Background
Polyaire Pty Ltd (Polyaire) entered into a lease with 167 Prospect Highway Pty Ltd (Prospect) of a warehouse premises in Seven Hills, NSW (Premises).
In addition to usual covenants for maintenance and repair, clause 12.1(a) of the lease required Polyaire to:
(i) yield up the Premises in a clean and tidy condition and in the same condition and state of repair as existed at the commencement of the term … except for fair wear and tear;
(ii) where all or part of the Premises comprised a warehouse as at the commencement of this Lease …, then the Lessee must reinstate that part of the Premises to its original form as at the commencement of this Lease..
It also provided that Polyaire was to indemnify Prospect:
…from and against any liability, loss, damage, expense, costs or claim suffered or incurred by the Lessor whether by act, omission or neglect of the Lessee or the Lessee’s contractors, sub-Lessees, licensees, agents, employees or invitees, including to a third party, during or after the term of this lease, in respect of or arising from:
(a) loss, damage or injury to property or person caused or contributed to by the act, omission, neglect or default of the Lessee…
(c) the overflow, leakage or escape of water, gas, electricity, fire, or other materials or substances in or from the Premises, caused or contributed to by the Lessee;
(d) loss, damage or injury to property or person, caused or contributed to by the Lessee arising out of use of the Premises; …
On 3 November 2018, a fire destroyed both the leased premises and an adjoining warehouse, also owned by Prospect (Adjoining Premises).
There was no dispute as to the cause of the fire, which originated from cardboard covered with transparent plastic wrap stored outside the Premises by Polyaire. There was no allegation that storage of the cardboard was negligent.
At first instance, Ward J found Polyaire liable under the lease for $15,180,146.68, being the costs to reinstate both the Premises and Adjoining Premises, and loss of profits.
Polyaire appealed, contending that it did not 'cause' the damage and that, properly construed, the lease did not render it liable.
Decision on Appeal
The primary issues on appeal related to:
- the interpretation of the contractual indemnity in clause 10.3 in the lease;
- whether clause12.1(a)(ii) goes beyond repair and requires a complete reconstruction of the Premises.
Indemnity
Polyaire argued that the indemnity in 10.3 required a strict causal link and only applied when Polyaire was responsible for the immediate or proximate cause of the damage. Polyaire alleged that the proximate cause of the fire was sunlight concentrating on cardboard in combination with wind, which was outside its control. Therefore, the indemnity did not apply.
The Court rejected Polyaire's this argument,finding that Polyaire's conduct of leaving plastic-wrapped pallets exposed was the material and proximate cause of the fire, and the involvement of natural elements did not break the causal chain.
Reinstatement
Polyaire argued that ‘yielding up’ was impossible as the warehouse required total reconstruction, and that the primary judge erred in equating ‘reinstatement’ in clause 12(a)(ii) with ‘reconstruction’.
The Court rejected this, finding that the term ‘reinstatement’ indicated an obligation beyond repair extending to full reconstruction.
The appeal was therefore dismissed.
Implications
The decision confirms that:
- a broadly drafted indemnity clause in a lease will be enforced according to its ordinary meaning and can expose a tenant to significant liability, even in the absence of any negligence;
- causation in indemnity clauses does not necessarily require the sole or proximate cause, and a common‑sense ‘but-for’ test is preferred;
- indirect or unusual chains of events will not necessarily break the causation chain;
- a 'reinstatement' obligation extends to rebuilding and is not restricted to mere repair.
From an insurance perspective the decision highlights that its critical for insureds and insurers to understand the exposure resulting from indemnity and reinstatement clauses and the need to ensure that exposure is matched by appropriate cover.
Many thanks to Benedict Lloyd for contributing to this article.
