MS Amlin Marine NV v King Trader Ltd [2025] EWCA Civ 1387: Court of Appeal redefines the “red hand” rule as the “onerous clause doctrine” and confirms the compatibility and efficacy of pay‑first clauses in marine liability insurance

Introduction

This Court of Appeal decision, delivered by the Master of the Rolls (Sir Geoffrey Vos) with whom Singh and Males LJJ agreed, is a significant authority on two fronts:

It confirms that “pay to be paid” (pay‑first) clauses in marine liability policies are compatible with insuring clauses which promise indemnity upon establishment of the insured’s legal liability, and that such clauses survive the transfer of rights under the Third Parties (Rights against Insurers) Act 2010 (save for the statutory carve‑out concerning death and personal injury).
It recasts and clarifies the so‑called “red hand” rule as the “onerous clause doctrine”, setting a high threshold for its application in commercial contracts, and especially in marine insurance placed through specialist brokers.

The case arose from a Charterers’ Liability policy issued by MS Amlin Marine NV to Bintan Mining Corporation (the charterer/insured). After the vessel Solomon Trader grounded in the Solomon Islands, the owner (King Trading Ltd) and the P&I club (Korea Shipowners’ Mutual) obtained an LMAA award exceeding US$47 million against the charterer. The charterer became insolvent. The insurer sought declarations that the policy’s pay‑first clause barred any recovery (including by the owner/club via the 2010 Act) because the insured had not first discharged the liability.

Summary of the Judgment

The Court of Appeal dismissed the appeal and upheld four core declarations:

The pay‑first clause (cl. 30.13, Part 5 – General Terms and Conditions) was incorporated into the policy.
It was enforceable against the insured and not inconsistent with the insuring clause (Part 1 – Class 1, Charterers’ Liability).
On the true interpretation of the policy, no indemnity was payable in respect of any liability the insured had not discharged.
The pay‑first clause survived the vesting of rights under the Third Parties (Rights against Insurers) Act 2010 (because the policy is a contract of marine insurance and the section 9(5) override does not apply save for death/personal injury: s.9(6)).

While broadly agreeing with the first‑instance judgment (Foxton J), the Master of the Rolls differed on the starting point for assessing inconsistency: given the policy’s hierarchy clause, the case should be approached in the same way as the leading “special vs printed terms” authorities (Glynn, Pagnan, Alexander, The Nounou), even though both the insuring clause and the pay‑first clause appeared within the same booklet (at [61]–[62]). Applying that framework, there was no inconsistency (at [63]–[64]).

Background and Issues

The insurer issued a policy (by Certificate incorporating a policy booklet) covering the charterer’s liability for Charterers’ Liability – Class 1. The policy’s insuring clause (Part 1) promised indemnity against “Legal Liabilities” defined as liabilities arising out of a final unappealable judgment/award. The General Terms and Conditions (Part 5) contained a pay‑first clause (cl. 30.13) making discharge of the insured’s liability a condition precedent to recovery.

The owner and the P&I club challenged the pay‑first clause on three grounds:

Inconsistency: alleged conflict between the insuring clause (and Certificate) and the pay‑first clause, which they said the hierarchy clause should resolve in favor of the insuring clause.
“Red hand” / onerous clause: argued that the pay‑first clause was onerous or unusual and had not been fairly and reasonably drawn to the insured’s attention.
Incorporation: contended that Part 5 (containing the pay‑first clause) was not incorporated.

The Court rejected all three grounds. It also dismissed the insurer’s application to adduce fresh evidence about market prevalence of pay‑first clauses on appeal, given the case had been tried on paper under CPR Part 8 (at [28]–[30]).

