Time is always an important factor in contractual relationships but when time is ‘of the essence’ (TOE), it becomes critical.
Why does it matter?
‘Of the essence’ means that something is extremely important – therefore when time is expressed to be ‘of the essence’, it is vital that deadlines are met.
You may think, surely it is always important that contractual deadlines are met, otherwise what would be the point in having them to begin with? True, but failing to meet contractual deadlines in a TOE clause can have further, more extreme consequences than you may expect.
When TOE for exercising a contractual right, that right will be lost if the party does not exercise it by the deadline. Also, when time is of the essence for complying with a contractual duty, that time limit becomes a condition of the contract. If the duty is not fulfilled by the deadline, the delay in performance may become a ground for termination of the contract.
Even the smallest delay can have drastic consequences. In a past Privy Council case the parties entered into a contract for the purchase of a flat to complete by 5pm on an agreed date. The contract expressly made time of the essence and specified that any delay would amount to a ground for termination and forfeiture of the Buyer’s deposit.
The Buyer sent the Seller the purchase price for the flat at 5:10pm. The Seller declared the deposit forfeited and the contract was terminated. This may seem harsh but it provides legal certainty.
So when is ‘time of the essence’?
Time will be of the essence when:
- an express contract term makes time of the essence
- the terms of the contract imply that TOE
- a contract allows for a notice to be served by one party to the other making time of the essence
The contract may use the phrase ‘time is of the essence’ or it may spell out the consequences of non-compliance, and the way any obligation should be complied with or any right exercised, before the deadline. In this situation, the contract expressly makes time of the essence.
It can be more difficult to spot where time of the essence is implied into a contract. The question to ask is ‘must the parties have intended even a slight delay to lead to the loss of the relevant right, or to termination?’ If the answer is yes, time is likely to be ‘of the essence’.
A good example is a break right in a lease – if a landlord or tenant does not exercise their break right by the break date, the right is lost. This is because time is implied to be of the essence.
On the other hand, sometimes parties to a contract specify that time is not of the essence in relation to a right or duty to ensure that it is not implied.
Finally, making ‘time of the essence’ – why would a party want to serve a notice making time of the essence? Let’s take a contract for the sale of property as an example. If one party is not able to complete on the completion date and time is not of the essence, a delay is not a repudiatory breach of contract and no right to terminate arises.
When a notice to complete is served, time is made ‘of the essence’ and the party receiving the notice is given a set deadline to complete, for example ten working days. If this deadline is not met, the delay then becomes a repudiatory breach and the right to terminate arises. This is a tactical way to ensure that a contract is brought to an end in a timely manner, whether by way of completion or termination.
Keep your eye on the clock, otherwise it could prove more costly that you think!
 Union Eagle Ltd v Golden Achievement Ltd  UKPC 5
 United Scientific Holdings v Burnley Borough Council  AC 904 (HL)