Sunk by the Small Print: Onerous Clauses in Marine Insurance

The Court of Appeal of England and Wales’ decision in MS Amlin Marine NV v King Trader Ltd[1] (King Trader) provides useful guidance on the interpretation of marine liability insurance policies and enforceability of standard “pay-to-be-paid” terms (PTBP Term), commonly found in P&I Rules and other marine liability insurance contracts which require an insured to first discharge its liability to (i.e. pay) a third party before being entitled to indemnity from insurers.

Whilst our Kennedys colleagues in London reported on King Trader here, this article explores the extent to which that decision offers guidance around policy interpretation and the incorporation of onerous or unusual terms in marine insurance policies in Australia.

We first explore the decision and reasoning in King Trader and then examine how it could be relevant to contractual interpretation in Australia.

Background to King Trader

The dispute in King Trader arose from a charterers’ liability insurance policy comprised of two (2) separate documents:

• a Certificate of Insurance, containing the details of the insured risk and the primary insuring clause; and
• a Booklet, containing the broader policy wording and standard terms (including the relevant PTBP Term).

The Certificate, which incorporated the terms of the Booklet, also contained a hierarchy term whereby the terms of the Certificate would prevail over the Booklet in the event of inconsistency. The Booklet contained the PTBP term.

Following a maritime casualty, the vessel owners and their P&I Club commenced arbitration against the charterers and obtained an award of approximately US$ 47M. Before the award could be enforced, however, the charterers went insolvent.

The owners/P&I Club subsequently pursued the charterers’ insurers directly under an English Act which permits third parties to proceed directly against an insurer where the insured is deceased, insolvent, or cannot be located.

The insurers relied on the PTBP Term to deny liability, as the charterers had not first paid the arbitration award to the owners.

Both at first instance and on appeal, the courts found in favour of the insurers.

Reasoning in King Trader

The Court of Appeal held the PTBP Term was valid and enforceable. In particular, it found that the PTBP Term was not:

• inconsistent with the Certificate’s insuring clause; and
• an onerous or unusual term that required special notice (previously required under the ‘red hand rule’ but now referred to as the ‘onerous clause doctrine’).

Interpretation: qualifying or negating

When considering whether the PTBP Term and the insuring clause could be read together “fairly and sensibly” so as to give effect to both, King Trader identified a critical distinction to be drawn between a term that:

• qualifies or supplements the insurers’ promise to indemnify; and
• negates or contradicts the insurers’ promise.

Ultimately, it was concluded that the PTBP Term did not negate or contradict the insurers’ promise to indemnify but rather qualified the insurers’ obligation by specifying how/when an insured might be able to enforce that indemnity.

Even though the charterers’ entitlement to indemnity arose once the arbitration award was handed down, the insurers’ obligation to pay that indemnity was contingent upon the charterers first satisfying their liability by paying that award to the owners. The
Court of Appeal rejected the argument from the owners/P&I Club that the PTBP Term rendered the insuring promise illusory and instead held the insuring clause continued to operate until the charterers had discharged their liability (which it could no longer do due to its insolvency).

Onerous clause doctrine

Under this doctrine, a particularly onerous or unusual term contained in standard contractual terms may not be incorporated or enforceable unless it has been “fairly and reasonably” brought to the other party’s attention.

The King Trader decision emphasised that this doctrine has limited application in the context of commercial insurance placements between sophisticated parties. Recognising that marine insurance contracts are typically placed through specialist brokers, expected to be familiar with standard market terms, the Court of Appeal held it would be extremely difficult (if not impossible) to find that a term contained in market-standard policy wording, such as a PTBP Term, could ever be susceptible to the onerous clause doctrine, holding:

Further, is said that the doctrine:

Market prevalence was highly relevant. Where a term, like a PTBP Term, reflects established industry practice within the relevant insurance market, it is unlikely to be regarded as unusual or onerous.

Practical implications and key take-aways in Australia

Although King Trader is not binding on Australian courts, it will be persuasive, particularly in the marine insurance context, given the countries’ common heritage of marine insurance law.

In addition to reinforcing the long-standing commercial validity of PTBP Terms in marine liability insurance,[2] Australian courts may find King Trader persuasive in several respects concerning policy construction:

1. Qualify versus negate
   

   Although it is well-established in Australia that Courts seek to reconcile policy terms wherever possible, the key distinction gleaned from King Trader is how that reconciliation process should identify whether a term qualifies or fundamentally negates insurers’ promises.

   This distinction is likely to extend beyond PTBP Terms, specifically, or even marine insurance matters, generally. Many provisions commonly found in insurance policies, such as excess clauses, notification obligations, and subrogation clauses, are intended to qualify or supplement the circumstances in which indemnity is to be provided, as opposed to negating or contradicting the insuring clause, or some other promise of the insurer.

   Further, the case serves as a reminder that a hierarchy term will not operate automatically to invalidate general terms and conditions if they can sensibly be read together, particularly where the latter does not undermine an insuring clause or deprive it of all practical effect. The same reasoning ought to apply when assessing whether condition precedents, claims control provisions or subrogation terms purportedly conflict with the primary insuring obligation in policy.

2. Unusual or onerous
   

   Where insurance is placed through brokers and involves sophisticated commercial parties, arguments that a term was insufficiently disclosed or is unusual or onerous, particularly a widely used industry standard term, are unlikely to succeed. Courts will generally look to enforce bargains between parties of equal bargaining power who are free to allocate risks as they see fit.

   King Trader’s reasoning here reflects principles already recognised under Australian law, particularly in the context of signed documents.[3] For example, the High Court of Australia[4] has confirmed that parties who sign contractual documents are generally bound by their terms (absent misrepresentation, fraud or non est factum), regardless of whether those terms were read or if ‘special notice’ of any unusual or onerous terms was provided.

   This reflects the commercial reality, particularly of marine insurance markets, where sophisticated parties negotiate coverage through specialist brokers who are expected to be familiar with standard market terms (such as Institute Clauses) and established industry practice.

Conclusion

Ultimately, King Trader provides a useful reminder in Australia that Courts will generally give coherent effect to all terms of a commercial contract and will be reluctant to invalidate established market provisions, particularly in a marine insurance context which often involve sophisticated parties and specialist brokers. Terms which regulate the timing or mechanism of an indemnity will not ordinarily be regarded as contradicting the insurers’ core promise to indemnify.