In brief:
- Lord Denning's "red hand" rule has been reframed as the "onerous clause doctrine" by the Court of Appeal.
- Where Party A's standard terms contain a particularly onerous or unusual term, and Party B does not know of that term, it will only bind Party B if Party A shows it was brought to Party B's attention.
- However, a high threshold must be met to establish the clause is onerous or unusual and the doctrine is unlikely to apply where the party is represented by a professional adviser.
In MS Amlin Marine NV v King Trader Limited & Ors [2025] EWCA Civ 1387 the Court of Appeal has provided helpful guidance on the application of the so-called "red hand" rule, reaffirming the principle that the court will be reluctant to interfere with commercial contracts negotiated between parties of broadly equal bargaining power with the benefit of professional advice.
Background
In 2019, a cargo vessel chartered by Bintan Mining (the charterer) from King Trading (the owner) grounded in the Solomon Islands. The owner obtained a US$47 million arbitration award against the charterer, but the charterer was wound up before the award was paid or could be enforced against it.
The charterer had the benefit of a marine insurance policy issued by MS Amlin Marine (the insurer).
Under the Third Parties (Rights against Insurers) Act 2010, a third party to whom the insured has incurred a liability can issue proceedings directly against the insurer where the insured is insolvent. However, in this case the insurer contended that it was not obliged to indemnify the charterer because of the presence of a "pay to be paid" or "pay first" clause in the policy, requiring the charterer to pay the arbitration award before it could recover under the policy. The insurer said the pay first clause survived the transfer of rights to the owner under the 2010 Act, and since the charterer had not paid the award, the insurer was not liable. In most cases the failure by an insured to comply with such clauses could not be relied upon by the insurer to deny claims brought against them by a third party under the 2010 Act. There is, however, a specific exception within the 2010 Act relating to marine insurance policies such as this one. As a result, it fell to the court to decide the question based on ordinary contractual principles.
At first instance the Commercial Court ruled in favour of the insurer. The owner appealed.
The Court of Appeal's decision
Ground 1: The "red hand" or onerous clause doctrine
The red hand doctrine is an established doctrine of interpretation, which provides that where clauses are incorporated into a contract by reference (as it was in this case), a particularly onerous term should not be given effect unless the other party's attention has been specifically drawn to it. The doctrine derives from Lord Denning's statement in J Spurling Ltd v Bradshaw (1956) that "some clauses….would need to be printed in red ink on the face of the document with a red hand pointed to it before the notice could be held to be sufficient."
In this case, the owner argued that the pay first clause was harsh, extremely unfair, onerous and commercially unreasonable and having not been adequately brought to the charterer's attention, should not be given effect.
The Master of the Rolls, Sir Geoffrey Vos, accepted the doctrine's existence, but thought it was better described as the "onerous clause doctrine", reframing it as follows:
“…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.”
He went on to observe that:
- A high threshold must be met to establish that a clause is onerous or unusual
The Master of the Rolls emphasised that a high threshold must be met to establish that a clause is onerous or unusual. He noted that some authorities have suggested a sliding scale applies, so that the more onerous the clause, the more notice is required for it to be effective. While he did not consider it necessary to formalise such a test, he observed that the question of how onerous or unusual the clause needs to be is a question of fact and degree that can only be decided by taking into account all the circumstances of the case, including industry usage and the identity of the parties.
In this case, the judge acknowledged the severe consequences that pay first clauses can have in the event of an insured's insolvency. Nevertheless, he found that such clauses are commonly used in marine insurance, and in such circumstances not every burdensome clause should properly be regarded as onerous. This is particularly true where the parties are commercial entities of broadly equal bargaining power, in which case the court will be slow to intervene.
- The doctrine is unlikely to apply where the party is represented by a professional adviser
The Master of the Rolls also emphasised that the onerous clause doctrine is fundamentally about notice. As a result, he considered that where, as in this case, a party is represented by a professional adviser whose duty it is to draw any onerous clause to their client's attention, the doctrine is unlikely to apply, even if the clause is hidden away or obscurely placed.
Ground 2: Inconsistency with the insuring clause
Going on to dismiss the appeal, Sir Geoffrey Vos also rejected the owner's argument that the insuring clause in the policy was inconsistent with the pay first clause, and so pursuant to the terms of a hierarchy clause, the pay first clause should not be given effect. In his view the two clauses could be read together fairly and sensibly to give effect to both. The pay first clause qualified and supplemented the insuring clause, but was not a negation of the indemnity, and did not deprive the insuring clause of all practical effect.
Commentary
While the Court of Appeal's decision makes clear that the red hand doctrine remains part of English law, albeit reframed as the onerous clause doctrine, it nevertheless reinforces the English courts' reluctance to intervene in commercial contracts negotiated between sophisticated parties with professional representation.