Onerous clauses and 'pay first' in marine policies

The Court of Appeal has restated the principles governing incorporation of onerous contractual terms concerning 'pay-first' clauses in marine insurance policies and has also considered their enforceability under the Third Parties (Rights Against Insurers) Act 2010 (the 2010 Act).

Case background: MS Amlin v King Trader

In February 2019, Bintan Mining Corporation (the charterer) chartered a vessel from King Trader Ltd (owner), which grounded in the Solomon Islands. King Trader and its Protection and Indemnity Association obtained an arbitration award for over US$47m against the charterer in March 2023. However, the charterer had been wound up in the BVI in March 2021 and in London in April 2024.

King Trader therefore sought to claim directly against the charterer’s marine insurer, MS Amlin Marine NV, under the 2010 Act . 

However, the policy contained a 'pay-first' clause which required the insured to pay and discharge any liability before claiming from the insurer, therefore MS Amlin denied the claim on this basis. 

The contentious clause appeared in a standard form booklet but was not referenced in either the insurance certificate or the insuring clause, leading the claimants to challenge its incorporation and enforceability.

The onerous clause doctrine

The Court was required to look at the "red hand rule" - Lord Denning's famous dictum that harsh clauses "would need to be printed in red ink on the face of the document with a red hand pointing to it" for adequate notice. 

The Master of the Rolls in this case renamed this the 'onerous clause doctrine', stating it applies where a particularly onerous or unusual term in standard terms binds the other party only if fairly and reasonably brought to their attention.

However, the Court of Appeal established a 'high threshold' for this doctrine, particularly in commercial contexts between parties of broadly equal bargaining power, as here, the insured was represented by a specialist broker. The Court of Appeal suggested the doctrine could never apply where a party engages professional brokers or advisers, who should have explained important or onerous terms.

Application to pay-first clauses

The Court of Appeal concluded that the onerous clause doctrine was not engaged and therefore the pay-first clause was incorporated and enforceable, and that it had survived the transfer of rights under the 2010 Act. 

It is true that the 2010 Act generally invalidates pay-first clauses, however Parliament deliberately carved out in the 2010 Act marine insurance policies where liability does not involve death or personal injury. This legislative choice was an important part of the Court's reasoning.

Pay-first clauses are common in marine insurance, making them neither unusual nor sufficiently onerous to trigger the doctrine. 

Conflict between terms

The claimants also argued that the pay-first clause contradicted the insuring clause, relying on a hierarchy provision stating that in case of conflict, terms in the insurance certificate or insuring clause would prevail. 

The Court of Appeal rejected this argument, finding no conflict existed. The pay-first clause qualified and supplemented the insuring clause "admittedly in a very significant way", rather than negating it. 

The indemnity became due when the arbitration award was made, but enforcement was conditional upon prior payment.

The clauses could be read together sensibly, consistent with business common sense given pay-first clauses are long-established in insurance and reinsurance. The Court of Appeal therefore dismissed the appeal.

Significance for insurers

This decision confirms that pay-first clauses will rarely be successfully challenged in marine insurance contexts, particularly where professional intermediaries are involved. Parliament's deliberate decision not to outlaw such clauses in marine insurance when passing the 2010 Act reinforced the Court's conclusion. 

The decision provides essential guidance on the onerous clause doctrine's modern application in commercial contracts.