Firstly, what does it mean?
The natural meaning of this expression is that timing is very important. So, when used in a contract, it means that applicable timescales must be complied with and there are potentially serious consequences of even a slight delay. So where a contract provides that ‘time is of the essence’ in respect of the performance of an obligation, there is a contractual requirement for that obligation to be performed within the timescale specified. Generally a failure to do so will result in a breach of contract which cannot be remedied (which may also attract damages for breach) and which will entitle the innocent party to terminate the contract, even where the failure to perform the obligation on time is minor.
When is it used?
Time of the essence clauses are often found in supply contracts attached to the performance or delivery obligations of the supplier (for example on-time delivery of goods or service deliverables). However, time of the essence clauses may also be included in respect of the customer’s payment obligations or their obligations to do certain things which the supplier may be dependent on for their performance (for example the provision of data or documents).
Time can also be stated as being of the essence in relation to the exercising of contractual rights (for example, a customer notifying the supplier of goods being received damage within a specified period after delivery) meaning the right is generally lost if not exercised within the time set.
It is worth noting that it is generally not advisable to use the term in a consumer context – firstly because it is not likely to be clear what the phase means to the typical consumer and secondly because it is likely to be considered unfair and therefore void where used to protect a supplier in relation to a consumer.
Why do we use it?
Focusing on obligations, there is no general rule that time is of the essence in relation to performance of a contract as a whole, however, where a contract does provide that ‘time is of the essence’ in respect of the performance of an obligation, this makes it a contractual requirement (which is a condition of the contract) for that obligation to be performed within the timescale specified. Generally, a failure to do so (however minor) is repudiatory meaning:
- The contract can be terminated by the innocent party.
- The innocent party can claim damages for loss of the contract (i.e. damages for loss caused by the early termination).
Time being of the essence can therefore make it easier for the ‘innocent’ party to terminate the contract and may result in increased damages being recoverable.
This makes inclusion of the phrase in a contract onerous for the party needing to comply with the obligation (in fact they may want to expressly state that time is NOT of the essence) but it is beneficial for the receiving party when compared to a more general right to terminate the contract in certain defined circumstances (e.g. for material breach).
Importantly, an obligation to pay an amount under a contract will not be of the essence in a commercial contract unless the parties have agreed that it should be, either by express agreement or by implication.
What if we don’t include it in our contract?
Usually, time is not of the essence unless the parties have expressly made it so but it is possible for it to be implied by the contract’s wording and context. For example, time may be of the essence where:
- The parties expressly stipulate that time will be of the essence using other phrasing. For example, by including a contract term stating that any failure to perform by the specified time is a repudiation of the contract or a term stating one fixed date for delivery of goods which must be met or the innocent party can terminate and claim damages. By contrast a contract providing for performance ‘without delay’ or ‘as soon as possible’ would not imply time is of the essence.
- A notice is served making time of the essence. Such a notice can, in certain circumstances, be sent by one contracting party to another when there has been a performance delay to help the sending party to terminate the contract at common law on grounds of delay and claim damages for loss of the contract, even if the original contract did not set a clear deadline or make time of the essence or if the original deadline has passed.
- There is an implied agreement that timely performance is essential. For example the conduct or intentions of the parties could make clear performance is time-critical, including repeated chaser emails or requests for updates saying that time is critical or the nature of the goods means on time delivery is essential e.g. because the goods are perishable and will otherwise be unsaleable.
If time is not of the essence when is performance required?
Performance is still required at the time stipulated in the contract, but the consequences of not complying (whilst still a breach) are unlikely to be the termination of the contract by the innocent party. It may be a liquidated damages clause, an interest payment, or a release of an obligation to take delivery.
Where time is not of the essence in respect of the performance of an obligation, and there is no date specified for performance, then there is only a contractual requirement to perform that obligation within a ‘reasonable’ time. What is “reasonable” will be fact and contract specific.
It is advisable to always request a “time of the essence clause”?
Even if you are the party set to potentially benefit from such a clause, it is worth considering whether it is in fact in your favour. Will you actually terminate the contract if the obligation is performed, say, 1 day, 1 hour or 1 minute late? Would it be preferable to have some other recourse which would compensate you for the damage but maintain the contractual relationship? Whilst termination may be seen as the ultimate remedy, the practicalities of enforcing this need to be considered. Do you have other suppliers for the same materials or services lined up, or would it in fact result in a supply gap? As always, the particular facts and circumstances will determine whether this is a desirable clause for your contract.
Disclaimer
This information is intended for general informational purposes only and does not constitute legal advice. We recommend seeking professional advice before taking any action on the information provided. If you would like to discuss your specific circumstances, please feel free to contact us on 0800 2800 421.
