to insure its capital investment. The Lessee's possible loss is variable. The appearance of new types of equipment on the market at a lower rental value might make the lease an economic burden rather than a benefit, and the development of new diagnostic techniques could render the continued use of the equipment unprofitable. The parties knew how to provide for insurance for the benefit of a particular party. The third paragraph of Paragraph VII requires the Lessee to procure liability insurance for the benefit of Lessor.
The intention of the parties is further illuminated by the fact that the only insurable interest in the value of the leased equipment was in the Lessor. The risk of its destruction by fire was expressly assumed by the Lessor and expressly excluded from the risks to be borne by Lessee. The Lessee had no obligation to restore or replace equipment destroyed by fire. The absolute right of Lessor to terminate the lease upon destruction by fire further limits any insurable interest that the Lessee might have. Under these circumstances the Lessee would have no right to the proceeds of an insurance policy on the full insurable value of the equipment.
It is argued that "it would be almost impossible to imagine any reason for the Lessor to have obligated itself to perform a contractual duty by the performance of which it alone would benefit." Counsel might try these for size. Lessee was specifically relieved of any obligation for the loss of the equipment by fire. This risk of loss was specifically placed on Lessor. Lessee did not have to return the equipment in good condition at the end of the lease in the event of destruction by fire. If Lessor wanted to continue an advantageous business relationship after destruction by fire, it was obliged to replace the equipment. The equipment was expensive. Without insurance the Lessor might not have been able to exercise its option. There is a balancing of the benefits between Lessor and Lessee in all these clauses.
Lessee also complains of Lessor's action in terminating the lease. Lessor on December 29, 1975, ten days after the destruction of the equipment, notified Lessee of its determination to terminate the lease. Apparently, Lessee had not yet given Lessor the notice which triggered Lessor's obligation to make this election.
First we inquire whether this action or the termination clause itself has any effect on the liability for loss or the nature of the obligation to insure. We find that it is consistent with the obligations allocated to the parties by the other parts of Paragraph VII, and should be read together with them to ascertain the intention of the parties from the four corners of the instrument, the landmarks within which the Court has attempted to confine itself in the analysis of this agreement. The consistent pattern is that Lessor was to insure against loss by fire, Lessee was relieved of any risk of loss by fire, but bore the risk of business interruption by reason of the loss of the equipment, that upon loss the Lessor had the option of supplying a new piece of equipment to Lessor, out of its insurance proceeds, or terminating the agreement and relieving Lessee from further obligation to pay rent.
However, we face an entirely different problem when we consider Lessee's charge that the lease was unlawfully terminated. Both parties pay deference to the legal principle that conditions precedent to a termination must be strictly fulfilled. We do not find it relevant to consider whether or not Lessor had insurance policies as described in Paragraph VII actually in force at the time of the fire or not. It was Lessor's obligation to insure and the same consequences will follow whether coverage was in effect or not. With or without insurance the Lessor had the absolute right to terminate.
The agreement does not describe what kind of notice is to be given Lessor by Lessee, or within which time. There are no options in the Lessee to make a "reasoned decision about how best to proceed in light of that loss." That option is specifically reserved to Lessor. The only purpose of the notice is to require the Lessor to make up its mind within thirty (30) days of being notified by Lessee.
An early decision in this regard would be advantageous to Lessee. Lessee's obligation to pay rent is not extinguished by the fire, but only by the exercise of the absolute right to terminate vested in the Lessor.
It is provided in Paragraph VI of the Agreement that
"Lessor shall have no obligation to Lessee with respect to LEASED EQUIPMENT except as expressly provided by this agreement and none shall be inferred."
The early termination is thus of benefit to Lessee only. Without it the obligation to pay rent continues.
Lessee argues that this clause can only be read as one contemplating that at the time of such loss it is for the Lessee initially to make the decision whether it wants to continue in business or whether it simply desires to take its share of the insurance proceeds as compensation for its loss. The difficulty with this argument is that it flies directly in the face of the terms of the agreement that place such option in the Lessor. Lessee is relieved of any risk of loss by destruction which is insurable. Lessee does not have to return the equipment in good condition at the end of the lease if the equipment is destroyed by fire. There is no provision for sharing the insurance proceeds because the various risks are specifically apportioned by the terms of the lease.
However, the Lessee cites the provisions for notice by it to Lessor as a condition precedent to termination. No such notice was given. Lessor, however, gave a notice of termination ten days after the fire. While it has been alleged that Lessor failed to procure the required insurance, its omission to do so did not shift either the insurable risks that were apportioned between the parties or any benefits that would flow therefrom. It is the Lessor who bears any loss from the failure to secure insurance because the Lessee was relieved of this risk. Lessor loses its capital investment and, if it is otherwise unable to replace the equipment, the option to continue an advantageous leasing arrangement. If it does not replace the equipment, the function of the notice clause is demonstrated, the Lessor must terminate the lease and Lessee's obligation to pay rent.
Lessor enjoys no windfall by the destruction of the equipment. It recovers its capital investment only. If it desires to continue receiving rent it must replace the equipment. If it does not it receives no more rent, and loses whatever benefit it had in the continuance of the lease, the rent reserved, the continued depreciation deduction, and the other income tax advantages that have been mentioned in the briefs as a motive for the transaction.
Lessee suffers no unintended forfeiture of its rights. Its only right on destruction is to give notice to Lessor to replace the equipment or terminate the obligation to pay rent. The Lessor very promptly exercised this option without waiting for the notice, thus extinguishing Lessee's obligation to pay rent at the earliest time, a benefit to the Lessee.
Thus the intended function of the notice clause has been served.
While the Lessee is relieved of the obligation to pay rent it may have suffered the loss of an advantageous business arrangement measured by the value of its bargain less the rental cost. Many factors could turn this into a burden rather than a benefit. Nevertheless, this is a risk specifically assumed by Lessee in the agreement.
Lessee also sues on a cause of action for negligence because of Lessor's failure to secure or maintain the proper insurance. Because we have found no right in the Lessee to the proceeds of such insurance, this cause of action must also fail.