The Critical Policy Terms and Structure

Insuring clause (Part 1): A promise to indemnify the assured against “Legal Liabilities” (defined in Part 7 as liability arising out of a final unappealable judgment/award) for events during the policy period (at [13]).
Pay‑first clause (Part 5, cl. 30.13): A condition precedent requiring the assured to have “first … discharged any loss, expense or liability” before recovery (at [14]).
Hierarchy clause (Part 5, cl. 25): Class‑specific terms prevail over general terms in case of “conflict”; the Certificate prevails “above all others” (at [15]–[16]).
Certificate: Identifies cover as “Charterers’ Liability … Class 1”, incorporates the “Marine Liability Policy for Charterers 1‑2017” booklet, and includes payment term warnings; it does not itself contain any inconsistent term negating pay‑first (at [18]–[20]).
General Terms and Conditions (Part 5): Standard provisions addressing certificates, exclusions, premium, claims (including cl. 30.13), insolvency/termination/deductibles/subrogation/assignment/interest/choice of law (at [21]–[27]).

Precedents Cited and Their Influence

1) The “special vs printed terms” line: identifying inconsistency

Glynn v Margetson [1893] AC 351: Main object of the contract can limit general printed terms; courts avoid constructions that defeat the manifest bargain (at [44]).
Pagnan v Tradax [1987] 2 Lloyd’s Rep 342: No predisposition to find inconsistency; a qualifying clause is not “inconsistent” unless it contradicts or deprives the other of effect such that both cannot fairly be given effect; businesslike reading (at [45]–[48]).
Alexander v West Bromwich [2016] EWCA Civ 496: Clauses are “inconsistent” where they cannot be fairly/sensibly read together; adopt business common sense; “single‑clause” test can be used (at [49]–[53]).
Septo v Tintrade (The Nounou) [2021] EWCA Civ 718: Distinguish between qualifying/supplementing a special term and transforming/negating it; focus on whether a printed term deprives a special term of practical effect or contradicts the contract’s main purpose (at [54]–[55]).

The Court applied these authorities (contrary to the judge’s starting point) because the policy contained a hierarchy clause privileging Class 1 terms/Certificate over general terms in case of conflict (at [61]–[62]). Even so, on proper construction there was no conflict (at [63]–[64]).

2) Pay‑first clauses and third‑party rights

Firma C‑Trade (The Fanti) and Socony Mobil (The Padre Island) [1991] 2 AC 1: Pay‑first clauses are effective; third parties take no better rights than the insured; payment is a condition precedent to the insurer’s obligation where so provided (at [37]).
Third Parties (Rights against Insurers) Act 2010: s.9(5) nullifies pay‑first conditions vis‑à‑vis third parties; s.9(6) carves out marine insurance except for death/personal injury liabilities; thus pay‑first remains effective for non‑personal injury marine liabilities (at [36]).
Charter Re v Fagan [1997] AC 313: Pay‑first clauses long‑established contractual provisions (per Lord Mustill, referenced at [58], [63(iii)]).

3) Accrual vs enforcement

Coburn v Colledge [1897] 1 QB 702 and Rolls‑Royce v Goodrich [2023] EWHC 1637 (Comm): No inconsistency in principle between an obligation accruing at time A and a separate clause deferring enforceability or providing a defence until time B (at [59]).

4) The “red hand” line and its restatement

Spurling v Bradshaw [1956] 1 WLR 461 and Thornton v Shoe Lane [1972] 2 QB 163: Denning LJ/MR’s “red hand” aphorism (obiter) about especially stringent clauses requiring conspicuous notice (at [71]–[73]).
Interfoto v Stiletto [1989] QB 433: Where a particularly onerous or unusual term is contained in standard terms, it will not bind unless fairly and reasonably brought to the other party’s attention; commercial context matters; common‑form terms are less likely to engage the rule (at [74]–[77]).
Goodlife v Hall Fire [2018] EWCA Civ 1371: High threshold; not every exclusion/limitation is onerous; usual terms between commercial parties are less likely to be “onerous”; party autonomy emphasized (at [78]).
Bates v Post Office (No 3) [2019] EWHC 606 (QB): High hurdle for “onerous and unusual”; bargaining power and context are relevant (at [79]).
Blu‑Sky v Be Caring [2021] EWHC 2619 (Comm) and Allen Fabrications [2012] EWHC 2213 (TCC): Further applications in commercial settings; ubiquity in the trade weighs against “onerousness” (at [80]–[82]).

The Court’s Legal Reasoning

A) Inconsistency: can the insuring clause and pay‑first clause “fairly and sensibly” be read together?

