Tsolon Investments Pty Ltd v Waffle Pod Footing Systems NSW Pty Ltd

CASES CITED: Sydney Turf Club v Crowley [1971] 1 NSWLR 724 DECISION : The appeal is dismissed; the appellant is to pay the respondent's costs of the appeal.

IN THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL CA 40584/01 DC 869/00

MEAGHER JA SHELLER JA HEYDON JA

9 September 2002 TSOLON INVESTMENTS PTY LTD v WAFFLE POD FOOTING SYSTEMS NSW PTY LTD Judgment

1 MEAGHER JA: I agree with Heydon JA. 2 SHELLER JA: I have had the benefit of reading in draft the judgment of Heydon JA. I agree with the orders his Honour proposes and his reasons for doing so. 3 Clauses 5.1 and 5.5 of the lease, which Heydon JA has set out, each impose obligations on the lessee which may overlap. Relevantly, under cl 5.1 the lessee covenants to repair the demised premises except in the case of damage by fire "unless any insurance moneys are irrevocable through the neglect or fault or misconduct of the Lessee". Under cl 5.5 the lessee covenants immediately to make good any damage to the building occasioned by its servants' want of care. If insurance moneys are recoverable despite any neglect or default of the lessee, the lessee is not obliged to repair the demised premises where the damage is caused by fire. I do not understand cl 5.5 to override this exception. Clause 5.5 says nothing about insurance moneys. It is concerned with damage to the building occasioned by want of care by the lessee or its servants. It is not concerned with the case, as here, where insurance moneys are recoverable despite that neglect or default. 4 Accordingly, the appeal should be dismissed. 5 HEYDON JA: This is an appeal by the plaintiff below from an order of Andrew ADCJ on 20 July 2001 entering judgment for the defendant after a trial on 26 and 27 June 2001. 6 The plaintiff was registered proprietor of 51-69 Leland Street, Penrith. The property comprised three factory units. Unit 2, the middle unit, was leased to the defendant for four years commencing on 5 June 1997 and expiring on 4 June 2001. Under the terms of the lease the defendant was entitled to manufacture polystyrene building components: clause 4.1. On 6 October 1998, while an employee of the defendant was using a welder, sparks from the welding caused a fire which destroyed unit 2. 7 The plaintiff sued the defendant for negligently causing the fire and claimed $575,424.96 (the cost of reinstating the building) plus interest. Liability was admitted and there was no dispute as to quantum. The property was insured by the plaintiff in its name and the plaintiff's insurer paid to the plaintiff what the plaintiff had lost as the cost of reinstatement. 8 This Court was told, though nothing in the pleadings suggests this, that the action was brought by the plaintiff's insurer pursuant to its right of subrogation. That right of subrogation depended on whether under the lease the plaintiff was entitled to recoup its loss only from the insurance monies and not from the defendant. That in turn depended, at least in the plaintiff's perception, on whether the lease imposed on the plaintiff an obligation to insure the property not only for its own benefit but also for the benefit of the defendant.

Relevant clauses 9 Clause 1(iv) of the lease defined "the Building" as the building situated at 51-69 Leland Street, Penrith. 10 Clause 1(v) provided: "'The premises' and 'the demised premises' shall mean that part of the Building known as Unit 2, 51-69 Leland Street, Penrith and shall include any part thereof together with the grounds and gardens of the land and where the context so admits such of the fixtures fittings furnishings plant machinery and equipment if any from time to time installed therein and owned by the Lessor;" 11 Clause 3.4 of the lease required the Lessee to pay to the Lessor 19.76% of the outgoings in respect of the land. 12 Clause 5.1 of the lease provided: "The Lessee will during the whole of the Term and otherwise so long as the Lessee may remain in possession or occupation when where and so often need shall be maintain replace repair and keep the whole of the demised premises in good and substantial repair order and condition (having regard to their condition at the commencement of the Lease) damage by explosion, earthquake, aircraft, riot, civil commotion, fire, flood, lightning, storm, tempest and reasonable wear and tear, act of God and war damage only excepted unless any insurance moneys are irrecoverable through the neglect default or misconduct of the Lessee. This covenant shall not impose on the Lessee any obligation in respect of any structural maintenance replacement or repair except when the same is rendered necessary by any act neglect default or omission on the part of the Lessee or by the Lessee's use or occupancy of the demised premises. The Lessee acknowledges that the demised premises were in good and substantial repair order and condition at the commencement of the Term." 13 Clause 5.5 provided: "The Lessee will immediately make good any breakage defect or damage to the Building or to any adjoining premises or any facility or appurtenance thereof occasioned by way of want of care misuse or abuse on the part of the Lessee or its servants, agents, licensees, workmen, clients, customers, visitors or invitees or otherwise occasioned by any breach or default of the Lessee hereunder or under the Rules and Regulations." 14 Clause 7.5 provided: "The Lessee will not at any time during the Term do or suffer to be done or allowed any act matter or thing upon the demised premises or bring or keep anything therein whereby any insurance relating to the demised premises or the Building against damage by fire and other risks as aforesaid may be rendered void or voidable or whereby the rate of premium on such insurance shall be liable to be increased … ."

