In most commercial contracts, there will be a clause or a phrase to the effect that “time is the essence of this contract.” Many a time, little or no thought is given to the clause and it is often inserted without a clear understanding of its meaning and effect.
The expression “time is of the essence” means that a breach of the condition as to the time of performance will entitle the innocent party to consider the breach as a repudiation of the contract. The parties may expressly provide that time is of the essence of the contract and where there is a power to terminate the contract on a failure to complete by the specified date, the stipulation as to time will be fundamental.
Halsbury’s Laws of England in regard to building and engineering contracts in Vol. 4, Para 1179 defines thus: Where time is of the essence of the contract–
“The expression time is of the essence means that a breach of the condition as to the time for performance will entitle the innocent party to consider the breach as a repudiation of the contract. Exceptionally, the completion of the work by a specified date may be a condition precedent to the contractor’s right to claim payment. The parties may expressly provide that time is of the essence of the contract and where there is power to determine the contract on a failure to complete by the specified date, the stipulation as to time will be fundamental. Other provisions of the contract may, on the construction of the contract, exclude an inference that the completion of the works by a particular date is fundamental; time is not of the essence where sum is payable for each week that the work remains incomplete after the date fixed, nor where the parties contemplate a postponement of completion, where time has not been made of the essence of the contract or, by reason of waiver, the time fixed has ceased to be applicable, the employer may by notice fix a reasonable time for the completion of the work and dismiss the contractor on a failure to complete by the date so fixed.”
Section 55 of the Indian Contract Act, 1872 provides that if something is promised to be done at a specified time and the same is not performed, the contract becomes voidable at the option of the promisee, if it was the intention of the parties that time should be of the essence of the contract. The section further provides that if it was not the intention of parties to make time of the essence, the promisee is entitled to claim compensation for any loss occasioned due to default in performance on or before the specified time. Finally, the section goes on to say that if time is intended to be of the essence by the parties but performance is accepted on some other time, compensation cannot be claimed by the promisee unless he gives notice to the promisor of his intention to claim compensation, at the time of acceptance of performance.
Intention to make time of the essence
The question whether or not time is of the essence of a contract would essentially be a question of the intention of the parties to be gathered from the terms of the contract.
Intention to make time of the essence, if expressed in writing, must be in a language which is unmistakable: the stipulation must show that the intention was to make the rights of the parties depend on the observance of the time limits prescribed in a fashion which is unmistakable. The language will have this effect if it plainly excludes the notion that these time limits were of merely secondary importance in the bargain, and that to disregard them would be to disregard nothing that lay as its foundation.
Even where the parties have expressly provided that time is of the essence of the contract, such a stipulation will have to be read along with other provisions of the contract and such other provisions may exclude the inference that the completion of the work by a particular date was intended to be fundamental. For example, if the contract were to include clauses providing for extension of time in certain contingencies, or for payment of fine or penalty for delay, on the expiry of the time provided in the contract, such clauses would be construed as rendering ineffective the express provisions relating to the time being of the essence of the contract.
When time is of the essence?
The mere mention of a specific date for completion of the contract or including the default clause imposing a penalty in the agreement are, by themselves, no evidence of the intention of the parties to make time of the essence. Such intention may be gathered by (i) the language of the agreement, which must be in unmistakable terms that the parties wanted to make their rights dependent upon observation of the time limit; (ii) the nature of property to be sold; and (iii) conduct of parties and surrounding circumstances at or before the contract.
The question if time was of the essence of the contract should be decided with reference to how the parties to it intended and the same has to be ascertained from the terms and conditions and not by substituting a guess as to what they might have intended under the circumstances.
Time is always considered of the essence of contract in the following cases:
- Where the parties have expressly agreed to treat it as of the essence of contract;
- Where delay operates as an injury; and
- Where the nature and necessity of the contract require it to be so construed.
When time is of the essence of a contract, failure to deliver goods in time gives a right to the buyer to repudiate the contract and the seller cannot claim damages against the buyer. The express stipulation as to time would be a condition precedent and not a mere warranty, even if the stipulated time was extended further by mutual consent of the parties.
When time is not of the essence?
Where a party to a contract commits defaults in the performance of its part of the contract and he is given an extension of time to complete the contract, time cannot be considered to be of the essence of the contract.
When the contract itself provides for an extension of time, the same cannot be termed to be the essence of the contract and default in such case does not make the contract voidable.
In the case of sale of immovable property, time is normally not regarded as the essence of the contract. In fact, there is a presumption against time being the essence of the contract. It has been consistently held by the courts in India, that in the case of agreement of sale relating to immovable property, time is not of the essence of the contract unless specifically provided to that effect. This principle is not in any way different from that obtainable in England. Under the law of equity which governs the rights of the parties in the case of specific performance of a contract to sell real estate, the law looks not at the letter but at the substance of the agreement.
Where there is an express provision that time is of the essence of a contract and at the same time provision for extension of time in certain contingencies, and for the payment of a fine or penalty for every day or week the work undertaken under the contract remains unfinished on the expiry of the time prescribed in the contract, such provision is inconsistent with time being of the essence of a contract, and would be calculated to render ineffective an express provision in a contract to that effect. In such a case it cannot be said that it was intended that time should be of the essence of the contract.
Tests for determining whether time essence of contract
Even where time is not of the essence of the contract, the Court may infer that in the circumstances of the case it has to be performed within a reasonable time, and it will depend on upon the intention of the parties, which has to be ascertained:
- From the expressed stipulation of the contract;
- From the nature of the property; and
- From the surrounding circumstances
Where a contract contains a promise to do a particular thing on or before a specified day, time may or may not be of the essence. If it is, the promisee is entitled to rescind, but he may elect not to exercise the right and an election will be inferred from any conduct which is consistent with the contract remaining in being. If not of the essence or no longer of the essence because of election, rescission is generally only permitted after giving a notice requiring performance within a specified reasonable time, and after non-compliance with the notice.
The question as to whether time is of the essence of the contract or not can be answered only by looking at the intention of the parties. Clauses such as the extension of time and imposition of liquidated damages or penalty etc. may go against the intention of the parties to make time of the essence since the parties find an adequate remedy by way of penalty or liquidated damages. To more effectively convey in a contract that you really mean it when you specify a time for performance, an intention to make time of the essence, it must be expressed in writing, in language which is unmistakable and without ambiguity.