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Understanding Time is of the essence (as a clause in a contract).

If you read the boilerplate in your commercial agreements (and you should), you will likely have come across the phrase, Time is of the essence. What does it mean? Simply this: where there are time stipulations present in a contract - say, in the form of delivery dates - adherence to those stipulations are to be understood as going to the very root of the agreement between the parties. So, for example, if a contract says that certain widgets are to be delivered to a buyer on or before January 14, 1999 then Time is of the essence is meant to indicate that the buyer will not accept delivery on January 15, 1999 or any time after that. In other words, it is essential to the bargain that the buyer receive its widgets on time. If not, the buyer reserves the right to with-hold payment, terminate that contract, and sue for damages, including, in certain circumstances, loss of profits.

The rationale behind Time is of the essence is the need for certainty in commercial relations. From a buyer's perspective, it is sometimes important to know precisely when it can expect delivery of a certain item, for example, a machine component. The buyer may indeed have obligations of its own - such as the delivery to a third party of the machine incorporating that component - which the buyer will be unable to satisfy if it cannot rely on its suppliers. A prudent buyer in these circumstances will want to protect itself from suppliers who quote delivery times recklessly or dishonestly.

That said, it must be remembered that in quoting delivery times, suppliers are, in effect, being asked to predict the future. To the extent that doing so accurately is not always possible, it may not be fair to expect that a supplier be held accountable in the event that something unforeseeable happens. In other words, there may be some valid reason - which neither party could have anticipated - for departing from a stipulated time provision.

In trying to balance these concerns, courts have generally adopted the position that where parties to an agreement agree that time is of the essence, then time will be of the essence unless holding to this strictly would be unconscionable. Consequently, courts sometimes consider the following factors to determine whether time will be of the essence:

* Is there a real and substantive reason for time to be of the essence, given the nature of the commercial transaction contemplated by the agreement?

* Is the buyer simply trying to repudiate a contract in order to get out of its obligations? That is, is the buyer relying on Time is of the essence as an escape valve?

* To what extent, if any, has the supplier already undertaken the manufacture of the product? Is it almost complete? Can the delay be absorbed by the buyer and compensated with damages?

* Is the buyer itself ready, willing, and able to carry out its obligations under the agreement at the stipulated time

(e.g. accept and pay for delivery)?

In cases where courts find that time is not of the essence (no matter what may be written in the contract), time stipulations can still function as a warranty by the supplier, the effect of which is to allow for a claim for damages by the buyer (i.e. for a failure to meet those stipulations) but not for treating the contract as at an end.

To further compel adherence to time stipulations in a contract, a buyer will sometimes require that a supplier agree to pay a certain pre-determined amount in liquidated damages for a failure to meet its delivery obligations. In theory, that amount must - in order to be upheld by the courts - represent a true pre-estimate of the damages the buyer is likely to suffer in the event of non-delivery. That amount cannot simply be a penalty determined out of all proportion to any actual losses the buyer might incur. The obvious problem with this approach is that pre-estimating damages is not a simple task. Further, an unscrupulous supplier may look upon a liquidated damages provision merely as the cost of doing business and so be willing to pay the damages amount and delay delivery rather than forego some other, more lucrative, opportunity.

Generally speaking, courts are not blind to that kind of chicanery. Both suppliers and buyers can be assured that a court, when faced with the issue of Time is of the essence, will consider the facts of a case with a view to doing what is fair and commercially reasonable.

A final point: if you, as a buyer, decide to extend say, a delivery date, or some other time stipulated item, be sure that you make clear, in writing, that the new time is of the essence, to avoid any dispute on the subject.

Nishan Swais is a lawyer with the firm of Miller Thomson in Toronto, Ontario.
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Author:Swais, Nishan
Date:Apr 1, 1998
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