The legal significance of the Covenant: "Time is of the Essence", in a Contract

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1.   The Law

Legal provision contained in Section 55 of The Indian Contract Act, 1872 states:

When a party to a contract promises to do a certain thing at or before a specified time, or certain things at or before specified times, and fails to do any such thing at or before the specified time, the contract, or so much of it as has not been performed, becomes voidable at the option of the promisee, if the intention of the parties was that time should be of the essence of the contract.

2.   Definition

“Time is of the essence” may be defined as a condition in a Contract stating that should the terms of the contract be not complied with by a specific deadline mentioned therein, the defaulting party or parties could be penalised or prosecuted for non-performance as per law.

3.   What is the importance and object of agreeing to make “Time is the essence” of a Contract and consequences for not?

a)   Importance:

Law on this point is definitely settled that in case a contract does not expressly provide this phrase then in that case time is not the essence of a contract. The legal position as such is clear from the decision of a Constitution Bench of the Supreme Court of India in Chand Rani Vs. Kamal Rani [1993 (1) SCC 519], wherein the Apex Court held that an intention to make time the essence of the  contract  must  be expressed in unequivocal language.

b)   Object

When ‘time is of the essence’ clause specifying time frame for performance is included in the Agreement / Contract, a defaulting party can be sued for breach of contract in the event of their failure to perform in compliance with the terms of the Agreement.

c)   Consequence

If the parties do not expressly illustrate an intention to make time as the essence of contract, then the promisee is not entitled to claim compensation on loss incurred due to promisor’s failure to perform his obligations as per contract.

4.   What if the agreement fails to expressly include the phrase that time is the essence in the agreement but goes on to prescribe time for performance and damages or penalties for non-compliance with the same?

It is also a settled legal position that mere inclusion of time for performance in the agreement, of a clause imposing penalty in case of default does not by itself evidence an intention to make time as the essence of Contract.

In the case of Arosan Enterprises Ltd. Vs. Union of India & Anr. [(1999) 9 SCC 449], the Supreme Court of India categorically pronounced that merely because a schedule is contractually prescribed or a provision for liquidated damages is contained in a contract, it does not mean that ipso facto time is necessarily of the essence of the contract.

5.   Conclusion

When time is the essence as per the terms of a Contract, the standard rule is that the parties have agreed to perform their obligations as per the time specified in a contract and may be subjected to penalties and damages in the event of failure to do so. Whereas, if time is not the essence of the contract and is not specified accordingly in the Contract, the court allows the parties to perform at some other time than agreed upon.

6.   What type of Contracts must necessarily include “Time is of the essence” clause?

Please ensure that “time is of the essence” is included in real estate and construction related contracts essentially when you are on the promisee side and expect the promisor to perform with in a designated time frame unless it does not suit your interests for any peculiar reasons; and

In any other types of Contracts as may be convenient to the parties.

7.   How best to be careful when you come across a covenant of Time is the essence of Contract?

At the outset, check that the clause as drawn is abundantly clear about the deadline and refers to the particular term it pertains to; and

Consider about what is your interest in having this provision included and how the termination would affect your interest; and

8.   Some sample covenants expressing “time is the essence” of Contract.

The first principle to be followed is that the agreement specifies a schedule for performance by the promisor and also outlines penalties for non-compliance with those terms. In addition to that the agreement can include “time is the essence” clause in one of the following ways as may be suitable in the circumstance touching the subject of the agreement:

 

Example 1:

“The parties to the agreement specifically agree that time is of the essence with respect to performance of each of the parties’ obligations under this Agreement.

Example 2: 

“With regard to all dates and time periods set forth, or referred to, in this Agreement, time is of the essence.”

Example 3: 

Time is of the essence under this agreement, and in the performance of every term, covenant, and obligation contained herein.”

Example 4: 

Time is of the essence of each and every provision of this Agreement.”

Example 5 (must):

Take a cover with the following essential addition to any of the above clauses that you chose to include in the agreement:

That, in the event that any date on which performance is to occur falls on a Saturday, Sunday, or state or national holiday, then the time for such performance shall be extended until the next business day thereafter occurring.”

 

 

Rakesh Taneja

Advocate, Supreme Court of India

rakesh@netlawman.co.in

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