Incorporation of terms – Court of Appeal takes a "red hand" to the onerous clause doctrine

MS Amlin Marine NV v King Trader Ltd & Ors [2025] EWCA Civ 1387

The question

How will a court determine whether onerous terms and conditions have been incorporated into a contract and can be relied on?

The key takeaway

An onerous or unusual contractual term or clause contained in one party's standard terms will not bind the other contracting party unless the party seeking to rely upon it can show that the clause was fairly and reasonably brought to the other party's attention. But the principle is unlikely to apply to commercial contracts between parties of equal bargaining power where the term is common in the industry.

The background

King Trading Limited (the Owner) time-chartered a vessel, the Solomon Trader to Bintan Mining Corporation (the Charterer and Insured). Sometime later, the Solomon Trader grounded in the Solomon Islands. This appeal concerns the proper interpretation of a marine insurance policy (the Policy) issued by the claimant insurer, MS Amlin Marine NV (the Insurer) to the Insured in respect of the Charterer's liability.

Key clauses of the Policy:

1. Part 1:

The Company [the Insurer] shall indemnify the Assured [the Charterer] against the Legal Liabilities [defined in part 7 of the Booklet as “Liability arising out of a final unappealable judgment or award from a competent Court, arbitral tribunal or other judicial body”], costs and expenses under this Class of Insurance which are incurred in respect of the operation of the Vessel, arising from Events occurring during the Period of Insurance as set out in sections 1 to 17 below.

2. Section 30.13 of part 5, the "pay first clause":

It is a condition precedent to the Assured’s right of recovery under this policy with regard to any claim by the Assured in respect of any loss, expense or liability, that the Assured shall first have discharged any loss, expense or liability.

There was also a hierarchy clause (clause 25) that provided that the terms of the specific Charterers' Liability clauses in the Policy should prevail over the General Terms and Conditions (in part 5, which included the pay first clause) "in the event of a conflict between them".

The Owner and another defendant obtained a significant arbitral award against the Charterer – the Charterer entered into insolvent liquidation, and they sought to pursue the Insurer direct.

In the Commercial Court, the Insurer successfully brought proceedings for declarations that the Policy's "pay first" clause meant that it did not have to indemnify the Charterer against its liability under the award. The proper interpretation of the Policy meant that it had no liability to the Owner (and others), even if the Charterer's liabilities passed to the Insurer under third party rights against insurers legislation.

The Owner and defendant appealed, arguing that the pay first clause should not be given effect on two main grounds. The first was that it was inconsistent with the Policy's insuring clause. Under that clause, the Insurer was required to indemnify the Insured when liability for the award arose and in the event of conflict, clause 25 meant that the insuring clause took hierarchy over the General Terms and Conditions which is where the pay first clause was located. The second ground was that it should not be given effect as it was an onerous and unusual term that was not brought fairly and reasonably to the Insured's attention. There was also an argument on incorporation, however, this argument was dismissed by the court and is not addressed.

The Court of Appeal rejected these arguments and dismissed the appeal, agreeing with the court of first instance.

The decision

A central question for the Court of Appeal was to determine whether, on interpretation, there was a conflict between the pay first clause and the insuring clause.

The inconsistency ground

The court endorsed the summary of the principles provided by Males LJ in Septo Trading Inc v. Tintrade Ltd (The Nounou) [2021] EWCA Civ 718 at [28]. To decide whether a general term qualifies or negates a specially agreed term, the court must consider "whether the two clauses can be read together fairy and sensibly so as to give effect to both". This must be assessed practically, having regard to "business common sense". If the court considers that the special term has been deprived of any effect, the two clauses are likely to be inconsistent. Additionally, if the specially agreed term is part of the main purpose of the contract, a term that detracts from it will likely be inconsistent. Ultimately, the object is to ascertain the intention of the parties as it appears from the language in its commercial setting.

Applying these principles, the court dismissed the inconsistency argument on the basis that, the indemnity in the insuring clause fell due when the award was made, however it could not be enforced until the Insured had paid the claim. The pay first clause was a qualification and did not negate the insuring clause, as the two clauses could still be "fairly and sensibly" read together. The court highlighted that pay first clauses are commonly used in the insurance and reinsurance industry. It also noted that, when Parliament had the opportunity to outlaw pay first clauses, it specifically excluded marine insurance policies from the prohibition (except in the context of death or personal injury).

The onerous clause ("red hand") ground

The court also dismissed this ground. Drawing on six cases that it recognised as authority for the doctrine, it summarised the doctrine as follows: where there is an onerous or unusual term contained in one party's standard terms, and the other party is not aware of that term, it will not bind the other party unless the party seeking to rely on it can show that the term was "fairly and reasonably" brought to the other party's attention. The onerous clause doctrine can be applied to both consumer and commercial contracts. The threshold for a finding that a clause is onerous or unusual will be high, particularly in commercial contexts where both parties are likely to be represented by professional agents and put on notice of the existence of such clauses. The doctrine is unlikely to have any application in commercial contracts where the parties are of broadly equal bargaining power, and where the challenged clauses in question are common form or usual terms regularly encountered in the business.

In applying all this to the facts of the case, the court found that inclusion of a pay first clause was not unusual; in fact, they are common in marine insurance. The owner could not benefit from the argument that the pay first clause was hidden away because the Insured was represented by a professional marine insurance broker who should have drawn the Insured's attention to it. This was a commercial contract between parties of broadly equal bargaining power, in which the court should be "slow to intervene".

Why is this important?

The court provided an in-depth review of the onerous clause doctrine and the qualifications it is subject to, reframing it as:

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.

Any practical tips?

Ensure onerous or unusual terms and conditions, including standard ones, are fairly and reasonably brought to the other party’s attention (in this case a reference to the Policy was acceptable). The more onerous or unusual the terms, the more that needs to be done to fairly and reasonably bring them to the notice of the other party. If on the receiving side, ensure that terms potentially embedded in other documents are caught in the review process. Extra care should be taken if an AI contact review tool is being utilised.

Despite the high threshold and qualifications attached to the onerous clause doctrine, and that it may prove challenging to apply in a commercial setting, consider that smaller businesses may seek to rely on the onerous clause doctrine where they have not received legal or professional advice.