15 The plaintiff entered a business insurance policy for the period 30 August 1998 to 30 August 1999 in its name alone. The business was described as being principally the manufacture of garbage compactors and insulation production. In the Schedule, against the words "Other Interested Parties" appeared the words "Not Applicable". General Condition 9 provided: "The Insurers will not insure the interest(s) of any person other than the Insured unless the Insured has notified the Insurers in writing of such interests(s) and the interest(s) and the person(s) are noted on the Schedule."

By Section 1, the Insurers agreed to pay for damage caused by fire to the "Insured Property", namely the "Buildings".

The trial judge's reasoning 16 The trial judge said that though there was no express covenant that the plaintiff was to insure in the names of both the plaintiff and defendant, there was a covenant obliging the defendant to pay 19.76% of the outgoings, including "All premiums payable by the" plaintiff for "insurance in the joint names" of the plaintiff and the defendant "of the buildings fittings and fixtures comprising the demised premises in their full insurable reinstatement value". The trial judge found that: "there is an implied term that the monies received by the plaintiff (the outgoings) are to be received to effect the insurance of the building in the joint names of the lessor and lessee."

He implied the term not only because of clause 3.4, but also because of clause 5.1 and clause 7.5. He said that clause 5.1 debarred the plaintiff from recovering from the defendant where the premises were damaged by fire in consequence of the defendant's negligence unless the plaintiff was unable to recover under its policy of insurance by reason of the defendant's default, and the plaintiff's subrogated rights against the defendant could not be superior to the plaintiff's rights. He said: "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 [lessor's] loss was to be recouped from the insurance monies and in that event they would have no further claim against the lessee for damages [in] negligence." 17 He then said: "Clause 7.5 does not create an obligation on the lessee to repair and reinstate the building in the case of fire (even if caused by its neglect) but not to do anything to prejudice the lessor's right to recover from insurance. The clause contemplates that both parties are to be covered by insurance. I can only read clauses 5.1 and 7.5 together (as submitted) that the intention of the parties was that (a) the plaintiff would insure the premises and (b) the defendant would receive the benefit of that insurance as long as it did nothing relating to the premises to prejudice the plaintiff's right of recovery under the policy. Factually there was no demand upon the defendant to reinstate the building; that was effected under the insurance policy which the plaintiff had taken out. Again that is consistent with an intention of the parties that there was to be joint insurance effected by the plaintiff from the outgoings as required by clause 3.4 of the lease."

The "implied" term 18 Most of the trial judge's reasoning, many of the parties' written submissions, and some of the parties' oral submissions, concentrated on the term which the trial judge "implied". However, it is not necessary to consider this question because the appeal can be decided by reference to clauses 5.1 and 5.5.