The Court accepted the structured approach of Glynn/Pagnan/Alexander/The Nounou. The policy’s hierarchy clause meant that if a conflict existed, the Certificate/Class 1 would prevail. But the question was whether such a conflict existed. The Court held:

The pay‑first clause qualifies and supplements the insuring clause; it does not negate it (at [63(i)]).
The indemnity accrues when the liability is established by a final unappealable award/judgment, but recovery is conditioned on prior discharge by the insured—this is a permissible qualification, not a contradiction (at [63(ii)], [59]).
Business common sense: pay‑first clauses are a widely‑used feature of marine liability insurance; Parliament deliberately preserved them in s.9(6) of the 2010 Act for non‑personal injury marine risks; they do not deprive the insuring clause of all practical effect (the clause responds where the insured pays), and the perceived mischief only arises upon insolvency (at [63(iii)]).
The clauses pass the “single‑clause test”: they can be sensibly combined—“We indemnify liabilities as established by a final award/judgment, provided the assured has first discharged the liability” (at [63(iv)]).

Accordingly, there was no “conflict” to trigger the hierarchy clause. The inconsistency ground failed (at [64]).

B) The “red hand” re‑cast as the “onerous clause doctrine”

The Court expressly preferred the term “onerous clause doctrine” to “red hand rule” and provided a clear restatement (at [83]–[86], [98]):

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.

Key features of the Court’s restatement and application:

High threshold: Especially in commercial contexts; not every burdensome clause is “onerous” (at [84], [88], [91(i)]).
Market ubiquity matters: Common‑form or usual terms in the trade are less likely to be onerous; pay‑first clauses are long‑established in marine insurance (at [77], [78], [90]–[91(i)]).
Brokers’ involvement: Where specialist brokers act for the insured, the doctrine will “rarely, if ever” apply; a broker’s duty includes explaining market terms (per Males LJ at [101]; see also [89]–[91(ii)]).
No formal “sliding scale” rigidity: Although the more onerous the term, the more notice may be required, the Court declined to formalize a graded rubric; both “onerousness” and “fair/reasonable notice” are questions of fact and degree (at [87]).
Outcome on the facts: The pay‑first clause was neither unusual nor (in this commercial context) onerous; and in any event the Certificate and booklet structure, with professional broking, defeated the notice argument (at [89]–[92]).

C) Incorporation

The incorporation argument was unsustainable. The Certificate expressly attached and incorporated the “Marine Liability Policy for Charterers 1‑2017” booklet. It would be artificial to excise Part 5 when the contractual scheme (and even the appellants’ hierarchy argument) depended on it (at [93]–[96]).

D) Procedural and evidential stance

The appeal court refused to admit fresh “market practice” evidence about the prevalence of pay‑first clauses, the case having been tried on the papers under CPR Part 8; the insurer could have sought an adjournment below if notice issues arose late (at [28]–[30]). The Court would not make first‑time inferences on knowledge or industry practice absent trial evidence.

Impact and Practical Implications

1) Marine insurance market

Pay‑first clauses affirmed: Clear endorsement of their compatibility with insuring clauses promising indemnity upon establishment of liability. Parties can continue to use pay‑first mechanics in marine liability covers (except for death/personal injury where s.9(5) applies).
Placement through brokers: Where specialist brokers are involved, arguments that pay‑first clauses are “onerous” or insufficiently notified will be very difficult to sustain. Broker advice will be central evidence in any future challenge.
Drafting comfort: A pay‑first clause located in the claims conditions can still be effective; best practice remains to signpost it clearly (e.g., cross‑reference in the insuring clause or Certificate), but its location alone will not defeat it.

2) Third party rights against insurers

Scope of s.9(5)–(6) (2010 Act): The case underscores that the statutory override of pay‑first conditions does not apply to marine insurance except for death/personal injury liabilities. Insolvency of the insured will not bypass a pay‑first barrier for property/financial liabilities.
Claims strategy: Third parties (owners, charterers’ counterparties, service providers) should anticipate pay‑first risk in marine cases and plan security (e.g., guarantees, escrow) or seek endorsements removing pay‑first for defined liabilities.

