Bit Badger Pty Ltd v Cunich
[1996] QSC 100
•4 June 1996
IN THE SUPREME COURT
OF QUEENSLAND
Brisbane No. 188 of 1994
Before the Hon Justice White
[Bit Badger Pty Ltd v. Cunich]
BETWEEN:
BIT BADGER PTY LTD
Plaintiff
AND:
MICHAEL RAYMOND CUNICH
DefendantREASONS FOR JUDGMENT - WHITE J
Judgment delivered 04/06/1996
CATCHWORDS LANDLORD and tenant - wh. lease relieves tenant of liability for loss from fire due to tenant's negligence - insurance.
Counsel:Mr W Sofronoff QC for the plaintiff
With him Mr J Bond
Mr P Lyons QC for the defendant
With him Mr P Applegarth
Solicitors:Feez Ruthning for the plaintiff
Quinlan Miller & Treston for the defendant
Hearing Date: 10 February 1995
IN THE SUPREME COURT
OF QUEENSLAND
No. 188 of 1994
[Bit Badger Pty Ltd v. Cunich]
BETWEEN:
BIT BADGER PTY LTD
Plaintiff
AND:
MICHAEL RAYMOND CUNICH
DefendantREASONS FOR JUDGMENT - WHITE J
Judgment delivered 04/06/1996
The plaintiff as landlord has commenced a writ action dated 11 February 1994 against the defendant as tenant for damages for the cost of reinstating a building and loss of rent occasioned by fire allegedly due to the default of the defendant. By order of Moynihan SJA made pursuant to O.39 r.12 certain questions have been heard separately. The plaintiff has filed a statement of facts and documents which the court is to take into account when answering the questions posed.
The plaintiff is the registered owner of certain land on which was erected a building at 183 Wellington Road, East Brisbane. By a registered lease dated 5 March 1991 the plaintiff demised to the defendant those premises and land for a term of three years commencing on 23 February 1991 and terminating on 22 February 1994. The defendant carried on the business, inter alia, of importing, assembling, wholesaling and retailing furniture and ancillary articles at the premises.
On or about 31 July 1991 the plaintiff renewed a contract of insurance with NZI Insurance Australia Limited ("the insurer") pursuant to which the insurer agreed to provide the plaintiff with insurance cover in respect of the premises, inter alia, for fire cover. That contract was for the period 31 July 1991 to 31 July 1992. The defendant was not a co-insured with the plaintiff under the contract of insurance. Pursuant to the lease the defendant paid to the plaintiff a variable charge in each accounting period which included amounts paid by the plaintiff for insurance premiums for insurance of the premises against fire.
Assumed Facts
On the evening of 4 June 1992 the defendant was working at a workbench in the building using a grinder to sharpen drill bits when sparks caused by that process ignited used rags kept in the vicinity of the workbench. Prior to that date the defendant and his employees had used mineral turpentine and woodfill in carrying out their work in the building. The plaintiff alleges that the air in the building around the workbench where the grinding was carried out was filled with flammable fumes. This allegation is denied by the defendant but is assumed to be correct for the purpose of answering the questions. The fire spread from the rags to a container of mineral turpentine kept near the workbench which also ignited. The fire spread and burnt the building causing extensive damage to it.
The plaintiff alleges that as a consequence of the damage caused to the building by fire it has incurred costs in reinstating the building in the sum of $273,566.55 and lost rent in the sum of $46,585. Those sums are not admitted in the pleadings by the defendant but may be assumed for the purposes of these proceedings. The defendant has declined to admit liability for the fire and the consequential losses or to indemnify the plaintiff for its losses.
By virtue of the contract of insurance the insurer has either paid to the plaintiff or others on behalf of the plaintiff amounts which equal the loss claimed by the plaintiff in its action against the defendant and has requested the plaintiff to prosecute the within action against the defendant. There is no indication as to whether an insurer is behind the defendant. It is not a factor in answering the questions but in a number of cases where this issue has arisen it has, in practical terms, been a dispute between two insurers.
The Questions
The questions posed are"(a)Whether it was an implied term of the lease that in the event of fire damage to the building, consequential losses, and loss of rent, the plaintiff's loss was to be recouped from the insurance moneys payable pursuant to the fire insurance cover referred to in cl. 1.8(m) of the lease, and that in that event the plaintiff would have no further claim against the defendant in respect of loss or damage caused by the fire.
(b)Whether by virtue of having received payment pursuant to insurance cover which it effected, the plaintiff has been fully indemnified in the manner envisaged by the provisions of the lease and is not entitled to recover damages from the defendant in addition thereto.
(c)Whether the proper construction of the lease is to exclude the right of the plaintiff to recover from the defendant damages caused by fire which occurred due to the negligence of the defendant."
The Issues
These questions raise issues which have not, according to counsels' researches, been the subject of judicial consideration in this State, nor of appellate decision in Australia. The only known decision in Australia directly on point is that of Foster J in New South Wales in Linden v. Staybond Pty Ltd (1986) NSW Conv R 55-308 although there are cases dealing with subrogation rights against a party characterised as a co-insured, see, for example, Co-operative Bulk Handling Ltd v. Jennings Industries Ltd unrep. decision of Scott J in the Supreme Court of Western Australia No 1520 of 1984 of 1 September 1995. The New Zealand Court of Appeal has considered the matter twice in Marlborough Properties Ltd v. Marlborough Fibreglass Ltd (1981) 1 NZLR 464 and Leisure Centre Ltd v. Babytown Ltd [1984] 1 NZLR 318. A single justice (Henry J) has also considered these issues in Perimeter Investments Ltd v. Ashton Scholastic Ltd (1989) 2 NZLR 353. The issues have been decided in the English Court of Appeal in Mark Rowlands Ltd v. Berni Inns Ltd [1986] 1 QB 211 and aspects were dealt with in the earlier case of Mumford Hotels Ltd v. Wheler [1964] Ch 117. The issues raised here for consideration have been extensively canvassed in Canada: Agnew-Surpass Shoe Stores Ltd v. Cummer-Yonge Investments Ltd (1975) 55 DLR (3d) 676; Ross Southward Tire Ltd v. Pyrotech Products Ltd (1978) 57 DLR (3d) 248; T. Eaton & Co Ltd v. Smith (1977) 92 DLR (3d) 425; and Greenwood Shopping Plaza Ltd v. Neil J Buchanan Ltd (1979) 99 DLR (3d) 289. Numerous United States' decisions deal with the issues. The defendant referred to Sutton v. Jondahl (1975) 532 P 2d 478; Community Credit Union v. Homelvig (1992) 487 NW 2d 602; and Dix Mutual Insurance Company v. LaFramboise (1992) 598 NE 2d 622.