The effect of clause 5.1 19 Clause 5.1 provided that the defendant was to keep "the whole of the demised premises" in good repair, except where damage was caused by fire, other catastrophic events or reasonable wear and tear, "unless any insurance monies are irrecoverable through the neglect default or misconduct of the" defendant. That is, clause 5.1 provided that in the event of fire, the defendant was not in breach of the duty to keep the demised premises in good repair unless any insurance monies payable were irrecoverable by reason of the defendant's neglect. 20 The defendant advanced a strong argument along the following lines. The fact is that the plaintiff did effect a policy of insurance against damage by fire to the demised premises. That fact remains a fact whether or not it was obliged to have done so, whether or not it was obliged to have done so in the name of both plaintiff and defendant, whether or not it was obliged to have done so for the benefit of the defendant as well as itself, whether or not it charged the defendant 19.76% of the premium, and whether or not, if it did, it was in breach of the lease in doing so. 21 It is also the fact that the insurer paid the claim: that is, there were "insurance monies" in the sense that policy monies were owing, and those policy monies were paid. Hence they were not "irrecoverable" through any "neglect default or misconduct of the" defendant, if for no other reason than that they had actually been recovered. 22 In consequence, the defendant was not in breach of clause 5.1, because the demised premises only ceased to be in good repair by reason of fire, and the insurance monies paid as a result of the fire were not irrecoverable through the defendant's default. Hence, though the plaintiff's insurer is subrogated to the rights of the plaintiff against the defendant, it cannot have greater rights than the plaintiff did: Sydney Turf Club v Crowley [1971] 1 NSWLR 724 at 734. In the events which happened, under clause 5.1 the plaintiff had no rights against the defendant. 23 The plaintiff argued that clause 5.5 stood alone, entirely separate from clause 5.1. It imposed an obligation to make good any damage to the Building, ie all three units, and any adjoining premises, not just the demised premises, ie Unit 2, with which clause 5.1 dealt. The plaintiff submitted that clause 5.1 was a covenant by the Lessee to repair the demised premises; to that there was an exception where the non-repair was caused by fire; to that there was another exception where insurance monies were irrecoverable because of the Lessee's fault. The plaintiff submitted that the reference in clause 5.1: "to irrecoverable insurance monies plainly constitutes an exception to the exception in effect engrafted upon an exception to the lessee's own promise to repair the [demised] premises. We suggest that one would not eke out of a qualification of an obligation on the lessee's part some express affirmative obligation by implication on the lessor's part."

The plaintiff asked rhetorically: "Why would one eke out from a very limited clause conferring a very limited protection in a very special circumstance to a limited cause [of action] a defence [to any cause of action based on fire?]" 24 The plaintiff also submitted that the second sentence of clause 5.1 created a positive obligation on the Lessee. While the first sentence dealt with the repair and maintenance, the second sentence dealt with structural replacement. The plaintiff said that the second sentence imposed a "substantive positive obligation on the lessee's part … to do structural replacement where that is rendered necessary as happened here by the neglect or default on the part of the lessee. …" The plaintiff also submitted that "if there is a fire that destroys the demised premises one would not go to the first sentence … [because] the topic is covered by the second sentence". 25 Further, the plaintiff argued that even if the defendant could rely on a defence created by the first sentence of clause 5.1 to a claim under that clause for failure to keep the demised premises in repair, the defendant was sued under clause 5.5 and was also sued in negligence, and the existence of a defence to a contractual cause of action did not operate as a defence to a cause of action based on another part of the contract or as a defence to a cause of action in negligence. If liability in negligence were to be excluded, more explicit words of exclusion were called for. In short, the plaintiff said: "one shouldn't eke out of a clause which really gives a defendant both an obligation and a defence, any bigger defence than the defence [that] the clause supplies to the cause of action which