When will time be of the essence?
Time will be of the essence in a contract when a time limit is an essential condition of a contract. Parties may agree to stipulate that a right must be exercised by a certain time and/or that a contractual obligation is performed by a certain time. If parties fail to meet these deadlines they may find themselves having lost a beneficial right of the contract or having terminated the contract.
If a party fails to exercise a right by the time specified the right will be lost. If a party fails to perform a contractual obligation by the time agreed the party will be in repudiatory breach of the contract. The aggrieved party may then opt to terminate the contract. It is therefore important for parties to ensure that they adhere to contractual deadlines.
Should time be of the essence?
Generally the default position is that time is not of the essence. For example, time is not of the essence for property transactions. Standard Condition 6.1 and Standard Commercial Property Condition 18.104.22.168 provide that time is not of the essence unless a notice to complete has been served. There are, however, circumstances in which parties may wish to make time of the essence.
Parties should agree to make time of the essence where it is important to secure performance of a contractual obligation by a specific date. In general it is best to ensure that this is expressly stated in the contract and that the provision is not too wide or ambiguous. The provision should specify which obligation is time sensitive. The court tend to interpret time of the essence provisions restrictively when they are not well drafted. The Court of Appeal determined in the recent case of Spar Shipping A.S v Grand China Logistics Holding (Group) Co. Ltd  EWCA CIV 982 that an obligation to make a punctual payment was a not a condition of the contract as the clause was not specified to be a condition and was so widely drafted that the breaches varied from trivial to grave in nature. The case demonstrates the importance of carefully drafting time of the essence provisions and the commercial uncertainty that may arise when parties fail to do so.
A carefully drafted time of the essence provision will not enable a party to terminate a contract where the party has prevented performance by their own actions. If a party makes it either implausible or impossible for another party to perform their obligations the time of the essence provision will fall away and will be replaced by a duty to perform the obligation within a reasonable time. This is known as the prevention principle. The prevention principle often provides protection for contractors who enter into an agreement with their employer to complete works by a certain date and are required to make variations a their employer’s request. In these circumstances the employer can no longer hold the contractor to the set completion date if their actions have prevented the contractor from completing the works by such date. Contractors should ensure they have read the terms of their contract as it is possible that a contract may provide mechanisms for avoiding the prevention principle.
It is important for parties to carefully consider using time of the essence provisions. If a party wishes to make time of the essence they should do so by way of an express term and should ensure their own actions do not undermine the provision. Time of the essence provisions are useful in ensuring timely performance of a contract, when used properly they are a helpful contractual tool.