Although always subject to the particular terms of the lease the preponderance of authority in cases similar to the present seems to favour a conclusion either that the lease ought to be construed expansively to exclude any right of recourse against the tenant or that a term ought to be implied into the lease to give it business efficacy and to reflect the parties' intention that the tenant was to have the benefit of the landlord's policy even if negligent thus precluding any right of subrogation. The leading Australian and English textbooks have accepted this approach, Derrington and Ashton, The Law of Liability Insurance (1990) pp. 82, 85, 161; Tarr et al. Australian Insurance Law (1991) p. 315; MacGillivray and Partington Insurance Law (1989) para 1240; Ivamy General Principles of Insurance Law, 6th ed (1993) 497.
The Terms of the Lease
Before examining these authorities it is convenient to set out certain clauses of the lease because they will determine the answers to the questions. In addition to the yearly rental, by cl. 2.6 of the lease the tenant covenanted to pay a proportion of the landlord's outgoings annually in respect of the demised premises, namely,
"Variable Charge - The tenant shall pay to the landlord by way of reimbursement (hereinafter called 'variable charge') in each accounting period an amount equal to the agreed proportion of the variable outgoings for that accounting period and the land lord shall furnish to the tenant an estimate of the variable charge payable by the tenant for the next ensuing accounting period and the tenant shall pay such estimated variable charge by equal periodic payments on the dates appointed for the payment of instalments of the yearly rental. At the end of each accounting period the variable outgoings for that accounting period shall be calculated and an adjustment shall be made between the landlord and the tenant by the payment of any deficiency by the tenant to the landlord or the refunding or crediting of any excess by the landlord to the tenant as the case may require. A certificate under the hand of the authorised officer or managing agent of the landlord shall be prima facie evidence of the variable outgoings for each accounting period. The monthly instalments payable on account of the variable charge for the first accounting period are as stated in Item 2 of the First Schedule hereto."
By cl. 1.8 "variable outgoings" are the aggregate of all amounts paid by the landlord (or for which the landlord may become liable) annually in respect of the demised premises. They include the usual items to be found in most commercial leases, namely, rates, land taxes and other local and governmental charges, cleaning and gardening costs, charges for light and power, security, maintenance and repairs to the common areas, and the cost of auditing the outgoings. Outgoings with respect to insurance over the building are included:
"(m)Insurance premiums and other charges (including stamp duties) for insurance of the complex against fire with extended cover endorsement vandalism malicious mischief earthquake flood water damage boiler and pressure vessel explosion fusion and mechanical breakdown in broad cover form with repair and replacement terms and such other risks as the landlord may in its absolute discretion deem desirable including, but not limited to, consequential loss of all rents receivable from the complex including all other charges payable as additional rent or in addition to the rent in such amount or amounts and for such period of periods as the landlord from time to time requires.
(n)Public risk liability insurance against third party liability hazards including exposure to personal injury bodily injury and property damage on an occurrence basis including insurance for all contractual obligations and covering also actions of all employees, other persons, subcontractors and agents while working on behalf of the landlord. Such policy shall be written on a comprehensive basis with limits of not less than $3,000,000.00 per occurrence or such higher amounts as the landlord from time to time reasonably requires.
(o)Insurance premiums and other charges (including stamp duties) for plate glass insurance in respect of the said Building and for workers' compensation insurance in respect of the employees of the landlord engaged in the maintenance operation and/or management of the complex."
The accounting period is a period of twelve months. The tenant was to be responsible for 100% of the variables. Clause 3.9 required the tenant to pay all extra or excess premiums and other charges, if any, for insurances effected by the landlord payable on account of extra risk caused by the use of the demised premises by the tenant. By cl 4.21 the tenant covenanted not to do anything on the premises whereby the insurances on the building might be vitiated or rendered void or voidable.
Clause 5 concerned the tenant's covenants as to the maintenance and repair of the demised premises. Clause 5.7 provided:
"Fair Wear and Tear - The tenant shall at its own cost and expense keep and maintain the demised premises and all appurtenances therein in good and tenantable repair and condition having regard to the condition thereof as at the date of commencement hereof fair wear and tear and damage by fire flood storm tempest explosion riot civil commotion war or otherwise by inevitable accident or act of God and without any neglect or default on the part of the tenant alone excepted provided always that the exception in respect of fair wear and tear shall apply only if the tenant shall have taken all reasonable measures and precautions to ensure that any damage defect or dilapidation which at any time shall be occasioned by fair wear and tear shall not give rise to or cause or contribute to any damage to the demised premises."
It is to be noted that by cl. 5.2 the tenant covenanted to repair or replace at its own expense all broken, cracked or damaged plate glass or other glass in the demised premises "in all cases where indemnity is not afforded to the landlord under any insurance cover which may from time to time be taken out by the landlord."
Clause 7 concerned damage or destruction of the demised premises and relevantly provided in cl. 7.1
"Abatement of Rent and Suspension of Covenant to Repair - In case of the total or partial destruction of or damage to the demised premises by fire ... or otherwise by inevitable accident or act of God and without any neglect or default on the part of the tenant whereby the demised premises shall be rendered wholly or partially unfit for occupation or use by the tenant in the conduct of its business payment of the rent hereby reserved or a proportionate part thereof according to the extent of the damage sustained and the covenants to repair therein contained so far as they relate to any such destruction or damage shall be suspended until the demised premises shall have been restored and again put in a proper condition but nothing herein contained or implied shall oblige the landlord to restore the demised premises or to restore the same according to the former specifications ... The tenant shall not in the event of the demised premises being destroyed or damaged by fire request the insurer of the building to apply the money for which the building is insured to be laid out and expended so far as such moneys go towards rebuilding reinstatement or repairing the building."
The latter sentence would appear to be a contracting out of the provisions of s. 58 of the Property Law Act 1974 which states in modern form the effect of s. 83 of the Fires Prevention (Metropolis) Act 1774 (14 Geo 3, c. 78). It entitles a person who has an interest in a building damaged by fire to request the insurer to lay out the insurance money towards repairing the building. If the building is damaged or destroyed, inter alia, by fire without neglect or default by the tenant cl 7.2 permits the tenant to terminate the lease if the landlord has not substantially commenced to restore the premises within a reasonable time. Similarly, cl 7.4 permits the landlord in lieu of restoring the building to give notice to the tenant of cancellation of the lease.
Clause 9 sets out, inter alia, the landlord's covenants and the indemnities given by the tenant. By cl. 9.4
"The tenant agrees to occupy and use the demised premises at the risk of the tenant and the landlord shall not in any circumstances be liable to the tenant for any damage to the plant equipment ... occasioned by ... fire ... notwithstanding that the same may occur by reason of any defect in the construction of the said building or ... from any act ... of any contractor of the landlord ..."
By cl 9.6 the tenant covenanted to indemnify the landlord in certain circumstances:
"The tenant shall indemnify and hold indemnified the landlord from and against all actions claims demands losses damages costs and expenses which the landlord may sustain or incur or for which the landlord may become liable whether during or after the term hereof in respect of or arising from:
(a)Breach of covenant - Loss ... occasioned ... by the neglect ... of the tenant ... to ... perform any of the covenants ...
