‘Time is of the essence’, what does it mean?
Has your firm placed an order for goods but they haven’t been delivered by the agreed date? Or has a deadline for making a payment to your company under an on-going contract been missed? These are common scenarios but before deciding whether to wait a bit longer or to try and cancel the contract on the basis of delay, one important matter to consider is whether time is ‘of the essence’ (‘OTE’) for that obligation.
What does ‘time of the essence’ mean?
If time is OTE for a contractual obligation in a commercial contract this means the deadline is a condition of the contract, rather than merely a term, entitling you to terminate the contract (but not obliging you to) even if the deadline is missed by the other party by only a narrow margin. In one reported case a delay of just ten minutes in a buyer transferring completion monies in respect of a property, entitled the seller to terminate the contract and keep the deposit.
Beware however that when time is OTE, you can’t terminate a contract on the grounds of delay if your own conduct, even if perfectly legitimate, made it impossible or impractical for the other party to meet the deadline. Unless the contract provides otherwise, in these circumstances the specified deadline would be replaced with a duty to perform within a reasonable time.
When is time OTE?
Time is OTE where the contract expressly says it is. It’s often used where it’s important to secure performance by the agreed date such as delivery of goods, completion of a sale or some types of payments.
If you haven’t expressly agreed that time is OTE, then the deadline is probably not a condition of the contract. However, an intention to make time OTE may sometimes be implied into commercial contracts, depending on the circumstances and the contract wording. The question is “must the parties have intended even a slight default to lead to a right to terminate the contract?”
It will usually be implied that time is OTE in the sale of perishable goods because late delivery may be useless to the buyer. Similarly, for completion of the sale of a business as a going concern, it’s important that the buyer can take control of the business before there’s too much change to its business, employees or assets.
Time is unlikely to be considered OTE if:
- The contract has no fixed or ascertainable date for performance. Phrases like ‘as soon as possible’ and ‘within a reasonable time’ are not sufficiently clear.
- The contract contains another inconsistent consequence of delay.
- The contract provides a procedure for extending a time limit, with liquidated damages.
- There is a clause giving interest on late payments which could indicate that time was not of the essence for payment.
What if time is not OTE?
Please see the further note on how ‘making time of the essence’ can be a helpful procedure for terminating a contract on the grounds of delay in performance where time was not expressly stated to be OTE.
Even if time is not OTE, a delay might still justify termination under an express contractual right, or at common law depending on the facts and contract terms. If you’re in any doubt about the legal implications of a contractual deadline being missed by either party, it’s best to seek legal advice before taking any steps which might prejudice your position.