Introduction
The Court of Appeal decision in MS Amlin Marine NV v King Trader Ltd ([2025] EWCA Civ 1387) marks a significant development in marine insurance law, upholding the enforceability of “pay to be paid” clauses in the context of insolvency but also revisiting Lord Denning’s ‘red hand rule” in English contract law. The case arose from the grounding of the vessel Solomon Trader in February 2019 which led to substantial claims against Bintan Mining Corporation (“the Charterer”). Following the Charterer’s insolvency and winding up, King Trader Ltd (“the Owner”) and The Korea Shipowners’ Mutual Protection & Indemnity Association (“the Club”) sought to recover damages from the Charterer’s insurers under the Third Parties (Rights against Insurers) Act 2010 after an arbitration tribunal found the Charterer liable for over USD 47 million.
Policy terms and dispute
The insurance policy at the centre of the dispute was structured around a certificate and a Booklet containing Charterers’ Marine Liability wording with a maximum cover of USD 50 million. The policy contained a “pay to be paid” clause which required the assured to discharge any liability before being entitled to recover under the policy. As they have been unable to do so, insurers said that they had no liability to the Charterers under policy, and so did not have any liability to the Owners. The Owners challenged this on three grounds: (1) inconsistency; (2) falling foul of the ‘red hand rule’; and (3) incorporation. The Court of Appeal found that the Owners’ position failed on all three grounds. The incorporation ground was swiftly rejected; we will consider below the other two grounds.
Inconsistency
The policy included a hierarchy clause stating that in the event of any conflict, the insuring clause would prevail over the general terms and conditions including the pay to be paid provision. Owners argued therefore that a pay to be paid clause was inconsistent with the insuring clause. The Court of Appeal rejected this, finding that the hierarchy clause clarified the relationship between the policy provisions, such that the pay to be paid clause was seen as qualifying rather than negating the right to indemnity. The court explained that while the indemnity became due when the award was made it was not enforceable until the assured had actually paid the underlying liability. This approach reflects the commercial reality of marine insurance where pay to be paid clauses are standard and widely understood within the market.
Revisiting Lord Denning’s ‘red hand rule’
Owners had also argued that where particularly onerous terms (ie. the pay to be paid clause) are incorporated by reference (ie. are not in the main body of the insurance), they will not be given effect unless the other party’s attention has been specifically drawn to it. This arose from a Lord Denning judgement where he had examined harsh exclusion clauses – the Court of Appeal preferred to label them “onerous clause doctrine”.
The Court of Appeal went on to clearly state the law on this doctrine:
“where a particularly onerous or unusual term of a contract (an onerous clause) 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.”
Owners claimed that a ‘pay to be paid’ clause was “at the top end” on a sliding scale of unfairness. The Court of Appeal rejected this. It noted that such clauses are not unusual in marine policies and their presence does not render them unfair or hidden. The parties involved were of equal bargaining power and the assured’s broker would have been aware of the clause’s implications. The court further clarified that the Third Parties (Rights against Insurers) Act 2010 only negates the effect of pay to be paid clauses in relation to claims for personal injury or death and not for other types of liability.
Implications and conclusion
The implications of this decision are significant for any insurance policy that contains a ‘pay to be paid’ provision. Owners in this instance utilised a number of arguments in order to defeat the provision, but none were accepted by the Court of Appeal, reinforcing their strength and applicability under English law. It also means that where entering into a contract with a party, that they are insured for any liability to you might ultimately be worthless – if there is a ‘pay to be paid’ clause and the contractual party cannot pay and goes insolvent, you will not be able to obtain the insurance proceeds. Seeking pre-contractual disclosure of the insurance policy would be wise to ensure that such provisions are not included or seeking other forms of protection if they are.
