“Red hands” revisited: the Court of Appeal clarifies the onerous clause doctrine

The Court of Appeal’s decision in MS Amlin Marine NV v King Trader Limited & Ors [2025] EWCA Civ 1387 is a significant development in English contract and insurance law. The judgment provides authoritative guidance on the so-called “red hand rule”, now rebranded as the “onerous clause doctrine”, and its application to “pay first/pay to be paid” clauses in marine insurance policies. The case will be of particular interest to practitioners in shipping, insurance, and commercial litigation, as well as to brokers and underwriters operating in the London market. The impacts at a glance:

For all English law contracts

• Heightened notice obligations for onerous terms: parties relying on unusual or burdensome clauses must ensure those terms are clearly highlighted and fairly brought to the other party’s attention, particularly where standard terms are used without professional advice.
• Commercial context matters: the court confirmed that the high threshold for classifying a clause as “onerous” means that such challenges will rarely succeed in contracts negotiated between parties of equal bargaining power.

For marine insurers

• Certainty and risk management: insurers can continue to rely on “pay to be paid” clauses to manage exposure, particularly in insolvency scenarios.
• Policy drafting: such clauses, if clearly incorporated, will be upheld. Insurers should ensure policy documentation is clear and that brokers are aware of these provisions.

For shipowners, charterers, and clubs

• Third party recovery risks: third parties cannot circumvent “pay to be paid” clauses to recover directly from insurers unless the insured has actually paid the underlying liability (except in cases of death or personal injury).
• insolvency exposure: the risk that an insolvent insured cannot recover under the policy (and thus third parties are left without recourse) remains a live commercial issue. This may affect the willingness of counterparties to contract with entities perceived as financially weak.

Factual background

The dispute arose from a marine insurance policy issued by MS Amlin Marine NV (the insurer) to Bintan Mining Corporation (the charterer). The vessel, Solomon Trader, was time-chartered by King Trader Limited (the owner) to the charterer. Following a grounding incident in 2019, the owner and its P&I Club (the Korea Shipowners’ Mutual Protection & Indemnity Association) obtained an arbitral award exceeding US$47 million against the charterer, which subsequently entered insolvent liquidation.

The insurer sought declarations that a “pay to be paid” clause, requiring the assured to discharge any liability before claiming indemnity, was incorporated into the policy, enforceable, and survived the transfer of rights to the owner and club under the Third Parties (Rights against Insurers) Act 2010 (the 2010 Act). The Commercial Court found for the insurer, and the owner and club subsequently appealed on three grounds: inconsistency; the “red hand” doctrine; and incorporation.

The Court of Appeal’s decision

The Court of Appeal upheld the Commercial Court’s decision and dismissed the appeal on all grounds. In reaching their decision, the Court of Appeal addressed, inter alia, three key issues:

1. Inconsistency and the hierarchy clause

The owner and club argued that the “pay to be paid” clause, found in the general terms and conditions, conflicted with the insuring clause and the certificate, which provided for indemnity upon liability being established. The policy contained a hierarchy clause giving precedence to the certificate and specific insuring clauses over general terms “in the event of a conflict”.

The Court of Appeal, after reviewing leading authorities on contractual inconsistency (including Glynn v Margetson, Pagnan v Tradax, Alexander v West Bromwich, and The Nounou), held that the “pay to be paid” clause did not negate the insuring clause but qualified it. The two could be “fairly and sensibly read together”, and the clause did not deprive the insuring clause of all practical effect. The court emphasised that a term is not inconsistent merely because it qualifies or modifies another, and that true inconsistency arises only where the terms cannot sensibly be read together.

2. The onerous clause doctrine (“red hand rule”)

The Court undertook a comprehensive review of the “red hand” caselaw, tracing the doctrine from Lord Denning’s famous dictum in Spurling v Bradshaw through Thornton v Shoe Lane Parking, Interfoto, Goodlife, Bates, and Blu-Sky.

Vos MR proposed that moving forward, the rule be known as the “onerous clause doctrine” and clarified that an unusual or burdensome term in standard conditions binds only if the party relying on it proves the clause was fairly and reasonably brought to the other party’s attention.

The Court held that the threshold for a clause to be considered “onerous or unusual” is high, especially in commercial contexts between parties of equal bargaining power. “Pay to be paid” clauses are common in marine insurance, and the Charterer was represented by a professional broker, whose duty it was to advise on such terms. The Court suggested that the doctrine could “never be applicable in any normal case in which a party has its own professional broker or adviser acting for it in the transaction”.

3. Incorporation

The argument that the general terms and conditions were not incorporated was swiftly dismissed. The certificate expressly referred to the policy booklet, and it was “obvious on a fair reading” that both the insuring clause and the general terms applied.

Implications

The judgment provides much-needed clarity on the scope and application of the “onerous clause doctrine”, confirming that standard terms like “pay to be paid” clauses in marine insurance are unlikely to be struck down for want of notice, particularly in a commercial context, where the parties are professionally advised and terms are market-standard.

The Court reaffirmed the effectiveness of “pay to be paid” clauses in marine insurance, even in the face of the 2010 Act. The Court noted that Parliament’s decision to exclude marine insurance from the statutory override was decisive, and any change to this position would require legislative intervention.

Conclusion

This case is now the leading authority on the “onerous clause doctrine” and a reminder that shipping cases continue to shape the development of English contract law. The Court of Appeal’s judgment provides certainty for the insurance market and reaffirms the primacy of party autonomy and commercial certainty. While the “red hand” metaphor may have been retired, the principle endures, albeit with a more rigorous and market-sensitive application.