(c)Escape of harmful agent - The ... escape of ... fire ... in or from the demised premises caused or contributed to by any act or omission upon the part of the tenant ...
...
(e)Use of demised premises - Loss damage or injury from any cause whatsoever to property ... caused or contributed to by the use of the demised premises by the tenant ..."
Clause 10 contained the tenant's covenants as to insurances. It provided
"The tenant shall during the term hereof at its sole cost and expense obtain and keep in full force and effect in the names of the tenant the landlord and all mortgagees of the demised premises (as their interests may appear) the following insurances:-
(a)Property - [owned by or for which the tenant is legally liable]
(b)Public Risk - [to apply to all operations of the tenant]
(c)General - Any other form or forms of insurance as the landlord or the landlord's mortgagee reasonably requires from time to time in amounts and for perils against which a prudent tenant would protect itself in similar circumstances."
Clause 10.2 required that all such insurance policies contain a waiver of any subrogation rights which the tenant's insurers may have against the landlord where damage is caused by the default of the landlord and the tenant agreed to hold harmless the landlord from liability for any loss to the tenant due to oversight fault or any other cause. By cl. 10.3 such insurance policies were to be taken out with insurers acceptable to the landlord and on policies and in forms satisfactory to the landlord. By cl. 10.4 the tenant covenanted that if he should fail to take out or keep in force any insurance as required or if the landlord did not reasonably approve the insurance the landlord would have the right without assuming any obligation to insure at the sole cost of the tenant to be paid as additional rent.
It is accepted that none of the clauses in the lease provides expressly that any insurance moneys received by the landlord in respect of fire damage caused by the negligence of the tenant was to be applied in extinction of, or at the least, in reduction of the tenant's liability to the landlord pursuant to cl. 5.7, (the repair covenant). The tenant by his amended defence and in his submissions in respect of how the questions ought to be answered contends that by virtue of a term implied into the lease or on the proper construction of the lease the lease has this effect.
The insurance contract is before the court. It was not referred to in submissions and, indeed, cannot assist in the construction of the subject lease which is the task in hand but it may be noted that one of the "important notices" on the back of each insurance certificate reminds the insured that it is a term of the contract that there will be no recovery under the policy if the insured has entered into any agreement which excludes or limits the insured's right of recovery from other parties. There are no documents which are said to impact upon the presumed common intention of the landlord and tenant other than the lease and no acts or conversations which would do so, Codelfa Construction Pty Ltd v. State Rail Authority of NSW (1981-1982) 149 CLR 337 per Mason J at p. 352. By cl 15.6 the parties have agreed that the terms and conditions set out in the lease constitute the entire agreement between them.
The lease is a lengthy document clearly drawn with the assistance of solicitors. It has been registered and the Form 8 lodged in the Titles Office to which the lease is a schedule has been signed on behalf of the parties by their respective solicitors. It might thus be inferred that the parties approached the lease and the rights and obligations contained within it with some understanding of standard commercial leases. I mention this because in order to imply the term or construe the lease as contended for by the defendant requires a recognition that that result was so obvious that it either was not considered necessary to insert a specific clause within the lease or, by some oversight, the term was not included but was obvious. Further, some of the authorities suggest that issues of "justice, reasonableness and public policy" ought to dictate the outcome of these questions, Mark Rowlands Ltd v. Berni Inns Ltd, supra at p. 233.
In Linden v. Staybond, Foster J, although he did not have the terms of the insurance contract before him, thought at p. 56,859
"... It would be quite unrealistic, when approaching the question of the implication of the term contended for, or the construction contended for, to disregard the obvious fact that both the landlord and tenant when reaching agreement as to the lease provisions relating to the fire insurance of the leased premises, would have done so against a background of knowledge, shared by each, of the insurer's ordinary rights of subrogation entitling it to bring an appropriate action in the name of the insured against a party who has negligently caused the fire damage in respect of which the insurer has paid a claim."
The contrary is said to be the common experience of landlords and tenants in the United State of America. Professor Keeton comments at p. 340 of Insurance Law (1988)
"The possibility that a lessor's insurer may proceed against a lessee almost certainly is not within the expectation of most landlords and tenants unless they have been forewarned by expert counselling. When the lease provisions are either silent or ambiguous in this regard - and especially when a lessor's insurance policy is also silent or ambiguous - courts should adopt a rule against allowing the lessor's insurer to proceed against the tenant. As the result of the judicial imposition of such a rule in the absence of an express agreement between the parties, statutory provisions, or administrative regulations, the lessor's insurer should not be subrogated to claims against the tenant.
In some instances, the question of risk allocation is addressed in leases. When provision in a lease clearly express an agreement that the risk of damages to the leased property is allocation to a tenant, a persuasive argument can be made for allowing the insurer to be subrogated to the lessor's claim when a fire is attributable to a tenant's negligence."
Some Propositions
Some uncontroversial propositions may be set out initially:
•the exception of fire in a repairing covenant does not exculpate a tenant from liability for damage done by a fire caused by the tenant's negligence (indeed cl 5.7 specifically mentions this);
•that the landlord has obtained fire insurance does not relieve the tenant of the obligation to make good the loss so caused;
•fire insurance provides indemnity to the insured for both accidental and negligently caused fires;
•the rights of subrogation of the landlord's insurers are co-extensive with the rights of recovery of the landlord under the lease;
•if the landlord by virtue of the agreement between it and the tenant has waived or excluded its rights of recovery against the tenant the insurer may not recover from the negligent tenant;
•a covenant between the landlord and the tenant that fire insurance obtained by the landlord will be for the benefit of both will bar any right of recovery by the landlord from the tenant for loss due to the tenant's negligence and in turn any right of subrogation by the insurer.
The Authorities
It is convenient to consider the various authorities of which mention has been made from other jurisdictions but ultimately it is a question of construction of this particular lease. It is appropriate to turn first to the Court of Appeal decision of Mark Rowlands Ltd v. Berni Inns Ltd. It is a recent, unanimous decision of high authority and was not available to Foster J when preparing his reasons in Linden, decided the previous year. The leading judgment was given by Kerr LJ with whom Croom-Johnson and Glidewell LJJ agreed. In that case the demised premises were virtually destroyed by fire allegedly by the tenant's negligence. The tenant occupied part of the building from which was run the business of a restaurant. The remainder of the building was tenanted by one other party. The landlord was effectively indemnified for all losses flowing from the fire by its insurer. By the terms of the lease the tenant was required to pay an "insurance rent" which was calculated by direct reference to the amount of premiums paid by the landlord against the usual perils, including fire. The tenant's repair clause excepted "damage by or in consequence of any of the insured risks ..." In similar terms the lease exempted the tenant from its obligations to paint and decorate and yield up the premises in a proper state of repair on the termination of the lease in cases of damage by or in consequence of the insured risks. The tenant covenanted to insure certain risks with an insurance office nominated by the landlord "in the joint names of the landlord and tenant". The landlord covenanted to keep the premises insured against, inter alia, fire, and to lay out the moneys so received in reinstating the demised premises. There was no corresponding requirement in the landlord's covenants to insure in joint names. If the premises were damaged by an insured risk such as to make them unfit for occupation or use and the insurance had not become vitiated by any default of the tenant then the rent would cease to be payable until the premises were reinstated or for a period not exceeding three years. The insurance policy preserved the insurer's rights of subrogation but it was agreed that this did not add anything to its ordinary common law rights.
