Paul Bugden, Bugden + Co., London
Ref: MS Amlin Marine NV v King Trader Ltd [2025] EWCA Civ 1387
This appeal concerned the proper interpretation of a marine insurance policy issued by the claimant insurer, MS Amlin Marine NV to the second Defendant, Bintan Mining Corporation as charterer and insured in respect of the charterer’s liability risks.
King Trading Ltd as owners time-chartered the Solomon Trader to the Charterer by a time charterparty during the course of the performance of which the Solomon Trader grounded in the Solomon Islands. The Owner and the third Defendant, the Korea Shipowners’ Mutual Protection & Indemnity Association, obtained an award on 14 March 2023 against the Charterer in LMAA arbitration in Hong Kong. The Award against the Charterer, together with costs and accrued interest, exceeded US$47 million. The Charterer was wound up in the BVI in March 2021, and in London in April 2024.
The Insurer issued proceedings seeking declarations that (i) a “pay to be paid” or “pay first” clause in the Policy (the “pay first clause”) was enforceable by the Insurer against the Charterer in respect of its liability under the Award, and (ii) the pay first clause survived the transfer of rights to the Owner and the Club under the Third Parties (Rights against Insurers) Act 2010. In other words, the Insurer claimed that its pay first clause (which was found at clause 30.13 of the Policy) meant that it did not have to indemnify the Charterer against its liability under the Award. The Charterer had not paid and could not pay the Award, because of its insolvency. As a result, the Insurer said that the proper interpretation of the Policy meant that it had no liability to the Owner and the Club, even if the Charterer’s liabilities passed to the Insurer under the 2010 Act.
The trial judge made declarations that: (i) the pay first clause was incorporated into the Policy, (ii) the pay first clause was enforceable against the Charterer, (iii) the true interpretation of the Policy meant that no indemnity was payable by the Insurer in respect of any liability that the Charterer had not discharged, and (iv) the pay first clause survived any vesting of the Charterer’s rights under the Policy in the Owner and the Club under the 2010 Act.
The Owners and the Club appealed on two main grounds arguing that the pay first clause should not be given effect because: (a) it was inconsistent with the insuring clause, and/or (b) it fell foul of the so-called “red hand doctrine”, as an onerous or unusual clause not brought fairly and reasonably to the Charterer’s attention.
The argument as to inconsistency was that the Certificate referring to “Charterers’ Liability including Liabilities for damage to Hull -Class 1”, and the insuring clause in part 1, providing, as it did, for the Insurer to indemnify the Charterer against its legal liabilities under the Award, were fundamentally inconsistent with the pay first clause in the general conditions. The two clauses, so it was argued, could not sensibly be read together especially as the two clauses were in different documents. The insuring clause was in the Certificate but the pay first clause only in the General Terms and Conditions.
The court however was not persuaded by these submissions and declined to hold that there was any inconsistency or conflict between the Certificate and the insuring clause on the one hand and the pay first clause on the other hand for the following reasons:-
- i) The pay first clause did not negate the insuring clause. It qualified and supplemented it; admittedly in a very significant way. Moreover, it does not make the qualifying provision inconsistent or repugnant, just because a wide and absolute provision is subject to limitation, modification or qualification.
- ii) In this case, the indemnity, as the judge said, fell due when the Award was made, but that indemnity could not be enforced until the insured had paid the claim. That is a qualification, not a negation of the indemnity.
iii) The legal background to pay first clauses demonstrates that they are a qualification to the insuring clause, not a complete negation of it. They are commonly used in the insurance and reinsurance industry. Parliament decided not to outlaw their use in contracts of marine insurance save to the limited extent I have outlined above (death and personal injury cases). The insuring clause has its full effect whenever the insured discharges a judgment or award. The mischief of the pay first clause only kicks in when insolvency of the insured supervenes. It is not enough if one term qualifies or modifies the effect of another; to be inconsistent a term must contradict another term or be in conflict with it, such that effect cannot fairly be given to both clauses”. That is not the case here.
As to the alternative red hand ground of appeal the court held that there was a principle of interpretation that where a particularly onerous or unusual term of a contract is contained in one party’s standard terms, and where the other contracting party does not actually know of that term, it will not bind the other contracting party unless the party seeking to rely upon it shows that the clause in question (whether individually or as part of the standard terms) was fairly and reasonably brought to the other contracting party’s attention. The parties called this the “red hand doctrine” but the court preferred to call it the “onerous clause doctrine”.
The usual nature of a clause does not automatically mean that it is not onerous but it does mean that such a clause is less likely properly to be regarded as onerous especially between two commercial parties and the authorities emphasise not only the high threshold needed to establish that a clause is onerous or unusual, but the fact that it is unlikely to have any application in commercial contracts where the parties are of broadly equal bargaining power, and where the challenged clauses in question are common form or usual terms regularly encountered in the business.
The Court also observed that the doctrine was unlikely to have any application to purely commercial transactions in financial markets such as insurance, where the party relying on the doctrine is represented by professional agents, whose duties will presumably include explaining the meaning and effect of the contracts it concludes for its principal, the insured.
The Owners and the Club had argued before the trial judge that the pay first clause was hidden away in the thickets of the Policy. The judge had rejected that argument on the ground that there was clear reference in the Certificate to the general provisions in the cover booklet and that general terms and conditions were commonplace in insurance policies. On that basis, the judge held that the pay first clause was not a fox in the henhouse or a wolf in the flock. He said that “[i]n a contract of marine insurance providing, in effect, P&I-type cover, the presence of a “pay first” provision cannot fairly be described as a bolt from the blue”.
Here the court was entirely satisfied that the judge was right to conclude that the pay first clause did not engage the onerous clause doctrine. It observed that Pay first clauses are commonly deployed by both P&I Clubs and in marine insurance generally and whilst the pay first clause does, have a serious and significant effect in the event of the insolvency of the Insured, it did not, in the court’s judgment reach the high threshold required to engage the onerous clause doctrine.
Common form or usual terms regularly encountered in the relevant business were not covered by the doctrine and the argument that the pay first clause was hidden away could not avail the Owners and the Club when the Insured was as here represented by a professional marine insurance broker. That broker ought to have drawn the Insured’s attention to it but all the same it went on to observe that even if there had been no insurance broker acting for the Charterer there was clear reference in the Certificate to the general provisions in the policy documents, so that any reader of the Certificate and the insuring clause would have appreciated that there were general conditions. This was a commercial contract between parties of broadly equal bargaining power, in which the court should be slow to intervene.