Pay to be paid proviso in P & I cover remains effective in transfer of rights under Third Parties (Rights against Insurers), Act 1930.
In these two cases involving different vessels, insolvency of the ship owners supervened after damage to cargo had occurred and before payment had been made by the vessel owners in order to qualify them for indemnification from their P & I Clubs.
Cargo interests argued that in suing the Clubs, they stood in the shoes of the vessel owners. As such, they would have to pay themselves to qualify for indemnification under the policies. As that was impossible, the proviso of pay to be paid should be ignored and the Clubs required to indemnify.
At first instance, Staughton J found in favour of cargo. Saville J found in favour of the clubs.
Bingham, O’Connor, and Stuart-Smith LJJ found in favour of the vessel owners.
The House of Lords (Lords Brandon, Keith, Ackner, Goff and Jauncey) held in favour of the clubs.
Their view was that if the right to be indemnify was contingent upon payment, it was the contingent right which was transferred to cargo by virtue of the Third Parties (Rights against Insurers) Act. The fact that the condition was impossible to fulfill did not result in a requirement that the condition be ignored. That the rights transferred were valueless was the inevitable consequence of the underlying contracts of insurance.
The House of Lords discussed an interesting argument based on equity presented by Sumption QC on behalf of cargo interests. It was argued that equity dispensed with conditions of prior payment in contracts of indemnity.
The House of Lords’ answer was that, since the fusion of equity and law in 1873, no principle in equity could override express contractual provisions, as were the pay to be paid clauses.
Lord Brandon also pointed out that, in all likelihood, cargo interests were the cargo underwriters, so the contest was between the 2 groups of insurers with no hardship to individuals.
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