An endorsement on the policy mentioned that the other tenant had "an interest in the insurance by this policy as tenants". Although the subject tenant had requested that there should be a similar endorsement with respect to it this did not happen through oversight and not due to any objection to the tenant. The trial judge had found that the correspondence together with the covenants in the lease led to an inference that the landlord was to be regarded as insuring the premises for the joint benefit of itself and the tenant. Kerr LJ drew that inference on the terms of the lease alone, p. 224. He identified the true issue in the case as whether the terms of the lease and the full indemnity of the landlord for the losses due to the fire precluded it from recovering damages and negligence from the defendant or whether the landlord's right to recover such damages remained unaffected.
The landlord relied upon the well known principles of construction of exemption clauses considered by the Privy Council in Canada Steamship Lines Ltd v. The King [1952] A.C. 192 and submitted that liability for negligent damage to the insured premises was retained by the tenant. The tenant contended that it was not open to the landlord, having recovered the full amount of their loss from the insurers, to recover a further indemnity from the tenant having regard to the terms of the lease. The court held that the tenant was not a co-insured under the policy, at p. 229, and the tenant could not thus rely upon the decision in Petrofina (U.K.) Ltd v. Magnaload Ltd [1984] Q B 127 to bar a claim by the insurer. Lord Justice Kerr referred to three decisions of the Supreme Court of Canada and adopted the reasoning of the majority in each, particularly of Laskin CJC and the unanimous decision of the Supreme Court of Nova Scotia in Greenwood Shopping Plaza Ltd v. Neil J Buchanan Ltd (1979) 99 DLR (3d) 289. He also followed and adopted the reasoning in a number of United States' decisions to which he referred generally but did not analyse. He concluded from these decisions and the construction of the lease that the insurers had no right to a subrogated claim. His Lordship said at p. 232
"An essential feature of insurance against fire is that it covers fire caused by accident as well as by negligence. This was what the plaintiff agreed to providing consideration of, inter alia, the insurance rent paid by the defendant. The intention of the parties, sensibly construed, must therefore have been that in the event of damage by fire, whether due to accident or negligence, the landlord's loss was to be recouped from the insurance moneys and that in that event they would have no further claim against the tenant for damages in negligence. Another way of reaching the same conclusion ... is that in situations such as the present the tenant is entitled to say that the landlord has been fully indemnified in the manner envisaged by the provisions of the lease and that he cannot therefore recover damages from the tenant in addition, so as to provide himself with what would in effect be a double indemnity. Although the receipt of insurance moneys by an innocent party is of course normally no defence to a wrongdoer (see Bradburn v. Great Western Railway Co. (1874) L.R. 10 Ex. 1), Mr Harvey relied on a number of passages in Parry v. Cleaver [1970] A.C. 1, 13 to show that considerations of "justice, reasonableness and public policy" (per Lord Reid) may require exceptions to this general principle. I do not think it necessary to elaborate upon this line of argument in the present case save to say that I accept it and regard it as complementary to the conclusion which is to be derived from the construction and effect of the terms of the lease itself, as indicated above."
Colman J applied the reasoning in Mark Rowlands in National Oil Well (U.K.) Ltd v. Davy Offshore Ltd [1993] 2 Ll Rep 582, a case concerning marine insurance, in which he concluded that in the absence of provisions in the agreement before him similar to the features in the lease regarded by the Court of Appeal in Mark Rowlands as the basis of its conclusion, the party in the position of a tenant could not succeed, at p. 606.
I should make some brief mention of the Canadian cases. In Agnew-Surpass Shoe Stores Ltd v. Cummer-Younge Investments Ltd, supra, the repair covenant was not in usual terms - the tenant covenanted to take proper care of the interior of the premises with an exception for reasonable wear and tear and for "damage to the building caused by perils against which the lessor is obligated to insure hereunder". The lessor covenanted to insure against all risk of loss or damage caused by or resulting from fire. The lease provided that the lessee should pay for enumerated things, for example water and electricity use and such other risks as it might insure against except "such insurance as is herein required to be carried by the lessor ...". The majority (Pigeon J, Ritchie, Dickson and Beetz JJ, concurring) held that the tenant's obligation to repair was subject to an exculpatory clause whereby it was relieved from liability for damage to the building caused by perils against which the landlord was obliged to insure. They held that since a fire insurance policy was to be read as covering negligence, the exculpatory clause extended to damage from fire however occurring including that caused by negligence of the tenant. Laskin CJC (with whom Spence and Judson JJ concurred) although agreeing as to the outcome took a slightly different approach. He concluded that when the provisions of the lease were read together, particularly the landlord's covenant to insure and its obligation to repair damage to the building caused by perils against which the landlord was obliged to insure, it was clear that the tenant was to have the benefit of the fire insurance effected by the landlord in respect of loss or damage arising from the tenant's negligence. He thought that reliance upon the principals governing exculpatory clauses was misconceived. De Grandpré J, (Martland J concurring) was unable to conclude that the lease excluded the tenant from liability for its negligence. He considered that the business relationship between the parties meant that the landlord's covenant to insure should be read as evidencing the concern of the tenant that should a fire occur the landlord would be financially able to repair the damage.
In Ross Southward Tire Ltd v. Pyrotech Products Ltd, supra, the tenant covenanted to pay the insurance rates on a building not then completed. Laskin CJC concluded that the tenant had qualified its obligation to repair beyond the normal exception of not being liable for accidental fire. He said that the tenant had paid for an expected benefit as between itself and the landlord which any standard fire policy would reflect. He concluded at p. 252 "... that it may make a difference whether the landlord undertakes to pay the insurance premiums and whether the tenant covenants to pay them." He seemed much concerned to apply business sense to the lease, at p. 251. He rejected any notion that the landlord's intention was to get a fixed amount by way of rent for its investment and to throw all other expenses upon the tenant. De Grandpré J, dissenting, concluded that the mere fact of payment of the insurance rates by the tenant did not have the effect of relieving the tenant of his normal obligation to pay damages caused by his negligence. He accepted that it made good business sense for the landlord to make sure of a certain return on his investment by putting on the shoulders of the tenant the payment of all the items which were yet to be determined when the lease was signed.
