“Time is of the Essence” Provisions in Contracts: What Does it Mean?
Certain phrases in our language originated as legal concepts. “Ready, willing and able” and “acts of God” are examples. Another such phrase is “Time is of the essence.” What is the legal significance of including this phrase in a contract? First, some background.
A contract is an exchange of promises between the parties to do (or not do) something. In construction, for example, that exchange is typically the performance of work or furnishing of material or equipment to a construction project, in exchange for payment. Virtually all construction contracts include some form of schedule requirements, whether stated as a completion date, number of working days, or other measure of the time for performance. Minor delays by either party, whether in performance or payment, generally do not result in a material breach (i.e. prevent the contract from being completed.)
However, there are certain contracts that are time-sensitive and the parties will not allow any delay by the other party in performing its obligations. Delivering a wedding cake the day after the wedding would be unacceptable to the buyer and would certainly be considered a material breach. What about the seller’s rights, if the agreement is that payment for the cake is due upon receipt of the order, but the buyer is one day late in payment? Depending on the facts, the buyer’s one-day delay may be of no importance. In such an example, it is the buyer who wishes to strictly enforce the time of seller’s performance: If seller is late, there will be no transaction. Unlike this simple example, most commercial agreements are more complicated in terms of whether or not a party should be allowed to strictly enforce the agreement’s deadlines.
Statutory law provides that absent express language stating that time is of the essence, performance can be made after the due date, provided the other party is properly compensated for the delay. Civil Code Section 1492 states:
Where delay in performance is capable of exact and entire compensation, and time has not been expressly declared to be of the essence of the obligation, an offer of performance, accompanied with an offer of such compensation, may be made at any time after it is due, but without prejudice to any rights acquired by the creditor, or by any other person, in the meantime.
Many construction contracts contain a liquidated damages provision, whereby the parties agree, in advance, that unexcused contractor delays will not result in a material breach, but entitle the owner to deduct a certain amount, per calendar day of delay, from the contract price, as “entire compensation.” Such provisions are generally enforceable, whether the contract includes a “time is of the essence” provision, or not.
Include or Not?
Time-is-of-the-essence provisions can be found in many construction contracts. Does that mean that every single scheduled event (even weekly contractor meetings) must take place precisely on time, to avoid a material breach? Courts are generally more likely to enforce such provisions when it applies to a significant event or transaction, such as delivery of a major order of materials or equipment, or completion of a project. Including such a provision to an entire contract or subcontract may lead to a court finding that it is too broadly applied and, therefore unenforceable. The better approach is to make only critical items, which cannot be properly remedied with liquidated damages, subject to the “time is of the essence” provision. Examples include substantial completion, submission of insurance certificates and payment applications, payment, notice of delays and changes, and 72-hour (or shorter) notices to cure. If the “time is of the essence” clause is properly applied, it will effectively encourage the parties to act without delay on those items where time is truly important.
Article written by Patrick McNamara, Esq. in 2017. Mr. McNamara is an attorney in The Porter Law Group, Inc. in Sacramento, California. He can be reached by phone at (916) 381-7868. Visit the firm’s website at www.porterlaw.com