The House was asked as to the effect of section 1(3) of the 1930 Act on policies including ‘pay or be paid’ clauses.
Held: The central question was whether the condition of prior payment was rendered of no effect by section 1(3) of the Act of 1930. It is well established that an indemnity is enforceable by way of action for unliquidated damages.
Lord Goff said: ‘It is evident that certain of the judges in the courts below . . were much affected by what they perceived to be the unfortunate consequences which would follow if the cargo owners were denied a direct action against the clubs. Indeed Stuart-Smith LJ went so far as to say that, if the argument of the clubs were to prevail, any liability insurer could drive a coach and horses through the Act by the simple device of incorporating a pay to be paid clause in the policy. To my mind, this statement both exaggerates the danger and ignores the policy underlying the Act of 1930 . . In his judgment, Bingham LJ . . summarised in eight points his general approach to the construction of the Act. With that admirable summary I respectfully agree. In it, he stressed that the primary purpose of the Act was to remedy the injustice highlighted in particular in In re Harrington Motor Co Ltd, Ex parte Chaplin [1928] 1 Ch 105, in which it was held that payment by an insurance company to an insolvent insured of a sum due under a liability policy, fell to be distributed among the creditors of the insured, of whom the injured party was only one: see Bradley v Eagle Star Insurance Co Ltd [1989] AC 957, per Lord Brandon of Oakbrook. He also stressed that under the Act there were to be transferred to the third party only such rights as the insured had under the contract of insurance, subject always to section 1(3) of the Act which in effect prevented contracting out of the statutory transfer. This being the statutory scheme, it is very difficult to see how it could be said that a condition of prior payment would drive a coach and horses through the Act; for the Act was not directed to giving the third party greater rights than the insured had under the contract of insurance . .’ and
‘The agreement to arbitrate is one which regulates the means by which the transferred right is to be enforced against the Club. As such, it is inevitable that such an agreement must be treated as transferred to the statutory transferee as part of, or as inseparably connected with, the member’s right against the Club under the rules in respect of the relevant liability.’
Lord Brandon of Oakbrook said that on the ordinary and natural construction of the ‘pay to be paid’ provisions of the clubs’ rules payment by the members of the cargo owners was a condition precedent to payment by the clubs to the members and that there was no principle of equity which enabled those express provisions to be disregarded or overridden. Furthermore, the ‘pay to be paid’ provision by the terms of the contract of insurance made between the members and the clubs did not purport, either directly or indirectly, to avoid those contracts or to alter the parties’ rights under them upon the members being ordered to be wound up, so as to render those provisions to that extent of no effect under s.1(3) of the Third Parties (Rights against Insurers) Act 1930.
Judges:
Lord Brandon, Lord Goff of Chieveley
Citations:
[1991] 2 AC 1, [1990] 2 Lloyds Rep 191, Gazette 25-Jul-1990
Statutes:
Third Parties (Rights Against Insurers) Act 1930 1(3)
Jurisdiction:
England and Wales
Citing:
At first instance – Socony Mobil Oil Co Inc v West of England Ship Owners Mutual Insurance Association Ltd (Padri Island) (No 2); Firma CF-Trade SA v Similar (Fanti) CA 30-Nov-1989
The court considered appeals from conflicting interpretations of the effect of s1(3) of the 1930 Act on pay to be paid clauses in the event of the insolvency of the insured.
Held: The condition did not purport to avoid the contract or to alter . .
Approved – Re Allobrogia Steamship Corporation 1979
The court considered the effect, on the insolvency of the insured, of ‘pay to be paid’ conditions in contracts of insurance. It was asked to order the winding-up of a foreign registered company. The company had to own assets within the jurisdiction . .
Cited – Re Harrington Motor Co Ltd, Ex parte Chaplin 1928
A person injured in a road accident had obtained judgment for damages against the company, but had been unable to enforce the judgment before the company went into liquidation. The company’s motor insurers paid the amount of the judgment to the . .
Cited – Bradley v Eagle Star Insurance Co Ltd HL 1989
Mrs Bradley was employed by Dart Mill several times from 1933 and 1970 and acquired byssinosis from inhaling cotton dust. The company was wound up in 1975 and dissolved in 1976. In 1984 she applied to the court for pre-action disclosure under . .
Appeal from – The Fanti and The Padre Island CA 1989
. .
Cited by:
Cited – Freakley and Curzon Insurance Ltd v Centre Reinsurance International Company and Another; similar CA 11-Feb-2005
Claims were made for personal injury caused by asbestos. The re-insurers sought declaratory relief against the head insurers, and the administrators of the insolvent company. The administrators sought declarations in turn. Curzon insured the company . .
Cited – Kastor Navigation Co Ltd and Another v AGF M A T and others (‘Kastor Too’) ComC 4-Dec-2002
The claimant ship owner and its mortgagee sued the defendant insurer after the loss of the insured vessel, through fire. The insurers replied that the damage by fire was so extensive that the vessel was beyond repair when she sank, and was therefore . .
Cited – Law Society of England and Wales and others v Shah and others ChD 30-Nov-2007
Solicitor firms had been made bankrupt leaving a shortfall after thefts from client accounts of over 12 million pounds. The thief had diappeared, and the other partners were now discharged form bankruptcy. The Law Society accepted that it could not . .
Cited – McGuinness v Norwich and Peterborough Building Society CA 9-Nov-2011
The appellant had guaranteed his brother’s loan from the respondent, and the guarantee having been called in and unpaid, he had been made bankrupt. He now appealed saying that the guarantee debt, even though of a fixed amount could not form the . .
Lists of cited by and citing cases may be incomplete.
Insurance, Arbitration
Updated: 12 April 2022; Ref: scu.223316
