Claim No: CL-2022-000527 - [2025] EWCA Civ 1387

The Third Party (Rights against Insurers) Act 1930 (the 1930 Act) was the precursor to the 2010 Act. It had been found to have one major flaw, in that under the 1930 Act “a third party [could not] issue proceedings against an insurer without first establishing the existence and amount of the insured’s liability” (see [7] of the explanatory note to the 2010 Act). The 2010 Act removed “the need for multiple sets of proceedings by allowing the third party to issue proceedings directly against the insurer and [to resolve] all issues (including the insured’s liability) within those proceedings”.

The unsatisfactory effect of the 1930 Act had been authoritatively determined in Post Office v. Norwich Union Fire Insurance Society Ltd [1967] 2 QB 363 (Post Office) and Bradley v. Eagle Star Insurance Co Ltd [1989] AC 957. Denning LJ explained the problem at pages 373-4 in Post Office. The policy in that case had provided that “the company will indemnify the assured against all sums which the insured shall become legally liable to pay as compensation …”. Until the insured’s liability to the injured person had been ascertained and determined to exist by judgment or award, no right to indemnity arose. As Devlin J had said in West Wake Price & Co v. Ching [1957] 1 WLR 45 at 49:“the assured cannot recover anything under the main indemnity clause or make any claim against the underwriters until they have been found liable and so sustained a loss”.

It will be observed that the insuring clause in part 1 of the Policy has a similar effect to the clause at issue in Post Office, though it was in slightly clearer terms.

The judge explained the relevant background to the 2010 Act in relation to pay first clauses at [19]-[32] of his judgment. I can summarise those paragraphs briefly here.

The Charterer’s rights under the Policy have been transferred to and vested in the Owner and the Club under section 1 of the 2010 Act. That section allows the Owner and the Club to bring a direct action against the Insurer to enforce those rights, which have been “established” for the purposes of the 2010 Act by the Award.

Section 9 of the 2010 Act directly addressed transferred rights that are subject to conditions “that the insured has to fulfil” including pay first clauses. Section 9(5) outlawed pay first clauses by providing that the transferred rights “are not subject to a condition requiring the prior discharge by the insured of the insured’s liability”. But section 9(6) added an important qualification. It provided that, in the case of a contract of marine insurance (such as here), section 9(5) “applies only to the extent that the liability of the insured is a liability in respect of death or personal injury”. The 2010 Act, therefore, directly addressed the mischief created by pay first clauses and relied upon by the Owner and the Club, but excluded non-personal injury marine insurance policies from the ambit of the statutory override. It is accepted that the Policy is indeed a “contract of marine insurance” within sections 9(6) and (7) of the 2010 Act.

The mischief created by pay first clauses was, therefore, well understood when the 2010 Act was passed. They were used widely by shipowners’ mutual Protection and Indemnity Clubs (P&I Clubs) and other insurers. The House of Lords had decided in Firma C-Trade SA v. Newcastle Protection and Indemnity Association and Socony Mobil Oil Inc v. West of England Shipowners Mutual Insurance Association (London) Ltd (No 2) [1991] 2 AC 1 (The Fanti and the Padre Island) that pay first clauses were effective. The pay first provisions in those cases were admittedly contained within the insuring clauses. In the Padre Island, the clause provided that the P&I Club would “protect and indemnify members in respect of losses and claims which they as owners of the entered vessels have become liable to pay and shall have in fact paid”. The House of Lords held that payment by the member was a condition precedent to the clubs’ obligation to pay, and that the third parties acquired no greater rights under the contracts of insurance in the Clubs’ rules than the members had had, so that the “pay first” provisions defeated their claims. Lord Goff recorded at page 36E that the P&I Clubs had submitted that the pay first clauses were essential because “members should be able to assume the financial probity of other members because all of them are insurers as well as insured”.

There were some well-documented expositions of how pay first clauses worked injustice. Mr Justice Mance (as he then was) wrote an article entitled Insolvency at Sea ([1995] LMCLQ 34) questioning the P&I Clubs’ justification of pay first clauses in The Fanti. The Law Commission consulted on reforms to the 1930 Act and pay first clauses in 2001 (CP152 at [5.58]). It noted in footnote 71 that there was concern over pay first clauses “being used more widely [than just by P&I Clubs] by mutual insurance companies …. The standard collision clause (clause 8 in the Institute Time Clauses, Hulls) does provide that the insured shall have paid sums due to a third party before being entitled to an indemnity”. The Law Commission’s report (No. 272) repeated the concern at [5.28].

The Law Commission ultimately recorded the conflicting views of consultees at [5.31] to [5.32] of its report, concluding at [5.37] that they were “reluctant to recommend that a new Act should intervene in the field of marine liability insurance, given current domestic and international negotiations. We wish to avoid proposing provisions which might conflict with international measures. Accordingly, the draft Bill only nullifies the effect of pay-first clauses in the context of marine insurance if the claim is for death or personal injury …”. As I have explained, this was what the 2010 Act eventually provided.

It was not suggested here or below that section 9(5) of the 2010 Act, which carves contracts of marine insurance, like the Policy, out of the override for other pay first clauses in section 9(4), was not applicable to this case. Instead, the Owner and the Club raised the three arguments I have mentioned already.

In relation to the arguments before him as to the ways in which the pay first clause in this case should be read out of the Policy, the judge cited Lord Diplock at page 851 in Photo Production Ltd v. Securicor Transport Ltd [1980] AC 827, where he said that: