Where Time is of the Essence

A shoe manufacturer has been asked by a customer to enter a contract for the supply of 100 pairs of shoes at 9 a.m. on the first day of each month for 12 months. He is happy with the proposed price, but the customer wants to state in the contract that "time of delivery is of the essence". Should he agree?

Where time is expressly stated to be "of the essence" and the obligation is not performed on time, generally speaking this gives the injured party a right to terminate the contract, regardless of the seriousness of the breach. The injured party can also, where appropriate, claim damages. If time is not "of the essence" a failure to perform on time is still a breach of contract, but the injured party does not have the right to terminate and can only claim damages.

So if the shoe manufacturer agrees that time of delivery is "of the essence" but then delivers the first batch of shoes late, his customer could chose to terminate the whole contract and sue for any loss sustained. Unless the manufacturer is completely confident that he can meet the agreed delivery schedule, he will not be able to rely on having a twelve-month supply agreement, because any lateness on delivery (even if only very minor) will generally give his customer a right to terminate.

However, the late performance of an obligation where time was "of the essence" does not guarantee that the innocent party can terminate. The right to terminate may be lost if the innocent party affirms the contract by continuing to perform it, or if he is considered to have waived his right. There are also circumstances where relief may be granted to the guilty party.

If there is no express provision, time may still be of the essence if the circumstances of the case imply this. This depends on the subject matter of the contract, the commercial significance of the term in question, and whether the term was considered by the parties to be "essential".

A recent decision concerning the delivery of socks clearly illustrates that time will not automatically be of the essence in a commercial agreement. The parties had agreed delivery dates, but had not expressly agreed that time of delivery was of the essence. The court found that in practice the parties were not concerned if delivery dates "slipped", and so the purchaser did not have a right to terminate for late delivery.

It is worth noting that under section 10 of the Sale of Goods Act 1979, unless a different intention appears from the terms of the contract, time of payment is not deemed to be of the essence of a contract of sale.

This is not the end of the story. Even if time was originally neither expressly nor impliedly of the essence, if one party has been guilty of delay the injured party can make time "of the essence" by giving reasonable notice that the relevant obligation must be performed by a particular date or time. What constitutes "reasonable notice" will depend on the facts of the case. Giving notice in this way does not, however, give the innocent party an automatic right to terminate if the guilty party fails to comply with the terms of the notice - the innocent party can only terminate if this failure goes to the root of the contract.

So, if you wish to have a right to terminate for late performance of a particular obligation, the best way to achieve this is still to include an express provision that the time of performance of that obligation is "of the essence".

For further information please contact Samantha Barr, Trinity Court,16 John Dalton Street, Manchester M60 8HS, UK, Tel: +44 161 830 5178

This article was first published in the Autumn 1999 issue of Hammond Suddards' Corporate Finance Newsletter.

The information and opinions contained in this article are provided by Hammond Suddards. They should not be applied to any particular set of facts without appropriate legal or other professional advice.