Cutting through the legalese: Time of the essence
Parties to a contract are sometimes surprised to learn that missing a deadline does not automatically mean a material breach of the contract (permitting termination of the contract). Courts tend to believe that minor deviations to timings in the contract do not always warrant damages or termination. For that reason, parties can use “time of the essence” clauses in their contracts when a party wants to make it clear that the contractual obligations are to be completed on time.
In ordinary English, if anything is “of the essence”, it means it is important or essential. When it is a clause in a contract, it indicates that the parties must perform by the time agreed because a delay will be deemed to be a material breach. In effect, a “time of the essence” clause is saying that the times and dates specified in the agreement are vital and mandatory to the contract and, as a result, any delay might be grounds for cancelling the contract.
A clause making time of the essence should identify which deadlines it effects, especially where the contract sets out more than one deadline. It often means that time of completion is of the essence but it is better if the contract sets this out.
If the parties have not expressly made time of the essence a clause in the contract, their intention to do so may be implied: it will boil down to whether or not failure to perform an obligation on time would deprive one party of substantially the whole benefit of the contract. If so, then time can be found to be of the essence for that deadline and failure to meet that deadline means the contract can be terminated
As a rule of thumb, where time is not of the essence, delay does not entitle a party (usually the employer) to terminate the contract. However, the terms “regularly and diligently” often appear in contracts. When a project is in delay, employers, main contractors and sub-contractors are often left asking if the main contractor/sub-contractor is proceeding regularly and diligently. It can be difficult to prove that the other party is not proceeding in such a manner. Unless the contract states that an employer can terminate the contract if the main contractor/sub-contractor does not proceed regularly and diligently, it would be difficult for the employer to do anything until the date of practical completion passes.
In conclusion, a time of the essence clause adds certainty for the employer but pressure and a strict deadline on the main contractor/sub-contractor (which may cause the contractor to tender a higher price for the works). Adding this clause entitles the employer to terminate the contract if deadlines aren’t met. Such clauses add more certainty than simply relying on a requirement to proceed regularly and diligently. The latter clause does not offer stability and it will be for the courts to decide if there has been a material breach to the contract.
These notes have been prepared for the purpose of an article only. They should not be regarded as a substitute for taking legal advice.