Although often relegated to the boilerplate provisions at the backend of a contract, a “time is of the essence” clause can significantly affect your rights as an innocent party to terminate and claim damages for a failure by another party to perform on time. However, drafted too widely and this often-ignored provision can result in an inadvertent breach and a termination right being enforced against you.
Although simple in its terms, a provision which expressly states that time is to be of the essence enables a party relying upon the clause to terminate an agreement and, if appropriate, claim damages if the other party fails to perform an obligation in accordance with the date or time specified in an agreement, regardless of the magnitude of the breach.
Innocent parties who enter into contracts without such a provision will not be able to terminate the agreement on the grounds that time limits were not complied with. As such, their claim may only be in damages. Although there are circumstances where the courts will imply such a term into a contract, it is clearly preferable to expressly provide this in an agreement (if indeed that is the intention of the parties).
“Time is of the essence” provisions are particularly important in agreements where completion of the contractual obligations at a particular time is important. These include, for example, contracts for the sale of shares (particularly where the price of the shares may be volatile), contracts for the sale of land, delivery of goods or the provision of certain services.
Although it may be tempting to include such a provision in all agreements (after all, everyone expects counterparties to perform on time!), the provision may not, however, be relevant in all circumstances. For example, it is not usual to include such a provision in construction contracts and, indeed, the general assumption for these contracts is that time is not of the essence unless stated to the contrary. While late completion of a construction contract may, in certain situations, render the works valueless to an employer (for example, for works intended for a particular event), more usually, for larger construction contracts, the inclusion of liquidated damage clauses provide a contractual remedy for late completion. In the jargon of construction contracts, “time being of the essence” must be distinguished from “time being put at large”. The latter describes a situation where the works are delayed due to the fault of the employer and, in the absence of appropriately drafted extension of time provisions, the contractually stated completion date for the works is set aside and replaced with an obligation to complete within a “reasonable time”. Accordingly, while extension of time provisions are often seen as only benefiting the Contractor, the reality is that they act to preserve the contractually required completion date and, therefore, the ability of the employer to collect late completion damages from the Contractor if this date is not met.
It may be, however, that while a blanket “time is of the essence” provision may not be relevant in respect of all obligations in an agreement, it could be applied to specific clauses. Apart from ensuring that such provisions are more likely to be upheld by the courts, a clause which generally makes time of the essence under the contract could result in a party inadvertently finding itself in breach of an obligation. Given that many commercial contracts (such as construction contracts) contain a number of procedural steps, many of which are unlikely to all be genuinely significant, specifying which clauses are time sensitive avoids the possibly draconian effect of termination for breach of a less important provision.
In any event, where time is made of the essence, the consequences of this should always be mirrored or co-ordinated with any termination (or other rights), and with any remedy periods elsewhere in the agreement.