The Court upheld the validity of "pay to be paid" clauses in marine insurance, reinforcing that third parties cannot claim against insurers unless the insured first pays the liability. The decision has implications for how the court will deal with conflicting contractual provisions, according to a report by Hill Dickinson.
By a time charterparty dated 29 May 2017, the Owners fixed the vessel to the Charterers, BMC. BMC obtained charterers’ liability insurance from MS Amlin on March 28, 2018. This insurance is effective for 12 months, starting April 1, 2018.
The vessel grounded in the Solomon Islands on February 4-5, 2019. On March 25, 2021, BMC entered insolvent liquidation in the British Virgin Islands.
In March 2023, LMAA arbitrators held BMC liable to the Owners and their P&I Club for over US$47 million, accounting for accruing interest and costs.
In April 2024, BMC was wound up under the Insolvency Act 1986.
The main issue was whether a "pay to be paid" clause in BMC’s insurance policy prevented Owners and their P&I Club from claiming indemnity under the policy.
The “pay to be paid” (aka “pay as may be paid” or “pay first”) clauses require the insurer to first pay any liability before claiming indemnity from the insurer. In 1991, the House of Lords confirmed the clauses' validity, even if third parties are involved, under the Third Parties (Rights Against Insurers) Act 1930. The updated Act of 2010 retains this provision for marine insurance, except in cases of death or personal injury.
The marine insurance policy consisted of the insurance certificate, attaching MS Amlin’s wording for “Charterers’ Liability: Marine Liability Policy 1-2017” (the booklet).
The “Conditions” section in the certificate stated “as per Marine Liability Policy for Charterers 1-2017”, but there was also express reference to various specific conditions.
The booklet had five parts, with parts 1 to 4 dealing with different types of covers. Under the certificate, only parts 1 (charterers’ liability) and 4 (war risk protection) formed part of the policy.
The "pay to be paid" clause in Section 30.13 stated that the Assured must first discharge any loss, expense, or liability to recover under the policy.
Owners and their P&I Club argued that:
The Court summarised the applicable principles where there are two apparently inconsistent contractual provisions as follows:
Applying the principles above, the court found that the "pay to be paid" clause was inconsistent with the policy's terms and purpose. It also coexisted with MS Amlin’s right to terminate the policy on insolvency while preserving BMC’s rights for pre-termination events.
As such, the Court upheld the "pay to be paid" clause, confirming its enforceability and denying the claim of Owners and their P&I Club under the policy.
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