The English Court of Appeal today handed down judgment in the Solomon Trader appeal, dismissing the appeal and confirming the continuing validity of pay first clauses in the context of marine liability insurance policies.
Campbell Johnston Clark acted for the successful P&I underwriters, who were represented at trial by John Passmore KC and Caleb Kirton of Quadrant Chambers.
Alistair Johnston, Maria Borg Barthet, Richard Hickey, and Dimitris Kroustallis summarise the judgment in MS AMLIN MARINE NV v King Trader Limited and Others [2025] EWCA Civ 1387. A full copy of the judgment can be found here.
Facts
In February 2019, the Solomon Trader grounded in the Solomon Islands. In a subsequent Hong Kong arbitration, the Charterers were held liable to the Owners and ordered to pay around USD 47 million in damages.
At the time, the Charterers were insured by MS AMLIN for charterers’ liability risks. After the incident, the Charterers became insolvent and could not satisfy the arbitration awards, prompting the Owners to pursue MS AMLIN directly for payment under the insurance policy.
It was common ground that Owners and their insurers were entitled to claim against MS AMLIN under the Third Parties (Rights against Insurers) Act 2010, subject to the operation of the pay to be paid rule found in MS AMLIN’s policy.
MS AMLIN commenced proceedings against Owners, Charterers, and Owners’ insurers, seeking declarations that: (a) the policy incorporated the pay to be paid clause, and (b) the clause would survive any transfer of rights to Owners and/or their insurers under the Third Parties (Rights against Insurers) Act 2010 (“Act”).
High Court judgment
The first instance judgment was handed down by Foxton J on 16 July 2024. In short, the judgment upheld the validity of MS AMLIN’s pay to be paid rule. A copy of CJC’s article at the time can be found here.
Court of Appeal judgment
The appeal was heard by the Master of the Rolls, Lord Justice Males, and Lord Justice Singh. It is worth reading in full for the helpful guidance it offers on a range of points, but in particular as to the scope of the so-called ‘red hand’ doctrine, which had previously been somewhat uncertain. The three main arguments raised on appeal were:
Inconsistency
The Appellants argued that the terms of the insurance policy were inconsistent. They argued that on the one hand the insurance policy required insurers to indemnify the policyholder when an arbitration award established their liability, whereas the pay first clause provided that there was no right of recovery until that award was paid. How, the Appellants asked, could those two terms be read together?
Having reviewed the key judgments in this area, the Court of Appeal applied the legal test as summarised by Males LJ in The Nounou [2021] which focused on whether one term deprived the other term of any effect. Applying this test, the Court held that there was no inconsistency.
Red hand
The part of the judgment that dealt with the so-called ‘red hand’ argument is particularly interesting, since it deals with a point that does not arise often in the commercial context and was of somewhat uncertain application up until now. It is now clear that:
- The red hand doctrine does exist, although a better phrase might be ‘the onerous clause doctrine’;
- It can be applied both to consumer and commercial contracts;
- The threshold needed to establish that a clause is onerous or unusual is high;
- The doctrine is unlikely to apply in commercial contracts where the parties are of broadly equal bargaining power;
- The doctrine is unlikely to apply where the challenged clauses in question are usual terms regularly encountered in the business; and
- Where it does apply, the doctrine means that the clause in question will not apply unless it can be shown that it was fairly and reasonably brought to the other contracting party’s attention.
Applying this test to the facts, the Court of Appeal did not hesitate to find that the onerous clause doctrine had no application on the facts. Pay first clauses were not unusual in the P&I context, and were not in any case generally onerous. In addition, the policyholder in this case had been represented by professional brokers who should have advised them of any important terms such as this, and the parties were of roughly equal bargaining power.
Incorporation
Finally, the argument that MS AMLIN’s general terms and conditions were somehow not incorporated into the policy was dealt with very briefly as an entirely unsustainable point.
Judgment
The Court of Appeal upheld the first instance judgment.
Conclusion
The Court of Appeal endorsed the reasoning of the judge in the court of first instance, reaffirming that a pay to be paid provision does not become onerous or unusual merely because of the potential hardship it may cause to an insured (or third parties) in the event of insolvency. Rather, such clauses are a recognised and longstanding feature of the marine insurance market.
This outcome will be welcomed by both commercial and mutual marine insurers.