The Solomon Trader [2025] EWCA Civ 1387: The ‘pay to be paid’ rule affirmed in the Court of Appeal

The Court of Appeal handed down judgment on the long-awaited appeal in the case involving The Solomon Trader. This decision serves as a helpful confirmation of the “pay to be paid” rule.

Factual background

In February 2019, the 38,779GT tanker Solomon Trader, ran aground in Kangava Bay, Solomon Islands whilst carrying a cargo of heavy fuel oil causing significant pollution and one of the worst environmental disasters in the country’s history. The charterer went into liquidation shortly thereafter.

The vessel owners and their Club settled the claim locally, and obtained an Award against the charterer in Hong Kong LMAA Arbitration, which with interest and costs exceeded USD47m. The owners and their Club tried to recover from charterer’s insurer (“MS Amlin”) who argued that it was not liable by virtue of the ‘pay to be paid’ rule contained in the policy.

The High Court decision

MS Amlin sought a declaration that the ‘pay to be paid’ rule: (1) was enforceable against the charterer and (2) survived the transfer of rights from the charterer to the owner under the Third Parties (Rights against Insurers) Act 2010. In simpler terms, MS Amlin argued that they were not liable to indemnify the charterer – i.e. the insured under the policy, as the latter had become insolvent and was unable to pay the Award in the first instance and this provided a defence to the claim from the owners and their Club.

Foxton J made the declarations to that effect, which led to the owners and their Club appealing on the grounds that the ‘pay to be paid’ rule:

(a) is inconsistent with the insuring clause as the ‘pay to be paid’ rule was found in the general terms of the contract and should not be given effect (the inconsistency ground),

(b) is an onerous or unusual clause, which was not brought fairly and reasonably to the charterer’s attention and, therefore, it was not enforceable against the charterer (the “onerous clause” ground), and

(c) was not incorporated into the policy at all (the incorporation ground).

The Court of Appeal decision

Sir Geoffrey Vos MR, who delivered the judgment, effectively upheld the High Court decision with the following reasoning.

In terms of the inconsistency ground, drawing from authorities on the matter, the Master of the Rolls found that there was no inconsistency between the insuring clause and the ‘pay to be paid’ rule as the latter qualified the indemnity rather than negated it.

As to the “onerous clause” ground, the judgment referred to the requirements for the “onerous clause” doctrine (a term which, as per Sir Geoffrey Vos MR, should be preferred to the previous one of “red-hand” doctrine) which are that the party burdened by the provision was not aware of it and that the party seeking to rely on it had not done everything that was “fairly and reasonably sufficient” to bring the clause to the attention of the other party. In his judgment, Sir Geoffrey Vos MR stated that this doctrine would not apply to a purely commercial context, such as insurance, where the parties are usually aided by professional agents and can have generally equal bargaining power.

The incorporation ground was dismissed quickly, as being wholly unsustainable given the policy wording itself and the appellants’ very position arguing inconsistency.

Singh LJ and Males LJ agreed, with the latter adding that it may be possible for an insured to contract-out of such provision, perhaps at a higher premium; and more importantly, that it should be for the Parliament to decide whether the ‘pay to be paid’ rule should be rendered ineffective as against third parties altogether.

Conclusions

Whilst it is unknown whether, as Males LJ noted, the Parliament will revisit this rule, this Court of Appeal decision serves as another affirmation of the survival and effect of the ‘pay to be paid’ rule in third party liability insurance.