In T Eaton Co v. Smith, supra, the leases under consideration contained covenants by the landlords (they were contiguous properties) with the tenant to insure the property against fire damage. The tenant covenanted to repair with the usual exception for fire. Laskin CJC said at p. 428:
"It is settled law that the exception of fire in a repairing covenant does not exculpate a tenant from liability for a fire caused by its negligence or that of a person for whose negligence it is vicariously liable. If it can escape this liability in the present case, it can only be on the basis that the landlord's covenant to insure is a covenant that runs to the benefit of the tenant, lifting from it the risk of liability for fire arising from its negligence and bringing that risk under insurance coverage.
Had the landlord insured without giving a covenant to that effect in the lease, the tenant's risk of liability for fire resulting from negligence would be unquestionable; and if the landlord collected from his insurer, the latter would have an equally unquestionable right of recovery from the tenant in a subrogated action."
He thought that the covenant could have no explanation unless it were for the benefit of the tenant as well as the landlord. Dissenting, de Grandpré J was of the view that the insurance covenant only enured to the benefit of the tenant in so far as it was a funding mechanism to support the tenant's option to purchase (of which there was a clause in the lease) and was an assurance of each landlord's capacity to rebuild the structure in the event of fire. He considered that the tenant's case was an attempt to achieve a statement of policy that actions in recovery by fire insurers should be kept to a minimum and only resorted to in case of negligence which was extreme, p. 440.
The court in Mark Rowland referred to Greenwood Shopping Plaza Ltd v. Neil J Buchanan Ltd, supra. That was decision by the Supreme Court of Nova Scotia. The lease had the usual repair covenant and a covenant by the lessor that it would insure the building against fire and provided that both lessor and lessee would arrange with their respective insurers not to grant subrogation rights for the recovery of any loss through fire occasioned by the acts of the other provided that the loss was covered by insurance. The clause providing for the lessor's obligation to obtain insurance also provided that if the landlord was unable to procure insurance on an agreed basis to notify the lessee and permit the lessee to acquire insurance itself at the lessor's cost. Neither of the insurers waived or was asked to waive subrogation rights as contemplated by that clause. This was held not to be a condition precedent to the operation of the clause. The court following T Eaton concluded that the landlord's covenant to insure implied a promise by the landlord to the tenant to assume by insurance the risk of loss by fire caused by any means including the negligence of the tenant and its employees. I have found the approach of the dissenting judgment more compelling and I refer to and agree with the comments made by Foster J in Linden v. Staybond infra about these cases.
I turn now to the New Zealand cases. The first is Marlborough Properties Ltd v. Marlborough Fibreglass Ltd, supra. The tenant covenanted to keep the premises fully insured in the name of the landlord and to pay all premiums. The landlord covenanted to keep in repair the exterior of the premises whilst the tenant covenanted to keep in repair the interior and certain other fittings, fair wear and tear and damage by, inter alia, fire excepted. The lease was to be terminated if the premises were destroyed or rendered unfit for carrying on the tenant's business. If the premises were destroyed by fire but not rendered unfit for the tenant's business the landlord covenanted to reinstate the premises and the rent was to be abated. The majority (Richardson and McMullin JJ in separate judgments) held that because the tenant paid the insurance premiums to cover the risk of a peril which eventuated the parties must have intended the benefit of the insurance to enure for the landlord and tenant alike. McMullin J at p. 473 recognised that on its face cl 4 of the lease, which was the tenant's repair clause including specifically the words "... damage by fire ... (all without neglect ... of the Lessee) alone excepted", may not be consistent with the construction which he gave to the covenant by the tenant to pay the insurance. If so, he concluded, that the inconsistency was the product of "somewhat inelegant draftsmanship". So too, Richardson J at p. 470 who thought that any "apparent overlapping between the two [cls 3 and 4] should be regarded as due to infelicitous drafting rather than as negativing the intentions of the parties under cl 3." Cooke J dissented. He held that there was nothing positive in the lease to indicate that the parties intended to negative the lessee's liability for negligence. He did not accept that an implied term to that effect was necessary to give the lease business efficacy, p. 468.
The Court of Appeal was unanimous in the following case of Leisure Centre Ltd v. Babytown Ltd, supra, (Cooke, Somers and Hardie Boys JJ). The court held that on a proper construction of the lease the tenant was not relieved of liability for fire damage caused by its negligence. The lessor covenanted to insure and to apply insurance moneys to reinstate with a provision exempting the lessor from liability to reinstate if, inter alia, the premises were destroyed or rendered unfit for the tenant's business purposes. The court held that the parties had made no express agreement on the question of relieving the tenant from liability for its negligence and there was no sufficient basis for implying a term to that effect. Somers J who gave the principal judgment thought that the object of the covenant to insure was to provide a fund to enable the repair and reinstatement of the premises for the benefit of both the landlord and tenant, at p. 321. He concluded that if a tenant wished to obtain "the absolution which this tenant seeks clear words or a necessary implication from words other than the common form will be required", p. 322. Hardie Boys J at p. 322 considered that the insurance covenant was so closely identified with the obligation to reinstate that it could not be regarded in isolation and it identified reinstatement as the object of effecting the insurance. He was of the view that that benefit to the lessee was considerable and provided an entirely sufficient explanation for the covenant. Cooke J at p. 323 was of a similar view that the covenant to insure was linked to the covenant to reinstate and thought that the provision for insurance in the lease was fully explicable on that basis with no need to explain it on an exemption from liability for the tenant.
In Perimeter Investments Ltd v. Ashton Scholastic Ltd, supra, the lease provided that the tenant would reimburse the landlord for insurance cover paid by it on demand, which occurred. It contained the usual tenant's repair covenant and provided that the lease would cease if the premises became untenantable. If the premises were damaged but not rendered untenantable the landlord covenanted to expend all insurance received in reinstating the premises. Henry J had reference to the two Court of Appeal decisions to which I have referred, to Mark Rowlands and to the Canadian cases. It was conceded before him that it was crucial to the tenant's case that it was obliged to pay the insurance premiums because it was the only provision creating an obligation in the tenant which could give rise, in the context of the lease, to the implication sought to be made. His Honour considered that the clause was explicable in two ways, neither of which required absolving the tenant from negligence - it ensured a net return to the landlord free of outgoings and/or it provided the source of a fund to meet the cost of reinstatement, p. 358.
