Red hands and contractual inconsistency: “pay first” in the Court of Appeal

In a celebrated dictum concerning the incorporation of harsh exclusion clauses, Lord Denning stated that “Some clauses which I have seen would need to be printed in red ink on the face of the document with a red hand pointing to it before the notice could be held to be sufficient.”

The foundation and contours of that so-called “red hand rule” have now been authoritatively considered by the Court of Appeal in MS Amlin Marine NV v King Trader Limited & Ors [2025] EWCA Civ 1387.

The case concerned a “pay first” (or “pay to be paid”) clause in a policy of charterer’s liability insurance. The insurer sought declarations that this clause – printed in a standard form booklet, but not referred to in either the insurance certificate or the insuring clause – had been successfully incorporated into the policy and was therefore binding on third parties seeking to claim an indemnity under the Third Parties (Rights against Insurers) Act 2010, the charterer having gone into insolvency. Although that statute generally outlaws “pay first” clauses, it does not do so in relation to contracts of marine insurance (unless the claim is for death or personal injury).

In upholding the Commercial Court’s decision that the clause had been incorporated, the Court of Appeal (Sir Geoffrey Vos MR, Singh LJ, Males LJ) undertook an extensive review of the “red hand” cases. In what will become the leading judgment in this area of contract law, the Master of the Rolls stated that the principle should now be called the “onerous clause doctrine”, and that it has the following scope:

“…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”.

On the facts the Court of Appeal concluded that this doctrine was not engaged by the “pay first” clause, which did not reach the “high threshold” required for the rule to apply. The Court also suggested that the doctrine could never be applicable in any normal case in which a party has its own professional broker or adviser acting for it in the transaction.

The Court also considered whether the “pay first” clause was ineffective because of an express hierarchy clause in the contractual documents, which stated that in the event of a “conflict”, terms appearing in the insurance certificate or as part of the insuring clause would prevail over the general terms and conditions. This clause was not applicable because the “pay first” clause did not negate the insuring clause; rather, it qualified and supplemented it “admittedly in a very significant way”. It was relevant in this regard that, when passing the 2010 Act, Parliament decided not generally to outlaw such clauses in contracts of marine insurance.

Benjamin Parker (with Michael Ashcroft KC of Twenty Essex) acted for the Appellants, instructed by Alex Kemp, Henry Dunlop and Bea Bray of HFW.

A copy of the Court of Appeal’s judgment can be found here.