MS Amlin v King Trader & Ors: “Fox in the henhouse?” – a cautionary tale

MS Amlin v King Trader & Ors: “Fox in the henhouse?” – a cautionary tale

MS Amlin Marine NV on behalf of MS Amlin Syndicate AML/2001 -v- King Trader Ltd & others (Solomon Trader) [2024] EWHC 1813 (Comm) is the latest in a string of recent cases that confirm the court’s reluctance to interfere with the wording of an insurance contract where the wording is clear. In this case, the wording was no ‘fox in the henhouse’, hidden away in the ‘thickets of the policy’ but front and centre.

Background

King Trader was the owner of a ship, Solomon Trader, which was chartered to Bintan Mining Corporation (“BMC”). MS Amlin issued a charterers’ liability policy to BMC (“the Policy”). In a run of bad luck, the ship became grounded in the Solomon Islands in 2019, BMC became insolvent in 2021, and an arbitration award in excess of US$47m (including interest) was made against BMC in 2023.

As BMC was no longer in the picture, King Trader and its P&I Club sought to recover under the Policy via the Third Parties (Rights Against Insurers) Act 2010.

You would be forgiven for thinking that is the end of the tale – a clear liability had been established, the policyholder had a liability policy, presumably the policy would respond? Sadly not, the wording contained a “pay first” clause, and MS Amlin therefore issued proceedings against King Trader and its P&I Club, seeking a declaration that there could be no indemnity in circumstances where the policyholder had not first discharged their legal liability.

The terms of the Policy

The relevant terms of the Policy for the purposes of this case were set out across various sections of a policy wording that was sub-divided into five parts, and accompanied the insurance certificate, as follows:

Part 1 provided that “The Company shall indemnify the Assured against the Legal Liabilities, costs and expenses under this Class of Insurance which are incurred in respect of the operation of the Vessel, arising from Events occurring during the Period of Insurance as set out in sections 1 to 17 below“.

“Legal Liability” was defined as “Liability arising out of a final unappealable judgment or award from a competent Court, arbitral tribunal or other judicial body“.

Section 25 of Part 5 stated “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.”

And finally, Section 30 of Part 5 contained the all-important “pay first” clause- “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.”

Third Parties (Rights against Insurers) Act 2010

It is worth noting that in most circumstances the usual position under section 9(5) of the Act is that transferred rights are not subject to a condition requiring the prior discharge by the policyholder of its liability to the third party (i.e. a “pay first” clause). However, there is a significant caveat to the usual position, which applies in most circumstance except where the policy is a “contract of marine insurance”, as set out in section 9(6) of the Act.

The Issues for the Court

Without the protection of the Act, the third party’s only hope was to persuade the court that the “pay first” clause either (i) did not form part of the Policy; or (ii) as a matter of construction does not apply where a third party seeks to enforce the Policy, or (iii) is inoperative where the insured is unable to discharge the liability or is insolvent.

The court summarised the relevant considerations as being:

1. Where there is inconsistency between a clause specifically agreed for the contract vs. a provision in an incorporated set of pre-existing printed terms, the court may find that the second clause is either not incorporated at all, or if it is, the court may read it down.

 

2. Where there is inconsistency between two clauses that appear in the same document, the court may conclude that the clauses co-exist.

 

3. When considering if two clauses can co-exist, attention will be paid to whether giving effect to the “repugnant” clause leaves the more substantive clause with a real and sensible content, and, if the subsidiary clause is to be read down, whether it will be left with a meaningful and sensible content.

 

4. The court may be more willing to read down or read out a subsidiary clause which is inconsistent with a provision that forms part of the main purpose of the contract, or which is inapposite to the main contract.

The Judgment

In respect of arguments on inconsistency / repugnancy, the court held that it was not possible to establish any inconsistency between the “pay first” clause and the terms of the insurance certificate on the basis that the certificate clearly incorporated and attached the entirety of the wording.

Furthermore, there was not an inherent inconsistency between MS Amlin’s promise to provide liability cover and a clause making enforcement of the obligation to pay the indemnity conditional on prior discharge of that liability by the insured.

Nor was there a conflict between sections of the Policy that allowed MS Amlin to terminate the Policy on BMC’s insolvency but preserve BMC’s rights to indemnity in respect of incidents occurring prior to termination, and the “pay first” clause, which would require an insolvent insured to discharge its liability as a condition precedent to an indemnity.

Finally, the court considered that the “pay first” clause was not “hidden away in the thickets of the Policy”, as it was clear from the insurance certificate and the index of the wording that it included general provisions effecting the scope of rights under the Policy. Furthermore, the “pay first” clause appeared in a section which imposed a number of obligations, which left the judge unpersuaded that the clause “in this context is in the nature of a fox in the henhouse (or a wolf in the flock)”.

As for the arguments on construction and implied terms, the court held that there was no legitimate process of contractual construction that could subject the clear language of the “pay first” clause to restrictions such as only being applicable in circumstances where the insured has the means to pay a claim or in the event that a third party must pursue a claim under the Act, nor could it be argued that necessity or business efficacy required the implication of words limiting the operation of the clause.

Comments

Perhaps not a surprising outcome, especially in the context of a number of recent commercial court and appellate level decisions such as Bellini v Brit and Project Angel Bidco v Axis, that have reinforced that the courts generally will be reluctant to interfere with clear wording in an insurance contract.

In this case, and in circumstances where there is an absence of statutory control for “contracts of marine insurance”, there was little support at common law that would assist these third parties under this particular wording.

That being said, the judge’s parting remarks certainly leave the reader with the impression that this can be seen as a particularly ugly outcome for parties involved, “The state of English law on this issue in the light of the 2010 Act is not particularly satisfactory… Prudent operators seek to insure against those liabilities, and a range of third parties who suffer loss and damage as a result of accidents at sea will look to insurances of this kind to be made whole. “Pay first” clauses reduce the efficacy of that protection when it is most needed”.

Anthony McGeough is a Senior Associate at Fenchurch Law.