In Short
- A “time is of the essence” clause makes deadlines legally binding, meaning any delay – even minor – can amount to a breach of contract.
- Missing these deadlines can lead to contract termination, financial losses, or court orders to perform obligations.
- Only use this clause where there’s a genuine commercial need, and ensure it’s clearly drafted and fair.
Tips for Businesses
Before signing or drafting a contract, decide whether timing is genuinely critical to performance. Include a “time is of the essence” clause only for essential deadlines, and back it up with a clear force majeure clause to protect against unforeseen delays. Seek legal advice to avoid unfair or unenforceable terms.
For business owners who enter into 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, such as a few minutes, can provide a reason for the other party to terminate or cancel the entire 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 include this rule because share values can fluctuate rapidly.
If third parties are involved who are not parties to a contract but assist with duties (e.g., delivery couriers for delivering a party’s goods to the other party), the party responsible for sending the goods must be particularly 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.
Continue reading this article below the formWhat Happens if a Contract Does Not Include This?
If a contract lacks a clause specifying “time is of the essence” (or a similar provision), we can assume that time is not the most critical factor in 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 consider it a reason to automatically terminate it. The court decides based on the following:
- how serious the breach is;
- how it affects the contract’s performance;
- what the contract states about termination; and
- the parties involved.
Courts may also consider whether the party seeking to terminate has taken any action that suggests they have accepted the delay. For example, if you accept a late delivery from a supplier, the court may see this as a waiver of the requirement to meet strict deadlines, even if there is a “time is of the essence” clause in your contract. In this case, you might not be able to terminate if the supplier makes another late delivery.
Ultimately, courts decide in each case if the clause is fair and how to enforce it appropriately.
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, failing to meet this obligation will harm you financially and damage your business relationships. Failing to comply with a court order may also attract penalties.
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:
- consider whether to 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.
You can add the “time is of the essence” phrase for specific deadlines or make it apply to every part of your agreement. However, be cautious not to make the contract unfair. If your business does not have a legitimate need for a strict deadline, a “time is of the essence” clause may be considered an unfair contract term. If it is unfair, this can result in penalties, and the provisions it affects may be void and unenforceable.
Delay Caused by an Unforeseen Event
There may be situations where you cannot meet a deadline due to unforeseen events, such as natural disasters or pandemics like COVID-19. A “force majeure” clause can excuse your failure to meet deadlines if these types of events occur.
Typically, this clause requires you to notify the other party of the event and provide details about how it has affected your ability to fulfil your obligations on time. You might also be required to take steps to minimise the effect of the event on your performance.
However, force majeure clauses do not cover all delays. You would usually not be able to rely on common business difficulties, such as supply chain disruptions and staff shortages, as a reason to excuse delays.
If you are required to meet deadlines under a contract with a “time is of the essence” clause, it is important to include a force majeure clause to protect you from liability for delays caused by unforeseen events.
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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 the clause is used without a genuine commercial reason, it may attract penalties and have no effect.
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.
Frequently Asked Questions
If you do not meet a deadline and your contract has a “time is of the essence” clause, you might have materially breached your contract. This can give the other party the right to terminate, potentially resulting in you losing business opportunities. You may also be liable for any losses or damages caused by the delay. In some cases, a court could order you to perform your obligations under the contract, including meeting other deadlines.
If the delay is caused by an unforeseen event, there may be a clause in your contract that excuses your delay and prevents the other party from terminating.
If your contract does not have a “time is of the essence” clause, you may still be able to terminate for breach if the other party fails to meet a deadline. However, this will be more difficult. The court will consider the importance of the deadline under your agreement and whether you have accepted previous delays.
Your contract may have a clause that allows you to terminate for any reason. This would allow you to terminate without proving that the missed deadline is a breach of your contract. However, this termination option typically requires a longer notice period, so you should plan ahead.
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