Court Of Appeal Recasts "Red Hand Doctrine" As The "Onerous Clause Doctrine"

The Court of Appeal in MS Amlin Marine NV on behalf of MS Amlin Syndicate AML/2001 -v- King Trader Ltd & others (Solomon Trader) [2025] EWCA Civ 1387upheld the enforceability of a "pay first" clause in a marine insurance policy, allowing the insurer of an insolvent insured to rely on the provision to avoid liability to third parties seeking to bring a direct claim against the insurer under the Third Parties (Rights against Insurers) Act 2010 (the 2010 Act).

The decision considered the extent to which the clause had been validly incorporated into the policy and contains discussion of the case law on the "red hand rule" in relation to onerous clauses. The judgment also discusses the duty of insurance brokers to bring any onerous or unusual clauses to their clients' attention with Males LJ noting that it would be unlikely that the red hand doctrine could ever be applied where an insured was represented by specialist insurance brokers who can be expected to be familiar with the terms available in the market.

BACKGROUND

In May 2017, King Trading Limited (the Owner) time-chartered a vessel to Bintan Mining Corporation (the Charterer or the Insured). On 28 March 2018, the Charterer took out a charterers' liability insurance (the Policy) with insurer MS Amlin Marine NV (the Insurer) which provided cover for 12 months. The Charterer was represented throughout the placement of the policy by a professional insurance broker.

The vessel grounded in the Solomon Islands in February 2019, following which the Charterer went into liquidation and was wound up in the BVI on 25 March 2021, and in London on 24 April 2024.

On 14 March 2023, an LMAA Arbitration Tribunal found the Charterer liable in damages to the Owner and its Protection and Indemnity Club (P&I Club) in respect of the grounding and made an award of over US$47 million, including interest and costs, in favour of the Owner and the P&I Club (the Award).

Due to the Charterer's insolvency, the Owner and P&I Club, as "relevant persons" under the 2010 Act, were entitled to bring a direct claim against the Insurer, as the Charterer's rights under the Policy had been transferred to and vested in them pursuant to section 1 of the 2010 Act.

The Policy

The Policy took the form of a Certificate of Insurance and wording entitled "Charterers' Liability: Marine Liability Policy 1 – 2017". The Policy wording was divided into 5 parts: Parts 1-4 set out the clauses for different types of cover, with Part 1 containing the relevant insuring clause. Part 5, headed "General Terms and Conditions", included the following provisions:

• Clause 25, a "hierarchy clause", which provided that the terms and conditions set out in each Class of Insurance (including Part 1 and the insuring clause) would prevail over the general terms and conditions in the event of a conflict between them but any terms appearing in the Certificate of Insurance would prevail above all others; and
• Clause 30, the relevant "pay first" clause with the following wording:

In 2022 the Insurer issued proceedings seeking declarations that the "pay first" clause in the Policy was enforceable by it against the Insured in respect of its liability under the Award, and that the "pay first" clause survived the transfer of rights to the Owner and the P&I Club under the 2010 Act. In other words, the Insurer claimed that the "pay first" clause in the Policy meant that it did not have to indemnify the Insured as the Insured had not paid itself and could not pay the Award because of its insolvency. It therefore followed that the Insurer had no liability to the Owner and the P&I Club.

FIRST INSTANCE DECISION

The Commercial Court found the "pay first" clause had been incorporated into the Policy and was enforceable, holding that no indemnity was payable by the Insurer in respect of any liability not discharged by the Charterer. As a result, the Insurer did not have to indemnify the Charterer for its liability under the Award, as the Charterer had not discharged it. For full analysis of this decision (as well as an overview of the genesis of "pay to be paid" clauses given in that judgment) see this article on our Insurance Blog here: The application of "Pay to be Paid" clauses in the context of a claim under the 2010 Act.

The Owner and the P&I Club appealed on three grounds:

• That it was not incorporated into the Policy (the incorporation ground);
• That the pay first clause was inconsistent with the Certificate of Insurance and the insuring clause (the inconsistency ground); and
• That it fell foul of the so-called "red hand doctrine", because it was an onerous or unusual clause, and was not brought fairly and reasonably to the Charterer's attention (the red hand ground).

COURT OF APPEAL DECISION

The Court of Appeal dismissed the appeal, finding that none of the grounds could succeed and upheld the Commercial Court's decision.

