Importance of the Phrase ‘Time is of the Essence’ in Commercial Contracts

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Table of Contents

• “Time is of the Essence” Meaning
• Contract Types
• What Happens if a Contract Does Not Include This?
• Enforcement 
• Consequences
• How to Include a “Time is of the Essence” Clause
• Key Takeaways

For business owners who enter contracts, following specified timelines is crucial for the smooth operation of your agreement. The phrase “time is of the essence” carries significant weight in commercial agreements, signalling strict deadlines for certain contractual obligations. Failing to meet these deadlines can lead to disruptions in:

• business operations;
• financial losses; and
• potential legal disputes.

This article will explore the importance of “time is of the essence” phrases in contracts, highlighting the potential consequences of non-compliance.

“Time is of the Essence” Meaning

In a contract, “time is of the essence” means that the parties must complete a task within a specified timeframe. 

It means that time is not just a word but a crucial duty in the contract. 

If a party fails to meet these time-based duties, the other party may end the contract and sometimes claim money for breaking it. Even slight delays, like a few minutes, can give a reason for the other party to end or cancel the whole contract. 

The phrase “time is of the essence” is very flexible and can refer to many things in a contract, such as:

• timeframe for delivery of goods; 
• payment deadlines; or 
• deadlines for certain milestones or tasks. 

Contract Types

Contracts that require one party to complete specific duties within a stated period sometimes have a “time is of the essence” clause. Specifically, contracts where times and dates are crucial and mandatory for completion. If they do not finish on time, they could face significant risks or penalties. For example, contracts for selling shares often have this rule because share values can change fast. 

If there are third parties involved who are not a party to a contract but help with duties (e.g. delivery couriers for delivering a party’s goods to the other party), the party responsible for sending goods has to be super careful. If those others are late, the other side might cancel the contract. This could lead to significant risks and losses if they have not spoken to a lawyer before signing. 

What Happens if a Contract Does Not Include This?

If a contract lacks a clause specifying “time is of the essence” (or similar), we can assume that time is not the most critical factor of the agreement. In such cases, contracts might mention a timeframe as a condition of the agreement, such as “as soon as reasonably possible”, rather than making it a strict obligation. In these cases, ending the contract due to delays may be challenging. 

Enforcement 

Failure to meet the conditions of a “time is of the essence” clause can breach the contract, but the courts do not always see it as a reason for ending it automatically. The court decides based on the following:

• how serious the breach is;
• how it affects the contract’s performance; and
• the parties involved. 

Consequences

You might face legal consequences if you do not follow a “time is of the essence” clause. For example, you could:

• be held responsible for financial losses due to being late;
• Receive a court order to comply with your duty (this is known as an injunction); or
• lose the contract. 

Overall, not meeting this obligation will hurt you financially and your business relationships.

How to Include a “Time is of the Essence” Clause

If you wish to incorporate a “time of the essence” in your commercial contract, you should:

• expressly use the phrase “time is of the essence”;
• ensure that the timeframe outlined is fair; 
• clearly communicate the obligation; and
• clearly outline the consequences if this timeframe is not met.

While you can add the “time is of the essence” phrase to every part of your agreement, be careful not to make the contract unfair. If it is unfair, the parts it affects might be void and unenforceable. 

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Key Takeaways

Understanding the phrase “time is of the essence” in commercial contracts is crucial for business owners and contract parties, as it shows the critical nature of timely performance. Incorporating this phrase in contracts highlights the importance of meeting specific timelines for tasks such as:

• delivery;
• payment; or
• milestone completion.

Failure to comply with time-based obligations can lead to:

• disruptions in business operations;
• financial losses; and 
• potential legal disputes. 

When drafting contracts, ensure that the “time is of the essence” clause is fair and clearly communicated, outlining the consequences of non-compliance.

If you have any questions about entering into a commercial contract with a “time is of the essence” clause, our experienced contract lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.