The Court of Appeal has handed down a judgment providing helpful clarification on the so-called ‘red hand doctrine’.

The precise facts of the case will be of less interest to a general audience (it concerned a so-called ‘pay first’ clause in a marine insurance policy). More pertinent is the discussion about whether the clause in question was particularly onerous and therefore was adequately brought to the attention of one of the parties, as required by the ‘red hand doctrine’. This phrase, coined by Lord Denning, refers to the principle that “some clauses…would need to be printed in red ink on the face of the document with a red hand pointing to it before the notice could be held to be sufficient”.

In its judgment, the Court considered the case law in this area in some detail. Before making any conclusions on the application of the doctrine, the first thing to address was its name: the Court held that the ‘red hand doctrine’ label should be retired and be replaced with the ‘onerous clause doctrine’.

In the Court’s view, the onerous clause doctrine applies in both consumer and commercial contracts and establishes that “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 also addressed the view expressed by some that a ‘sliding scale’ applies such that the more onerous a clause, the more notice is required. Delivering the leading judgment, the Master of the Rolls said that “for my part, I would not formalise that as part of the onerous clause doctrine. It is sufficient to say that both the question of how onerous or unusual the clause needs to be and the question of what amounts to fair and reasonable notice are questions of fact and degree that the court needs to decide taking into account all the circumstances of the case in question. It is always unwise to lay down strict conditions for the application of simple principles, since one cannot predict the facts and circumstances of future cases”.

Importantly, the Court also stressed the high threshold that is required to show that a clause is onerous or unusual in the first place, particularly in a commercial context. In fact, the Master of the Rolls went as far as to say that “the red hand or onerous clause doctrine is all about notice and it is not likely, in my judgment, to have any application to purely commercial transactions in financial markets such as insurance, where the party relying on the doctrine is represented by professional agents, whose duties will presumably include explaining the meaning and effect of the contracts it concludes for its principal, the insured”.

Ultimately, on the facts, the Court held that the onerous clause doctrine did not apply, noting that “this was a commercial contract between parties of broadly equal bargaining power, in which the court should be slow to intervene”.

To read the judgment in full, click here.