Contracts Basics Series #6: Time for performance - DAC Beachcroft

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Contracts Basics Series #6: Time for performance

Published On: 1 November 2015

When is "time of the essence" and what are the consequences of failing to perform? 

"Time of the essence" with regard to performance obligations in a contract, means that those obligations must be performed in strict compliance with required timescales. The consequences of failing to do so are severe - even a minor deviation from those timescales would amount to a fundamental breach of contract which entitles the aggrieved party to terminate the contract. Given the seriousness of the potential remedy, purchasers should not be surprised if suppliers push back hard against the inclusion of the phrase in most commercial contracts, unless the real-life consequences of them being late in delivering to precise timescales genuinely merit termination.

It is also for that reason that the general position is that time will not be considered "of the essence" unless:

  1. The contract expressly states that time must be strictly complied with;
  2. It is implied by the nature of the contract or the surrounding circumstances; or
  3. Neither (a) nor (b) applies but time is subsequently made "of the essence" by the party who has been subjected to unreasonable delays sending a notice requiring the defaulting party to complete performance within a specified (reasonable) date/time.

Express Term of the Contract

Obligations to meet specific timescales will often attach to, for instance, delivery of goods, building works and payment terms and these will either be linked to a termination event or expressed as "time of the essence" obligations. 

Be aware, however, that for these obligations to truly be "of the essence" i.e. time is of the upmost importance with regards to meeting such obligations (and hence, for a right of termination to arise as an immediate consequence of a breach of these obligations):

  • (a) There should not be any other inconsistent provisions within the contract, such as liquidated damages provisions (these effectively provide that the contractor/supplier will be required to compensate the purchaser in the event of a delay, therefore indicating that time is not "of the essence" and that the parties have acknowledged that delays may occur);
  • (b) The phrase should be allied with a specific timescale or timescales which is/are clearly essential to the contract. Generic provisions such as "time shall be of the essence of this Agreement" where the contract contains a number of non-essential as well as essential timescales are unhelpful, in the sense that they:
    • Appear to create an overall right to terminate even for a breach of any timescale which bears no significance to the contract; and
    • May be interpreted by a court as being too generic to make time of the essence i.e. leaving it up to the court to decide which obligations are , by implication, essential enough to the contract to be deemed to be of the essence. 

Implied Term of the Contract

If there is no express provision in the contract, time may still be of the essence in relation to certain obligations which are by implication essential to the contract (and would warrant a right of immediate termination) depending on the terms of the contract or the actions of the parties. 

Time is likely to be of the essence in circumstances where the terms of the contract or the actions of the parties indicate that a date or time is so essential to the contract that a failure to perform on time would deprive a party of the benefit of the contract, which it was intended that it would receive. For instance, if the contract is for the supply of perishable goods and if these goods are not received on time, then it is likely that the purchaser will be deprived of the benefit of the contract, and it should then be entitled to terminate immediately without liability. 

However, (as for express terms above), if any alternative forms of remedies in relation to a breach of timescales are set out in the contract e.g. liquidated damages provisions, then it is unlikely that time would be deemed to be of the essence. 

Notice making time of the essence

If time is not of the essence in relation to any obligation under the contract (either by lack of express provision or by implication) it may become of the essence in circumstances where there is a continuing delay in performing the contract, which becomes so significant as to constitute a fundamental breach of the contract which would entitle the other party to terminate. 

Termination of the contract of this basis, however, is not without risk as it is difficult to determine the point at which the right to terminate arises. If the contract is terminated too early, the terminating party could be in breach of the contract itself and be liable for damages. 

It is preferable in these circumstances for the aggrieved party to give notice making time of the essence and request compliance with a particular date or time by which an obligation must be complied with, and stating the consequence of a failure to do i.e. termination of the contract. 

Note however, that such notice:

  1. Must be reasonable (given the particular circumstances and depending on what remains to be done to comply with the stated obligation);
  2. Must not change the terms of the contract: A party can only terminate in this way if the failure to comply with the stated obligation goes to the very root of the contract so as to deprive the aggrieved party of a substantial part of the benefit to which it was entitled under the terms of the contract i.e the notice serves to indicate the point at which the aggrieved party considers the delay has become so significant that it constitutes a fundamental breach of the contract).

In summary

When it comes to drafting the terms of a contract, including time of the essence provisions, these need to be clear and unequivocal. 

If you consider that time of performance/delivery is absolutely essential to your contract, then say so! Ensure that your contract clearly and unambiguously links performance/delivery with your required timescales and states the consequence of any failure to meet those timescales i.e. termination. Care should also be taken not to include inconsistent provisions within your contract which would otherwise conflict with such interpretation e.g. agreeing interest on late payment, when the contract states that time is of the essence regarding payment on a specific date. 

If you require any advice in relation to time of the essence provisions or more generally in drafting contract terms and conditions, please do not hesitate to contact us.