“Pay to be paid” lives on - MS Amlin Marine Nv v King Trader Limited and others - Court of Appeal

“Pay to be paid” clause in policies of marine insurance are ancient and widespread and recently were the subject of scrutiny by the Court of Appeal in a judgement which, it is said, is likely to be treated as a leading authority on contract interpretation – so, not so much the topic of “pay to be paid” but, rather, incorporation of onerous clauses in contracts.

The court, whilst noting the prevalence of “pay to be paid” clause, also noted that any such clause – which on its face seems to turn the idea of third parties rights against an insolvent party’s insurer on its head (the insurer does not need to indemnify the third party unless the insured has paid out; the insured is insolvent; ipso facto the insured will never be able to pay), was specifically upheld when the original 1930s legislation was amended and updated in 2010. Such clauses could have been outlawed, and so they were – but only for death and personal injury claims; all else remains.

No, the real focus was on the interpretation of contracts, specifically what had traditionally been referred to as the “red hand” doctrine (in other words, the party seeking to rely upon an onerous clause should point to it with a red hand pictogram) and which the court re-titled as the “onerous clause doctrine”.

What is it?

If an onerous clause is contained in standard terms and the other party does not know of its presence, it will not be binding unless the party seeking to rely upon it, brought it to the other party’s attention.

In all honesty, apart from the re-naming, it doesn’t sound like a major reformulation of the existing law.

As it happens, the court upheld the pay to be paid clause on three grounds.

Firstly, it did not negate the insuring clause but (significantly) modified it.

Secondly, they are widespread and (except for death and personal injury claims) survived statutory intervention.

And, thirdly (a warning to the broking community) it will be hard (impossible?) for a party to state that any such clause had not been brought to their attention if they had employed the services of a broker in procuring the cover (who should know all about the “pay to be paid “principle).