I turn to the United States' cases. The present issues have been convassed there at least since the 1950's and there are dozens of cases to which reference could be made, with different outcomes. I propose to mention only those referred to by Mr Lyons on behalf of the defendant and mention more briefly those which Kerr LJ in Mark Rowlands described as "this impressive series of North American authorities". Sutton v. Jondahl, supra, a decision of the Court of Appeal of Oklahoma is regarded as a leading case which decided that a tenant should be treated as a co-insured, absent an express agreement to the contrary, where a landlord has taken fire cover and sustained loss by fire due to the tenant's negligence. The court concluded at p. 482:
"Basic equity and fundamental justice upon which the equitable doctrine of subrogation is established requires that when fire insurance is provided for a dwelling it protects the insurable interests of all joint owners including the possessory interests of a tenant absent an express agreement by the latter to the contrary. The company affording such coverage should not be allowed to shift a fire loss to an occupying tenant even if the latter negligently caused it. New Hampshire Ins. Co. v. Ballard Wade, Inc., 17 Utah 2d 86, 404 P.2d 674 (1965). A parallel effect was reached in Hardware Mut. Ins. Co. v. Dunwoody, 194 F.2d 666 (9th Cir. 1952). For to conclude otherwise is to shift the insurable risk assumed by the insurance company from it to the tenant - a party occupying a substantially different position from that of a fire-causing third party not in privity with the insured landlord."
The court considered that as a matter of "sound business practice" the insurance premium paid had to be taken into account in establishing the rent and it followed "that the tenant actually paid the premium as part of the monthly rental". The case concerned a domestic lease and the house sustained fire damage when the tenant's ten year old son used an electric popcorn popper to heat chemicals, the ensuing flame from which caused the fire. The principle in the case was applied in Community Credit Union of New Rockford, North Dakota v. Homelvig, supra. The parties entered into an oral agreement to lease a house with an option to buy. The kitchen was destroyed by a fire allegedly due to the tenants' negligence. The fire insurer brought a subrogation action against the tenants and they moved for summary judgment on the ground that they were co-insured with the landlord. The Chief Justice of the Supreme Court of North Dakota, with whom the other four members of the court concurred said at p. 603:
"The great majority of courts which have addressed this issue have held that, absent an express agreement to the contrary, a tenant is an implied co-insured under the landlord's fire policy and subrogation is barred."
The Court noted that other courts which had followed Sutton v. Jondahl had expanded upon the rationale expressed in that case and addressed various public policies which supported the rule. It said at p. 605
"Other policy arguments in favor of the majority rule include preventing windfalls to insurers and preventing multiple policies and overlapping coverage. See, e.g., Tate v. Trialco Scrap, Inc., supra, 745 F.Supp. at 473; Safeco Insurance Cos. v. Weisgerber, supra, 767 P.2d at 274.
[2] The cases adopting the majority rule are well-reasoned and highly persuasive. We hold that, absent an express agreement to the contrary, a tenant is an implied co-insured under the landlord's insurance policy and the insurer may not seek subrogation against the tenant."
The third case referred to by Mr Lyons is Dix Mutual Insurance Company v. LaFrombaise, supra, a decision of the Supreme Court of Illinois. The landlord and tenant entered into a relatively unsophisticated lease in writing in respect of a house on a farm property. It provided that the tenant was to assume responsibility for his own personal property and that the landlord would not be responsible for fire, wind or water damage. During the term of the lease the landlord maintained fire insurance on the real property. Whilst attempting to strip paint from the exterior of the house the tenant allegedly damaged the house by fire. The majority held that it was essential to look at the "spirit" of the whole agreement between the parties and noted that they were not sophisticated. They thought it significant that each had considered the possibility of fire and expressly provided for the tenant's property but had not done so with respect to the leased premises. This was said to indicate that each was to be responsible for his own property supported by the landlord taking out his own insurance. At p. 626 the majority referred to the notional inclusion of the insurance premiums in the rental sum "thereby gaining the status of co-insured under the insurance policy". Although concurring in the result, Freeman J disagreed at p. 627 that the tenant had the status of a co-insured. He said:
"... the majority's holding on this point sweeps too broadly, serving to eviscerate the common law principle that a tenant is responsible for damage to leased premises resulting from his own negligence ... indeed, the majority's holding, while stated to be limited to "particular facts of this case" ... serves to elevate the status of every tenant to that of a co-insured under his or her landlord's insurance policy, unless expressly indicated otherwise. By logical extension, the tenant might then also be considered a co-insured of the landlord with respect to personal property or negligence liability on the premises."
Heiple J dissenting analysed the issues and principles to be applied more in accordance with the approach of the non-United States' cases to which I have referred. I found his judgment of considerable assistance in working through the large number of conflicting United States authorities. At p. 627 his Honour expressed his disagreement with the majority in strong terms:
"The effect of this unfortunate decision is to make all tenants at any time and at any place co-insureds with their landlords. The only exception would be if the parties had a clear agreement to the contrary.
I have two objections to the majority opinion. The first objection is that the opinion makes factual findings which are, simply put, not correct. My second objection is that the new rule of law which it announces is bad public policy."
It is unnecessary to deal with the factual matters but I set out his Honour's summary of the United States case law at pp. 629-630:
"Other jurisdictions have also addressed the issue of when a tenant will be relieved from liability for negligently causing a fire in leased premises. The decisions from various jurisdictions can be divided into three categories: (1) absent an express agreement to the contrary the tenant is treated as a co-insured of the landlord and is not liable for negligently causing a fire; (2) absent an express agreement to the contrary the tenant is liable for negligently causing a fire; and (3) an express agreement is not required and the determination of whether to hold the tenant liable for negligently causing a fire must be ascertained from the lease as a whole.
The lead case which determined that a tenant should be treated as a co-insured, absent an express agreement to the contrary, is Sutton v. Jondahl (Okla. App. 1975), 532 P.2d 478. The reasons expressed for reaching this conclusion were that: (1) an insurance policy protects all property interest and both the tenant and landlord have insurable interests in the premises; (2) in reality the tenant pays for part of the insurance premium through the payment of rent; (3) the reasonable expectations of tenants is for the landlord to provide fire insurance which will cover them; and (4) equity calls for placing the risk of fire loss upon the insurer which has collected premiums for the risk, rather than upon the tenant, which is a party in privity with the landlord. Sutton, 532 P.2d at 482.
Several jurisdictions have followed Sutton. Alaska Insurance Co. v. RCA Alaska Communications, Inc (Alaska 1981), 623 P.2d 1216; Safeco Insurance Co v. Weisgerber (1989), 115 Idaho 428, 767 P.2d 271; Reeder v. Reeder (1984), 217 Neb. 120, 348 N.W.2d 832; Safeco Insurance Co v. Capri (1985), 101 Nev. 429, 705 P.2d 659; Monterey Corp. v. Hart (1976), 216 Va. 843, 224 S.E.2d 142; Liberty Mutual Fire Insurance Co v. Auto Spring Supply Co. (1976), 59 Cal. App. 3d 860, 131 Cal. Rptr 211; New Hampshire Insurance Group v. Labombard (1986), 155 Mich. App. 369, 399 N.W.2d 527; Fashion Place Investment, Ltd. v. Salt Lake County/Salt Lake County Mental Health (Utah App. 1989), 776 P.2d 941; Cascade Trailer Court v. Beeson (1988), 50 Wash. App. 678, 749 P.2d 761.
