'Pay to be paid' principle of P&I Clubs

Can a P&I Club's 'pay to be paid' principle be circumvented? This was the question before a Brazil appeals court last month.

The claim was in relation to cargo damage. The cargo underwriter was seeking to enforce an earlier court judgement (for cargo damage and attorney fees) against the ship owner but as the latter had gone out of business, the cargo underwriters decided to go directly against the owner’s P&I Club (an IG member) contending that the Club is jointly and severally liable for such.

The court considered the nature of P&I business and distinguished them from other commercial insurers. Court found the business was largely statutory in nature and not contractual. ‘Pay to be paid’ principle which does not make a P&I Club liable for payment to the member unless the member settles the claim first, was also referred to when coming to the decision that the Club was not liable in this instance. As regards attorney fees, since the Club was not a party to the lawsuit, it was considered to be a third party and therefore not responsible for any payment.

Caution: the outcome is jurisdiction specific and though it is in line with various other foreign precedents, certain jurisdictions may go the other way.

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