemnity in respect of Mrs Stewart's claim against them. On 23 March 2011, Kapada, acting by its liquidator, assigned to Mr and Mrs McKenna the benefit of the insurance policy and the entitlement to receive any sums payable thereunder.

Mr and Mrs McKenna disputed that Allianz was entitled to avoid the policy and called upon Allianz to submit that dispute to arbitration. Allianz refused to do so, and asserted that under the terms of the policy such a dispute must be referred to arbitration within 12 months and that, since the dispute in issue was not referred to arbitration within this timeframe, it was deemed to have been abandoned. Mr and Mrs McKenna contended that, independently of any rights that they enjoyed as assignees of the Allianz policy, the effect of section 62 of the Civil Liability Act 1961 was to confer on them an entitlement to procure payment to themselves of any insurance monies that may be paid by Allianz to Kapada. They claimed that, assuming that Allianz was not entitled to repudiate the policy, monies should be payable by Allianz to Kapada, and those monies should be ring-fenced from the creditors of Kapada and available to Mr and Mrs McKenna pursuant to section 62.

Decision

The court held that the assignment of the benefit of the insurance policy, including the arbitration clause, was valid. The assignees could elect to join the arbitration proceedings, but were not obliged to do so.

Validity of assignment

The first preliminary issue was whether Mr and Mrs McKenna had a legal entitlement to seek and/or obtain an indemnity pursuant to the applicable insurance policy made between Allianz and Kapada.

The court found that the assignment of the benefit of the policy was valid, and that Allianz was on notice of that assignment. Therefore, Allianz, if required to make a payment under the policy, was now bound to make such payment to Mr and Mrs McKenna.

Barrett J. noted that there was nothing in the form of the policy prohibiting its assignment, nor any requirement that such assignment be in a particular form. Furthermore, it did not appear from case-law that the consent of the insurer was required in respect of an assignment. The court did not consider that notice to the insurer of the assignment was legally required in order to complete the McKennas' title, but it was a practical necessity to avoid the risk to assignees of a debtor continuing to treat an assignor-creditor as his creditor and to discharge his debt by payment to that assignor.

The court rejected the contention by the McKennas that section 62 of the Civil Liability Act 1961 entitled them to procure payment to themselves of any insurance monies that might be paid by Allianz to Kapada. Pursuant to section 62, where a legal person (that is, Kapada) who has effected a policy of insurance is wound up, monies payable to the insured under the policy shall be applicable only to discharging in full all valid claims against the insured in respect of which those monies are payable, and shall not go towards disappointed creditors of the liquidated entity.

The court held that Mr and Mrs McKenna did not come within, and could not avail of, section 62 of the Civil Liability Act 1961, as they had not secured judgment against Kapada in respect of such liabilities as allegedly arose between them and Kapada. It is also worth noting that, on 4 April 2011, Mrs Stewart was granted judgment in default of defence against Kapada. However, because of the assignment of 23 March 2011, no monies were payable, at the time of judgment, to Kapada by Allianz; instead those monies were required to be remitted to Mr and Mrs McKenna.

Abandonment of claim

The second preliminary issue was whether Mr and Mrs McKenna had a legal entitlement to seek and/or obtain an indemnity pursuant to the policy and whether that claim had been abandoned pursuant to clause 11 of the policy by not having been referred to arbitration within 12 calendar months from the date of disclaimer of the liability (that is, 26 March 2010). Further, the court considered whether Mr and Mrs McKenna were entitled to an extension of time under section 45 of the Arbitration Act 1954.

The court held that the solicitors for the defendants had, on 13 October 2010, validly put Allianz on notice that the liquidator of Kapada intended to refer the issue of the indemnity to arbitration. The court further held that the benefit of the insurance policy, including the arbitration clause, was validly assigned to Mr and Mrs McKenna on 23 March 2011. As assignees of a chose in action, Mr and Mrs McKenna were entitled to commence an arbitration in their own name. The court was not aware of any Irish authority that precludes an assignee from joining in a pending arbitration and was aware of at least one English case where this was expressly allowed, namely The Jordan Nicolov [1990] 2 Lloyds' Rep. 11.

However, the court noted that an assignee does not automatically become party to a pending arbitration on an assignment taking effect in equity. The tripartite contractual nature of arbitration further requires that notice be given to the other party to the dispute and also to the arbitrator. In this case, an arbitrator had not yet been appointed.

Accordingly, the court found that the McKennas were not a party to the live arbitration commenced by their solicitors' letter of 13 October 2010, which had remained live, albeit in a state of stasis ever since, given the continuing failure to appoint an arbitrator. However, the McKennas could make a submission to join the arbitration proceedings which were commenced on 13 October 2010, or they could also elect not to do so.

It was not necessary for the court to rule on the issue of an extension of time under section 45 of the Arbitration Act 1954, but the court noted that the 1954 Act had been repealed by the Arbitration Act 2010. The latter Act applies to all arbitrations commenced on or after 8 June 2010, which would include the current dispute.

Obligation to arbitrate

The third preliminary issue concerned whether Mr and Mrs McKenna had a legal entitlement to seek and/or obtain an indemnity pursuant to the Allianz insurance policy and, if such a claim had not been abandoned pursuant to clause 11 of the policy conditions, whether that claim must be brought by arbitration pursuant to clause 11.

The court considered that the McKennas were eligible to submit to the jurisdiction of the arbitrator as may be appointed pursuant to clause 11, however they were not obliged to do so. As assignees under the Allianz policy, the McKennas were not parties to the policy, and thus not bound by its terms, including the arbitration clause. Accordingly, they could sue Allianz in its alleged capacity as debtor provided that they had not previously proceeded to arbitration.

Comment

This decision demonstrates that, in the absence of any prohibition or restriction on an assignment, a party may validly assign the benefit of a contract, which is subject to an arbitration agreement, to a third party. It shows that the third party assignee will not be bound by the obligation to arbitrate contained in that contract, nor will the assignee automatically become a party to any pending arbitration. Rather, the assignee may elect to join any pending arbitration by giving notice to the other party and to the arbitrator. However, an assignee will also be free to litigate his or her claim in the event that he or she does not elect to proceed to arbitration.

It is worth noting that, in England, it appears that the courts have adopted a different approach. The case of Schiffahrtsgesellschaft Detlev von Appen G.m.b.H. v Voest Alpine Intertrading G.m.b.H. (The 'Jay Bola') [1997] 2 Lloyd's Rep. 279 shows that, as a matter of English law, where contractual rights are assigned, the assignee will usually be bound by any applicable arbitration agreement contained in the original contract. The assignee therefore takes the transferred rights with both the benefit and the burden of the arbitration clause.

Case

Stewart v McKenna [2014] IEHC 301