The Supreme Court of Kentucky in Britton v. Wooten (Ky. 1991), 817 S.W.2d 443, recently addressed whether a tenant will be held liable for negligently causing a fire. In Britton, the court held that in order for a tenant to be exonerated from liability for negligently causing a fire, the lease must contain a clear and unequivocal expression stating such intent. In reaching this conclusion the Britton court noted that public policy disapproves of exculpatory agreements in derogation of tort liability and such an agreement should be found only if it is explicit. Similar conclusions were also reached in Sears, Roebuck & Co. v. Poling (1957), 248 Iowa 582, 81 N.W.2d 462; Winkler v. Appalachian Amusement Co. (1953), 238 N.C. 589, 79 S.E.2d 185; Zoppi v. Traurig (1990), 251 N.J. Super. 282, 598 A.2d 19; and Galante v. Hathaway Bakeries, Inc. (1958), 6 A.D.2d 142, 176 N.Y.S.2d 87. But cf. Fireman's Insurance Co. v. Wheeler (1991), 165 A.D.2d 141, 566 N.Y.S.2d 692.
Falling between these two views are the jurisdictions which do not require an express agreement to be in the lease. These jurisdictions determine whether or not a tenant is liable for his own negligence in causing a fire based upon the intent of the parties as evidenced from a reading of the lease as a whole. If the intent of the parties is unable to be ascertained, the common law rule placing liability upon the tenant for his negligent conduct is enforced. This court, prior to today's decision, clearly fell within this classification. (Cerny-Pickas & Co. v. C.R. Jahn Co. (1955), 7 Ill.2d 393, 131 N.E.2d 100.) Other jurisdictions which have endorsed this view include Neubauer v. Hostetter (Iowa 1992), 485 N.W.2d 87; Acquisto v. Hahn Enterprises, Inc. (1980), 95 N.M. 193, 619 P.2d 1237; Page v. Scott (1978), 263 Ark. 684, 567 S.W.2d 101; and Rock Springs Realty, Inc. v. Waid (Mo. 1965), 392 S.W.2d 270.
In general, I believe that the public is better served if negligent actors are held responsible for the damage or injury they cause. While I would agree that parties to a lease may agree to exculpate a tenant for negligent conduct which damages the premises and that a lease may be drawn so as to regard the tenant as a co-insured, I cannot agree that the lease in this case contemplated any such thing. Further, I cannot agree that the mere payment of rent in the absence of other language should operate to exculpate a tenant who negligently causes damage to the premises."
The first United States' case mentioned by Kerr LJ was that of General Mills Inc v. Goldman (1950) 184 F 2d 359 a decision of the Court of Appeal of the Eighth Circuit. The majority found an intention in a written commercial lease that the landlord was to take out insurance for the benefit of both the landlord and tenant. The clause relied upon for this result provided that on termination of the lease the tenant should return the property in good condition "loss by fire ... excepted" and inferred that the parties intended that insurance premiums should be taken from the rental sums, p. 364. Sanborn J dissented, being unable to find anything in the lease to relieve the tenant of liability for negligence and thus from exposure to a subrogation action by the insurer. In Fred A Chapin Lumber Co v. Lumber Bargains Inc (1961) 11 Cal Rptr 634 the District Court of Appeal, Fourth District of California construed a lease containing the usual repair clause and the following clause
"Lessor agrees to maintain in full force and effect and to pay all premiums for fire, earthquake and storm insurance to cover the value of the buildings."
Since the lessor was not required to rebuild in the event of total destruction by fire nor to repair in the event of damage by fire the court concluded that the lessee had no reason to require the lessor to maintain insurance solely for the benefit of the lessor. The court inferred that the lessor had agreed to maintain fire insurance on its building for the benefit of both parties to the lease and, as between them, with respect to any loss covered thereby and agreed to seek reimbursement for such loss solely from the proceeds of the insurance. Without such an interpretation the clause, it thought, would have no meaning. The Court of Appeals of Arizona in General Accident Fire & Life Assurance Corporation v. Traders Furniture Co (1965) 401 P 2d 157 followed the majority in General Mills. Donofrio J said at p. 160
"This case [General Mills] is more in keeping with the modern trend, and takes a more realistic view of the present day business world and the part fire insurance plays in the transaction of ordinary business affairs. The case stresses that insurance premiums are an important factor to be considered by parties in determining rental payments."
The court rejected the reasoning in Carstens v. Western Pipe & Steel Co of California (1927) 142 Wash. 259 which had held that a repair clause which excepted fire did not mean that the lessee was to be relieved from fires which were the result of its own negligence. Carstens had concluded that such a concession would hardly be looked for in a contract between businessmen and if the parties had intended such a contract then it would be expected to be stated in clear terms.
The final case mentioned by Kerr LJ is New Hampshire Insurance Company v. Fox Midwest Theatres Inc (1969) Kan 457 P 2d 133. The parties had agreed that the lessor would purchase fire insurance protecting the improvements on the premises and providing for adequate protection of the building itself. The lessee was required to subordinate its activities in order not to void the insurance or increase the rates. If the premises were damaged by fire the lessor covenanted to rebuild, repair or replace them at the lessor's expense but should it fail to do so the lessee was given the option of rebuilding or repairing the premises. If that option were exercised the lessor agreed to make available to the lessee the proceeds of all insurance received by the lessor on account of that damage. The court concluded that the true implication of those provisions was that the landlord's obligation to insure was an obligation intended to enure to the benefit of both parties, a conclusion with which it would be difficult to disagree.
I have been able to obtain little assistance from the decisions from the United States relied on by Mr Lyons and those mentioned by Kerr LJ. The approach in many of the cases seems to have been to take as the starting point a particular exposition of "business sense" which assumes that insurance over a building effected by a landlord is also for the benefit of the tenant and to read the lease against such a policy position. Even though some of the judgments emphasise reading the lease as a whole to ascertain the intention of the parties a robust reading of the lease has often been necessary to bring it within the enunciated policy. Further, they contain propositions of law such as that found in the majority judgment in Sutton v. Jondahl which are contrary to settled principles of law in this country.
The final case to be mentioned is that of Linden v. Staybond Pty Ltd, supra. The landlord sued the tenant to recover the cost of repairs occasioned by fire damage to the demised premises due to the alleged negligence of the tenant in carrying out its commercial purposes. As here, the central question of the tenant's liability in the face of the landlord's receipt of insurance money was heard as a case stated. The repair and yielding-up clauses provided that the tenant would incur no liability for the fire except in circumstances of negligence on its part. The lessee covenanted that in addition to the rent it would pay the landlord's outgoings such as rates, water, drainage and "all the lessor's insurances in respect of the demised premises". These insurances were defined to include insurance of the demised premises against loss or damage by fire and an extension of cover for property owner's public liability if not adequately covered by the lessee's policy. Any dispute as to the adequacy of the insurances effected was to be settled by an expert. Foster J considered the Canadian decisions to which I have referred and the New Zealand decision of Marlborough Properties. He confessed "to an uncertainty as to whether the Court [Supreme Court of Canada] has reached its decision on the basis of the implication of a term necessary to give the insurance provisions of the lease business efficacy or whether certain expressed terms of the lease have been read in a particular way" p. 56, 862. His Honour concluded that the most likely basis for the decisions of the majority in the Canadian cases was that the Court had implied a term which they did not expressly formulate in the judgments but the existence of which having regard to the surrounding circumstances and provisions of the particular leases was felt necessary to give business efficacy to the express agreement between the parties. He had similar reservations about Richardson J's judgment in Marlborough Properties and preferred the approach of Cooke J in dissent.
