Court of Appeal recognises "onerous clause doctrine" where terms are incorporated by reference

The Court of Appeal has upheld the enforceability of a “pay first” clause in a marine insurance policy, allowing the insurer of an insolvent insured to rely on the provision to avoid liability to third parties seeking to bring a direct claim against the insurer under the Third Parties (Rights against Insurers) Act 2010: MS Amlin Marine NV on behalf of MS Amlin Syndicate AML/2001 -v- King Trader Ltd & others (Solomon Trader) [2025] EWCA Civ 1387. 

The court considered the extent to which the clause had been validly incorporated into the policy. It recognised the so-called "red hand rule", which it said was better described as the "onerous clause doctrine" and could be summarised as follows:

"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."

The court noted that the key question is whether a party has reasonable notice of the onerous clause, and said the doctrine is therefore not likely to apply to purely commercial transactions in financial markets such as insurance, where a party is represented by professional agents who have a duty to draw an onerous or unusual clause to their attention. Further, while the court confirmed that the doctrine applies to both consumer and commercial contracts, it stressed the high threshold needed to establish that a clause is onerous or unusual. 

For more information, see this post on our Insurance Notes blog.