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 of the English court which could be realised in a winding-up for the benefit of creditors; and that, in turn, depended on whether the company had any realistic prospect of success in a claim against its insurers (a PandI Club). The rules of that Club included a ‘pay to be paid’ condition. The petitioners had obtained judgments against the company in respect of loss of cargo. Liability under those judgments was a risk covered by the company’s membership of the Club. on the making of a winding-up order, the company’s rights against the Club in respect of its indebtedness to the petitioners would be transferred to the petitioners under the provisions of section 1(1) of the 1930 Act.
Held: The Club faced a dilemma. Either the insolvency did, ex hypothesi, render impossible compliance with the ‘pay to be paid’ condition; or it did not. If the latter, then it the claim was not valueless; if the former, then the ‘pay to be paid’ condition would have the substantial effect of altering the rights of the parties under the contract upon the insolvency of the company, and so had to be struck down by section 1(3) of the 1930 Act: ‘The use of the phrase ‘directly or indirectly’ in s.1(3) shows that provision in a relevant contract can fall foul of s.1(3), even though it does not expressly and in terms purport to avoid the contract or alter the rights of the parties upon the happening to the insured of any of the relevant events. The effect of the word ‘indirectly’ is in my judgment that any provision in such a contract which has the substantial effect of avoiding a contract or altering the rights of the parties upon the happening to the insured of any such events is invalidated, even though the contract does not in terms so provide.’ and ‘The manifest purpose of s.1(3) is to make certain that, in any of the events specified in s.1(1), the third party shall be able to take the full benefit of the rights against the insurer, unaltered and undiminished by any provision in the contract which is designed directly or indirectly to cancel, prejudice or reduce such rights in the event of one or more of such events taking place.’
Judges:
Slade J
Citations:
[1979] 1 Lloyd’s Rep 190
Statutes:
Third Parties (Rights Against Insurers) Act 1930 1(3)
Jurisdiction:
England and Wales
Cited by:
Dicta Adopted – Firma CF-Trade SA v Newcastle Protection and Indemnity Association (the ‘Fanti’) QBD 1987
The court considered the effect of section 1(3) on a ‘pay to be paid’ clause in a re-insurance contract.
Held: If, as a matter of construction of the membership rules, the condition survived the making of a winding-up order – which he thought . .
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 . .
Approved – Socony Mobil Oil Co Inc and others v West of England Ship Owners Mutual Insurance Association Ltd (Padri Island) (No 2); Firma CF-Trade SA v Similar (The ‘Fant’) HL 14-Jun-1990
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 . .
Lists of cited by and citing cases may be incomplete.
Insurance, Insolvency
Updated: 19 July 2022; Ref: scu.223312