He was unpersuaded that it was necessary to imply the term contended for to give business efficacy to the lease. If necessary he would have been prepared to imply an obligation on the part of the lessor to use the moneys received from the tenant as fire insurance premiums for the purpose of effecting fire cover. He did not find any obligation imposed upon the lessor either to effect a fire cover apt to protect the lessee from the results of its own negligence or to apply moneys received under a fire policy in diminution or extinction of the tenant's liability to repair fire damage occasioned by its negligence. His Honour concluded at p. 56, 866
"If the tenant wished to be afforded protection under a policy of fire insurance taken out by the lessor and, specifically, wished to obtain cover in that policy against claims in respect of fire damage arising from its negligence, then it could seek that the landlord obtain such cover when taking out its policy, even if this resulted in a higher premium becoming payable by the tenant" p. 56866.
He concluded that when all of the provisions in the lease particularly those relating to rental, repair and insurance were read together they preserved the tenant's liability to the landlord for the negligence causing a fire damage and gave it the option of seeking to be included as a party covered by insurance taken out by the lessor or simply taking out appropriate insurance itself to protect itself against claims arising from its negligence.
Conclusion
Turning then to the present lease, the tenant covenanted with the landlord to keep the demised premises in good repair at its own cost excepting damage by fire, etc, which occurred without negligence on the part of the tenant. There is no correlative covenant to repair or reinstate by the landlord in the circumstances of damage by fire without fault by the tenant. Instead, if the premises are damaged by fire (without fault by the tenant) the tenant is to be relieved of his obligation to pay rent and to repair in so far as those obligations related to the damage. The parties agreed that there was no entitlement by the tenant to request the insurer to lay out insurance moneys on the repair of the building. Both landlord and tenant in the case of damage to the building in certain circumstances were entitled to cancel the lease on notice. The tenant agreed to carry the risk of loss or damage from, inter alia, fire vis-à-vis the landlord, and to indemnify the landlord against any losses due to fire occasioned by any act of the tenant. The landlord entered into no covenant with the tenant to insure the premises against fire loss although, like Foster J, I would have no difficulty in implying an obligation on the landlord to use the sum received from the tenant referrable to insurance premiums for fire cover.
On a plain reading of the lease I can find no suggestion that the tenant is to be relieved of his obligations to repair on notice pursuant to cl 5.2 where the landlord has obtained fire insurance and the fire was caused by the negligence of the tenant. Paying an insurance rent does not have the effect contended for by the tenant in the context of this lease. That obligation appears amongst a long list of outgoings and suggests that the parties agreed that the landlord was to have its rent free of outgoings. The payment of the insurance premium was not without value to the tenant. He would be concerned to have a fund from which the building could be repaired quickly, should the landlord choose to do so.
I turn then to the question of an implied term. If a term of the kind contended for is to be implied into the lease it must come within the principles restated in Codelfa Construction Pty Ltd v. State Rail Authority of NSW (1981-1982) 149 CLR 337 in the judgment of Mason J at p. 347:
"The conditions necessary to ground the implication of a term were summarized by the majority in BP Refinery (Westernport) Pty Ltd v. Hastings Shire Council (1977) 52 ALJR 20 at p. 26: "(1) It must be reasonable and equitable; (2) It must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it; (3) It must be so obvious that "it goes without saying"; (4) It must be capable of clear expression; (5) It must not contradict any express term of the contract."
Taking each of those conditions in turn the term contended for is both reasonable and equitable in the sense that it could have been incorporated into the lease without unduly straining the other clauses (subject to questions of conflict with, eg, cl 5.7) and would not lead to an inequitable result. As to business efficacy, the approach of the majority in the Canadian and the United States cases and of the Court of Appeal in Mark Rowlands was to say that the leases under consideration would not make "business sense" (per Laskin CJC at p. 251 in Ross Southward) without the implication of such a term. The minority judgments and the New Zealand cases except Marlborough Properties (Cooke J diss.) equally thought that the leases under consideration made good business sense without the implication of the terms (or the interpretation of the lease) contended for by the tenants. In my view this lease has business efficacy without such a term being implied in it. As I have mentioned, the parties agreed that the tenant would pay for all of the landlord's outgoings and so give a "clear" rent and the insurance provided a fund from which the building could be repaired which was a matter of concern to the tenant operating its business from those premises. The third requirement is that the term must be so obvious that it goes without saying. So far from "going without saying" is the implied term that it requires cls 5.7, 7.1, 9.4 and 9.6 to be read down at best, or explained away. The final requirement that the implied term must not contradict any express term of the contract is, in a sense circular because without the implied term the tenant would be liable for the consequences of the fire due to its negligence which is expressly stated in more than one place in the lease. I am unable to find any reason for implying the term contended for into this lease.
The defendant argues that it would be offensive to principal and unjust to deprive him of the benefit of the insurance for which he has paid. In Mark Rowlands the Court of Appeal at p. 233 accepted that that was a proper case to except the principle that receipt of insurance moneys by an innocent party is no defence to a wrongdoer, Bradburn v. Great Western Railway Co (1874) LR 10 Ex 1. Considerations of "justice, reasonableness and public policy" per Lord Reid in Parry v. Cleaver [1970] AC 113 excepting that principle were held to be complementary to the construction of the lease arrived at, p. 233. Issues of public policy have been much canvassed in the authorities. In a detailed commercial lease negotiated with the assistance of solicitors and where the burden of various risks is extensively canvassed within it and which makes commercial sense, it is unnecessary to resort to propositions of public policy to construe its meaning. It would have been a matter of no difficulty at all to have inserted a term which would have required the landlord's insurance to have been in the names of the landlord and the tenant and/or to incorporate an express covenant that any insurance obtained by the landlord contain a waiver of subrogation rights which the landlord's insurer might have had against the tenant. This may have led to slightly higher premiums because such a clause would need to be drawn to the insurer's attention. Alternatively, the tenant could have taken out his own liability insurance with the same insurer or the insurer covering the risks in cl 10.
Accordingly the answers to questions posed are as follows:
(a)No
(b)No
(c)No
In the absence of submissions to the contrary the defendant must pay the plaintiff's costs of and incidental to the hearing of the questions to be taxed.
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