A recent case in the Court of Appeal (MS Amlin Marine NV -v- King Trader Ltd) has emphasised the importance of bringing any onerous clauses in a contract to the attention of the other party and, in particular, any clients who contract on your standard terms, to make sure that the agreement is enforceable.
The case came about when a ship grounded in the Solomon Islands after which the hirer became insolvent. The hirer was found to have been liable for grounding the ship and was ordered to pay damages of US$47 million to the owner.
The owner brought a claim against the hirer’s insurer under the Third Parties (Rights Against Insurers) Act 2010 to recover its losses, but cover was denied because of a so-called ‘pay first’ clause in the insurance policy which said that the hirer first had to compensate the owner by paying US$47 million before this sum could be recovered under the policy. The insolvent hirer had not made any payment and as part of its claim against the insurer, the owner argued that the ‘pay first’ clause did not have effect because the clause was onerous and should have been specifically brought to the attention of the hirer.
The policy consisted of an insurance certificate with a series of schedules which made reference to the policy’s general terms and conditions. The ‘pay first’ clause was referred to in one schedule but this provision was not set out in full.
The Court of Appeal did not consider that the ‘pay first’ clause was particularly onerous in the context of a marine insurance policy and the Court’s judgment made clear that in the case of commercial contracts between parties which have broadly similar bargaining power and legal representation, the courts will be reluctant to find that a particular clause is unenforceable under the so-called onerous clause rule because inadequate notice has been given to the other party.
This case emphasises that if any contracting party is seeking to rely on an unusual or particularly onerous term, it should be fully set out in the contract rather than being referred to indirectly perhaps by way of a reference to separate terms and conditions. If your client is legally represented by lawyers or a specialist broker or intermediary, then this reduces the risk that they will be able to rely upon the onerous clause rule. But contracting parties like professional services providers which contract with their clients on standard terms favouring their own businesses should be careful to make sure that their clients are aware of any non-standard provisions.
Alex Haddad is a Legal Director in the Litigation Department and advises clients in relation to contractual disputes.