English contracts often contain a clause stating that delivery, payment or performance of a particular provision is “of the essence”. Dutch parties should not underestimate its effect when negotiating an agreement under English law. A “time of the essence” clause creates a hard deadline meaning that any deviation from the contractual time limit for performance will lead to a repudiatory breach. A repudiatory breach is a breach so fundamental that it is a ground not only for damages, but also for termination of an agreement. In order to understand the common use of a “time of the essence” clause you should know that under English law there are only three situations where time will be of the essence: (1) when it is implied, (2) after a notice for performance within a reasonable time or (3) by express agreement.
1: Time of the essence will be implied where the parties must have intended that even a trivial delay would lead to termination, for example where otherwise a party would have been deprived of substantially the whole benefit of the contract. This is very case specific. Under common and statute law particular rules have been developed. For example, in section 10 (1) of the Sale of Goods Act there is a presumption that time of payment is not of the essence in a contract of sale of goods.
2: In situations where time is not of the essence and there has been a breach of the time limit, a party may give notice for performance within a reasonable time. As a result time becomes of essence and a subsequent breach of the notified deadline will lead to the right to terminate. The party serving the notice for performance, however, must be ready to perform its own obligation. If not, the other party, who has been served with a notice, may be entitled to termination.
3: Finally, time is of the essence where the parties have expressly agreed strict compliance with the time specified or that the time is to be of the essence. In practice there are often time of the essence clauses with respect to payment, delivery of goods and the completion of a sale.
The parties can also agree that time is not of the essence, but this does not exclude the possibility of termination per se, as the breach may still be repudiatory (for example in the event a serious or a unreasonable long delay) or covered by an express contractual termination right. If parties wish to exclude termination they should explicitly state this in the contract.
When you come across a “time on the essence” clause:
- First of all, carefully consider your particular interest in having this provision included and how a termination would affect you; maybe you are better off without it or by including a clause stating the opposite (for example when you are not sure that you are able to meet the deadline);
- When such a clause is included, check that it is clear what the deadline is and to which particular term it refers (for example, a clause to perform within a reasonable time or referring to the whole contract will not be effective);
- Ensure that the clause is compatible with other terms in the agreement, for example other (termination) rights, remedies and time schedules in the contract;
- Know that “time is of the essence” is never included in a consumer contract, as this is considered to be not plain or clear enough for a consumer to understand and therefore invalid; and
- Avoid termination for insignificant breaches as this may be an invalid unfair term under the Unfair Contract Terms Act.