the cause creates. And that's a defence to say it's a fire, and that is not a defence to an action under 5.5, and it is not a defence to an action in negligence. …" 26 The plaintiff's arguments fail. 27 In the first place, it is not correct to read the second sentence of clause 5.1 as creating an independent obligation on the Lessee to carry out structural replacement the need for which arose from its own neglect. Clause 5.1, as a single clause, must be read as a whole. One cannot avoid, as the plaintiff attempted to avoid, the consequence of the first sentence by going only to the second sentence: both deal with the instant events. Under clause 5.1 as a whole, the Lessee had an obligation to keep the demised premises in repair unless the Lessee could satisfy one of two conditions. One was stated by the first sentence of clause 5.1 and one by the second sentence. The first condition was that the cause was fire or one of the other listed catastrophes (provided any insurance monies were not irrecoverable by the Lessee's neglect). The second condition was that the necessity to carry out any structural maintenance replacement repair arose from some cause other than the Lessee's conduct. That is, the Lessee could escape liability if either condition were satisfied. Even if the second was not, the first was. The plaintiff's confidence in the proposition that the second sentence of clause 5.1 creates an independent cause of action may be gauged from the fact that it did not sue on that basis; it sued only for breach of clause 5.5 and in negligence. 28 Secondly, if clause 5.1 and clause 5.5 are read as the plaintiff suggests, a conflict between them arises. According to the plaintiff, in the present circumstances, where as a result of the defendant's conduct there was a fire and the demised premises had "damage" caused to them (in the language of clause 5.5) and hence were not "in good and substantial repair" (in the language of clause 5.1), but where insurance monies remained recoverable, while it was not possible for the plaintiff to recover against the defendant under clause 5.1, it was possible for the plaintiff to recover against the defendant under clause 5.5. There is a conflict because clause 5.1 provides that where damage is caused by fire or other catastrophes, the Lessee is not liable unless any insurance monies are irrecoverable through the Lessee's neglect, while clause 5.5 provides that in circumstances which include damage caused by fire or other catastrophes, the Lessee is liable in any event. 29 The plaintiff contended that clause 5.1 and clause 5.5 had to be made to work together. The plaintiff said they did work together because clause 5.1 merely provided a defence to a contractual action for breach of the covenant to repair, while clause 5.5 created a separate contractual liability. Since this approach scarcely removes the contradiction, the plaintiff then fell back on the proposition that clause 5.5 should be preferred to clause 5.1, because clause 5.5 was "the clear provision that deals specifically with the obligation to make [good] damage to the building". But clause 5.1 deals with an even more specific subject: damage to that part of the "Building" which comprises Unit 2, being damage caused by fire and other catastrophes. 30 Yet another mode of reconciliation, advanced by the plaintiff as its very last oral submission in reply, was to submit that clause 5.1 operates "generally as a repair covenant independently of fault", while clause 5.5 "operates when fault is found". On this basis it was said that each clause dealt with a discrete subject matter. But this argument gives no weight to the second sentence of clause 5.1, which must be read with the first sentence, and which makes liability under the first sentence turn on various matters including the "neglect" or "default" of the Lessee. 31 It is true that in one respect clause 5.5 can have an independent and non-contradictory operation. Clause 5.5 deals not only with damage to the "demised premises" (ie Unit 2) but the "Building" (Units 1-3) and "any adjoining premises". In this very case, according to the plaintiff, the fire had not only damaged Unit 2, but had also damaged other buildings. The plaintiff pointed to paragraph 6 of the Statement of Claim and the first two particulars of damage: "On or about 6 October 1998, an agent or employee of the Defendant was using a MIG welder ('the Welder') on the Premises when sparks emitted from it and ignited polystyrene off-cuts causing a major fire and damage to and the destruction of the Premises. PARTICULARS OF DAMAGE (a) Building reinstatement $380,063.62 (b) Demolition, site clearance and adjacent building repairs $121,696.74"

