Campbell Johnston Clark acted for the successful underwriters, who were represented at trial by John Passmore and Koye Akoni of Quadrant Chambers. 

Alistair Johnston, Maria Borg Barthet, Richard Hickey, and Konstantina Zariou summarise the judgment in MS AMLIN v King Trader and others ([2024] EWHC 1813 (Comm)) below. A full copy can be found here: https://www.bailii.org/ew/cases/EWHC/Comm/2024/1813.html 

Facts 

In February 2019, the Solomon Trader grounded in the Solomon Islands. In the subsequent Hong Kong arbitration, Charterers were found liable to Owners for the incident, and Owners were awarded damages in the amount of approximately USD 47 million. 

At the time of the incident, MS AMLIN insured Charterers for charterers’ liability risks. Following the incident, Charterers went in to insolvency without meeting their liabilities under the arbitration awards, and it became apparent that Owners were likely to look to MS AMLIN for payment of their claim.

It was common ground that Owners and their insurers were entitled to claim against MS AMLIN under the Third Parties (Rights against Insurers) Act 2010, subject to the operation of the pay to be paid rule found in MS AMLIN’s policy. That rule was worded as follows:

“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.”

MS AMLIN therefore commenced proceedings against Owners, Charterers, and Owners’ insurers, seeking declarations that (a) the policy incorporated the pay to be paid clause, and (b) the clause would survive any transfer of rights to Owners and/or their insurers under the Third Parties (Rights against Insurers) Act 2010 (“Act”). 

Argument

At trial, Owners’ case focused on two main arguments. The first was that there was a fundamental inconsistency between the main purpose of the policy as stated in the certificate of insurance, which was to cover charterers’ liabilities, and a pay first clause found in the general terms and conditions to which the certificate was subject. 

The second was that the pay to be paid provision should be construed as being subject to one or more of several suggested implied terms that (a) it only applied where the insured has the funds to pay a claim before receipt of insurance monies, (b) it did not apply in cases of insolvency; and/or (c) that it did not apply to claims by third parties. 

Owners sought to lend support to their arguments by seeking to distinguish between the use of pay to be paid clauses in the P&I context, which has long been recognised (see, for instance, the House of Lords judgments in The Fanti and the Padre Island [1991], and in the context of fixed premium commercial insurance. 

MS AMLIN’s case was that the clause was perfectly clear, permitted by section 9 of the Act for all contracts of marine insurance, and not capable of being artificially written out of the policy by reference to any principles of contractual interpretation or implication. 

Judgment 

Owners’ suggestion that, because pay to be paid clauses were (in their submission) “bad things”, it was open to the court to “ruthlessly” read them down, was rejected by the court. 

MS AMLIN’s case was accepted by the court, which dismissed Owners’ attempts to find assistance from the common law rules on incorporation, interpretation and implication in the face of a clearly worded clause that was perfectly permissible under the relevant statutory framework. 

Conclusion 

Up until now, there has been relatively little English law authority directly addressing the operation of pay to be paid rules in the non-mutual marine insurance context. This judgment confirms that, with clear enough wording and provided that they are properly incorporated in to the policy terms, such clauses are legitimate and can be relied on by insurers.

The judgment will be welcomed by commercial insurers operating in the fixed premium marine insurance market as putting them in the same position as their mutual competitors, as well as by mutual insurers selling fixed premium products. 

It remains to be seen whether permission to appeal the judgment will be sought.  

16 July 2024