The incorporation and inconsistency ground

The Court of Appeal found that the policy documents validly incorporated the "pay first" clause, as the Certificate of Insurance expressly referred to the Marine Liability Policy wording, which contained the general terms and conditions. Without these provisions, the Policy would lack essential terms typically found in marine insurance.

The Court also found that there was no conflict or inconsistency between the insuring clause and the "pay first" clause as it did not negate the indemnity obligation, rather it qualified and supplemented it, albeit "admittedly in a very significant way". Both provisions could be read together: the Insurer's obligation to indemnify arose when liability was established, but recovery was conditional on prior payment by the Insured.

The red hand or onerous clause ground

The Owner and P&I Club argued that there was principle of interpretation that, where terms were incorporated by reference, a particularly onerous term was not to be given effect unless the other party's attention had been specifically drawn to that term – the red hand or onerous clause doctrine. They relied on six cases in support of this doctrine: J Spurling Ltd v. Bradshaw [1956] 1 WLR 461, Thornton v. Shoe Lane Parking Ltd [1972] 2 QB 163, Interfoto Picture Library Ltd v. Stiletto Visual Programmes Ltd [1989] QB 433, Goodlife Foods Ltd v. Hall Fire Protection Ltd [2018] EWCA Civ 1371, Bates v. Post Office Ltd (No 3: Common Issues) [2019] EWHC 606 (QB) and Blu-Sky Solutions Ltd v. Be Caring Ltd [2021] EWHC 2619 (Comm).

The Court of Appeal undertook an extensive review of the existing case law and recognised the existence of the principle. However, it considered the principle was better described as the "onerous clause doctrine" rather than the "red hand doctrine" as formulated by Lord Denning. The Master of the Rolls summarised the onerous clause doctrine as follows:

The Court of Appeal described the effect of the doctrine to be that "the onerous clause in question is not to be regarded as incorporated into the contract, or, perhaps more accurately, as having effect" and noted that the key question is whether a party has reasonable notice of the onerous clause. The Court of Appeal confirmed that the doctrine applies to both consumer and commercial contracts, but stressed the high threshold needed to establish that a clause is onerous or unusual.

Turning to this case, the Court of Appeal agreed with the judge at first instance and found that "pay first" clauses are not onerous or unusual. They are commonly deployed by both P&I Clubs and in marine insurance generally and "cannot fairly be described as a bolt from the blue". The judgment considered the legal background to the 2010 Act and noted that while section 9(5) of the 2010 Act generally outlaws "pay first" clauses for insurance contracts, it expressly carves out marine insurance in section 9(6), except in cases involving death or personal injury. As the "pay first" clause did not reach the high threshold required to make it an onerous clause, the onerous clause doctrine did not apply.

The Court emphasised that in commercial contracts between parties of equal bargaining power, as was found to be the case here, the courts should be slow to intervene. Lord Justice Males noted that it would be difficult to apply the red hand doctrine in marine insurance where the insured is represented by specialist brokers:

However, the Court noted that in this case even if there had been no insurance broker acting for the Insured, given the clear reference in the Certificate of Insurance to the general provisions in the wording and the fact that a "pay first" clause in a marine insurance policy is not unusual, it was clear that the "pay first" clause was validly incorporated.

COMMENT

Despite noting the judicial and academic criticisms of "pay first" clauses, the Court of Appeal reinforced their enforceability in marine insurance contracts, noting they remain prevalent in the marine market and that such clauses will not be considered too onerous. The Court noted that the carve out of marine liability policies from section 9(5) of the 2010 Act was a deliberate legislative choice, such that any change "must be a matter for Parliament."

The decision also provides authoritative guidance on the red hand rule, now to be referred to as the onerous clause doctrine, highlighting that the court will be reluctant to interfere with unambiguous wording in commercial contracts between parties of equal bargaining power. Notably, it also shines a light on the established duties of insurance brokers to bring onerous or unusual clauses to their clients' attention. The Court of Appeal certainly did not hold back when stating that it would be unlikely that the red hand doctrine would ever be applied where an insured was represented by specialist insurance brokers. While the ruling therefore reinforces the importance of clear contract drafting and the role of brokers in advising clients on onerous policy terms, one can envisage situations involving bespoke wordings and multiple intermediaries where there might be some scope for a more nuanced approach as to whether a clause is to be regarded as onerous. Brokers will likely wish to reflect on how policy terms said to be onerous are identified, drawn to the insured's attention, and such explanations recorded.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.