3) Contract interpretation

No predisposition to find conflict: Even with a hierarchy clause, courts will strive to read clauses together fairly and sensibly before concluding that they are inconsistent. Qualification is not negation.
Accrual vs enforcement: Drafters may safely separate the moment an indemnity “arises” from the conditions for “recovery”. This judgment endorses that architecture.

4) Onerous clause doctrine beyond marine

Refined doctrine: The Court’s restatement supplies a clean, modern label and test, likely to guide future commercial cases. The emphasis on trade ubiquity and professional representation will temper overuse of the doctrine in B2B disputes.
Litigation hygiene: Parties alleging “onerousness” should prepare evidence of unfamiliarity, lack of notice, and market atypicality; absent such proof—especially with brokers/solicitors involved—the doctrine will seldom assist.

5) Policyholder and broker practice points

Consider negotiating “non pay‑to‑be‑paid” endorsements or limited carve‑outs (e.g., for specified third‑party liabilities or where insolvency is established) if available and commercially justified.
Where pay‑first is accepted, ensure internal liquidity or external financing can bridge to insurer reimbursement following payment.
Brokers should document advice on pay‑first implications and any attempts to obtain alternative terms/premiums.
Certificates can highlight pay‑first alongside other key conditions to reduce future disputes about notice.

Complex Concepts Simplified

Pay‑first (pay to be paid) clause: A condition precedent requiring the insured to pay the third party before the insurer must indemnify the insured.
Insuring clause vs recovery condition: The insuring clause states the promise to indemnify (typically when liability is established). A separate condition (like pay‑first) can defer or limit enforcement of that promise.
Hierarchy clause: A rule within the policy stating which terms prevail if there is a conflict (e.g., Certificate over special terms; special terms over general conditions).
Condition precedent: A contractual requirement that must be satisfied before a right arises or becomes enforceable.
Third Parties (Rights against Insurers) Act 2010, s.9: Generally nullifies pay‑first vis‑à‑vis third parties, but not for marine insurance, except claims for death/personal injury.
Onerous clause doctrine: Particularly onerous or unusual standard‑term clauses will not bind a counterparty lacking actual knowledge unless fairly and reasonably brought to that party’s attention. High threshold, especially in commercial contexts.
Single‑clause test: A practical tool: can the two provisions be combined into one coherent clause? If yes, they are likely not inconsistent.

Notable Nuances and Observations

Starting point for inconsistency: Vos MR held the hierarchy clause placed the case within the “special vs printed” paradigm (Glynn/Pagnan), even though both clauses sat in one booklet (at [61]–[62]). The result, however, was the same—no conflict.
Market prevalence and policy: Judicial criticisms of pay‑first exist, but their prevalence in marine business and the 2010 Act’s deliberate carve‑out weigh heavily in favor of enforceability (at [63(iii)], [102]).
Parliamentary space: Males LJ noted any further curtailment of pay‑first clauses vis‑à‑vis third parties is for Parliament, particularly given the Law Commission’s earlier caution about international alignment (at [103]).

Conclusion: Key Takeaways

Compatibility confirmed: Pay‑first clauses are compatible with insuring clauses promising indemnity once liability is established; they qualify enforcement, not the existence of the indemnity.
Third‑party claims constrained in marine cases: The 2010 Act’s carve‑out means pay‑first continues to bite against third parties for non‑personal injury marine liabilities.
Onerous clause doctrine refined: The Court adopts a clear label and test, setting a high threshold in commercial contexts, especially where brokers act. Trade ubiquity and professional involvement will usually defeat “onerousness” arguments.
Interpretation approach: Courts will resist a predisposition to find inconsistency; qualification is not negation. The “single‑clause” test and business common sense remain central.
Drafting and practice: Insurers can rely on pay‑first clauses located in general terms; insureds seeking different risk allocation must negotiate it up front. Brokers’ advice is critical.

MS Amlin v King Trader is now a leading authority both on the status and operation of pay‑first clauses in marine liability policies and on the modern shape of the onerous clause doctrine. It offers a coherent framework for future cases at the intersection of policy wording, market practice, and third‑party rights, while signposting that broader policy change—if any—is for Parliament, not the courts.