Paragraph 3 of the Statement of Claim defined "the Premises" as Unit 2. Though paragraph 7 of the Statement of Claim referred to a duty on the defendant to make good "any breakage defect or damage to the Building", the allegation of breach of that duty in paragraphs 8 and 9 spoke only of damages "to the Premises". But even if the Statement of Claim is to be read as extending beyond damage to Unit 2, the plaintiff was unable to say how much of the $121,696.74 claimed for demolition, site clearance and adjacent building repairs was for damage to Units 1 or 3, or for adjacent building repairs, and, even after the defendant denied there was material in the appeal papers going to that question, did not point to any. 32 In these circumstances the plaintiff advanced the following indignant pair of alternative submissions at the end of the oral argument: "It would be remarkable and not to say wholly unjust, we submit, if a qualification or an excusing provision in a repair covenant limited to its own subject matter of repairing the premises let, somehow grew out of its own shoes and enlarged itself so gigantically as to exempt the person only obliged to repair the demised premises from any obligation at all to answer for damages for negligence going outside those premises. If your Honours are otherwise against us on everything else we have said in this appeal, your Honours must still recognise that your Honours are against us because of the application of a participle within the repair covenant in cl 5.1. And how can that clause outgrow its content to hold blameless the tenant when [its] negligent acts have financial consequences extending beyond the protection which the limited repair covenant confers upon it being limited as it is only to the premises, the subject of the demise. We submit, that would be such an unreasonable result as to call for first a serious inquiry, as to whether the repair covenant has that operation at all which is our preferred position. Secondly, at very least even if it does, to justify a new trial unless it's to the question of, what are damages not answered or what are the damages apart from the protection supplied by the repair covenant?" 33 So far as the request for a new trial made in the second part of that oral submission is concerned, this Court cannot order a new trial unless "some substantial wrong or miscarriage" has occurred: Supreme Court Rules Part 51 rule 23(1). The plaintiff had a complete opportunity to ventilate this question at the trial which has already taken place, and there is no wrong or miscarriage to be cured by a second trial. 34 The first part of the submission may have weight in the task of making a choice between methods of overcoming possible conflicts between clause 5.1 and clause 5.5. 35 One approach is to seek to avoid any conflict between clause 5.1 and clause 5.5 by treating clause 5.1 as dealing with claims for failure to keep Unit 2 in repair where the cause of the lack of repair is a fire or other catastrophe, while treating clause 5.5 as dealing with "any breakage defect or damage" caused otherwise than by fire or other catastrophe. This approach, which involves reading down the words "any breakage defect or damage", is perhaps less attractive, because it leaves the issue of breakages, defects or damage caused to Units 1 or 3 or to adjoining premises by negligently caused fires and other catastrophes unresolved. In short, it is exposed to the complaint made in the plaintiff's submission at the end of the oral argument. 36 A second possible mode of reading clause 5.1 and clause 5.5 minimises the plaintiff's reproach. That mode of construction would read clause 5.1 as giving the Lessee immunity from action for damage caused by fire and other catastrophes to Unit 2 (unless any insurance monies were irrecoverable by the Lessee's neglect), while treating clause 5.5 as applying in relation to damage caused by fire and other catastrophes, and otherwise caused, for damage to Units 1, 3 and adjoining premises. Clause 5.1 deals with the specific subject of damage caused to Unit 2 by fire and other catastrophes; clause 5.5 with the general subject of damage caused by fire and other catastrophes and otherwise; the specific provision prevails over the general one. Another, more mechanical, rule of construction which achieves the same result is that if a clause in a contract is followed by a later clause which destroys the effect of the first clause, the latter clause is to be rejected as repugnant and the earlier clause prevails; but if a later clause can be read as qualifying rather than destroying the effect of the earlier clause, then the two are to be read together, and effect given to both. See K Lewison The Interpretation of Contracts (2nd ed, London, Sweet & Maxwell, 1997) para 8-08. On that principle a wide construction of clause 5.5 is to be rejected, but only to the extent of the repugnancy. It is to be rejected to the extent that it would make the Lessee liable for damage caused by fire and other catastrophes to Unit 2, being a form of damage which clause 5.1 rendered the Lessee immune from liability for. The construction arrived at by these means appears sound. On that basis the defendant would be able to resist the plaintiff's claim under clause 5.5 so far as it rested on damage to Unit 2, but not otherwise. However, since neither the Statement of Claim nor the evidence identified what the relevant quantum referable to damage otherwise than to Unit 2 was, the plaintiff wholly fails. 37 The plaintiff's contention that its right to sue the defendant at common law in negligence was unaffected by clause 5.1 encounters difficulties which are similar to those raised by its reliance on clause 5.5. The Lessee is only liable under clause 5.1 for failure to maintain the premises in respect of structural maintenance replacement or repair "when the same is rendered necessary by" inter alia any neglect or default on the Lessee's part. To that liability and negligence clause 5.1 creates a defence in relation to fires or other catastrophes where it is not the case that any insurance monies are irrecoverable through the Lessee's neglect. If clause 5.1 creates a defence for negligently caused fires, why should the device of suing, not under clause 5.1, but in the tort of negligence, permit the Lessor to recover for the conduct in tort in a manner it cannot recover for in contract? 38 There is a further difficulty in the plaintiff's contention that even where it is debarred from recovery under clause 5.1 it can recover under clause 5.5 or in negligence. The plain effect of clause 5.1 is that where the Lessor has recovered insurance monies for losses caused by catastrophic fires which were the result of the Lessee's conduct (including the Lessee's fault), the Lessor is not to recover any monies from the Lessee. Clause 5.1 contemplates single recovery through the insurance monies where they are recoverable. It rules out double recovery, whether by the Lessor's direct action against the Lessee or by an insurer of the Lessor pursuing a subrogated claim against the Lessee. Yet to permit recovery under clause 5.5 or in negligence would generate the double recovery against which clause 5.1 set its face.

Orders 39 For the above reasons the following orders are proposed.

2. The appellant is to pay the respondent's costs of the appeal.

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