Commercial Contracts in India more often than not contain a clause of “Time is the essence of the Contract”. This clause becomes imperative considering the fact that sometimes the transactions are of enormous value and any kind of delays on the part of one party can entail very large amounts of losses for the other. The consequences of delay are different depending on whether time is of the essence and when it is not.
Garner’s Dictionary of Modern Legal Usage defines the phrase “time is of essence” in the following words: “When a contract stipulation relating to the time of performance is ‘of the essence’ of a contract, a party’s failure to meet that stipulation automatically justifies the other party’s rescinding the contract—no matter how trivial the failure.” A time-of-essence provision is a powerful weapon, since it can give an otherwise minor delay the legal effect of a material breach of contract.
In India, the provision relating to “time as the essence of contract” is contained in Section 55 of the Indian Contract Act, 1872. Stating simply, the Section provides that if something is promised to be done at a specified time and the same is not performed, the contract becomes voidable at the option of the promise if it was the intention of the parties that time should be of the essence of the contract. Further, the section provides that if it was not the intention of parties to make time of the essence, the promisee is entitled to claim compensation for any loss caused by the default. Finally, the section goes on to say that if time is intended to be of the essence by the parties but performance is accepted on some other time, compensation cannot be claimed by the promise unless he gives such a notice to the promisor.
Intention of the parties
In Indian law the question whether or not time is of the essence of the contract would essentially be a question of the intention of the parties which are to be gathered from the terms of the contract. An express stipulation in this matter cannot be a conclusive determination of the intention of the parties. If the contract in its terms provides that time is the essence of the contract, but other terms of the agreement show that the parties did not intend time to be of the essence, the court has held that time is not of the essence. The intention of the parties can be ascertained from:
(a) The express words used in the contract;
(b) The nature of the contract itself;
(c) The nature of the property which forms the subject matter of the contract;
(d) The surrounding circumstances.
It has been held in the case of China Cotton Exporters v. BeharilalRamcharan Cotton Mills Ltd .that in commercial contracts time is ordinarily of the essence of the contract. The rule is that except in commercial contracts, the ordinary presumption is that time is not of the essence of the contract. This presumption can be rebutted by showing the intention of the parties. Time is presumed not to be of essence in contracts relating to immovable property , but of essence in contracts of renewal of leases . At common law stipulations as to time in a contract giving an option for renewal of a lease of land were considered to be of the essence of the contract even if they were not expressed to be so and were construed as conditions precedent. The onus to plead and prove that time is of essence of the contract is on the person alleging it, thus giving opportunity to the other party to adduce rebuttal evidence that time was not of essence. Where both the parties are engaged in business and articles are purchased by one party from the other party for business purposes the transaction falls within the term ‘mercantile transaction. ’
Stipulations in the Contract and their consequence
In order to ascertain whether time was intended to be of the essence or not, the terms and conditions of the agreement should be carefully read . If the parties intend to make time of essence, they must express this intention in clear and unambiguous terms. If no time is specified, the question of time being of the essence does not arise at all. However, merely specifying the time at which the contract has to be performed does not make time the essence of the contract. If the contract provides that in case of delay by any party the contact would be held to be cancelled, it raises a strong evidence towards the parties intending the time to be of the essence.
An express stipulation, however, is not a conclusive proof of time being of the essence of the contract. Even where the parties have expressly provided that time is of the essence of the contract, such a stipulation will have to be read along with the other provisions of the contract. It is pertinent to note the case of Hind Construction Contractors v. State of Maharashtra to further elucidate this point. The Appellant entered into a contract with the respondent on July 2, 1955 for the execution of a work with the condition that contract should be completed in 12 months from the commencement of the work. The Appellant could not complete the work within the stipulated time and the Respondent rescinded the said contract with effect from August 16, 1956. The Appellant contended that time was not of the essence and further on account of several difficulties, such as excessive rains, lack of proper road and means of approach to the site, the completion was delayed. The Supreme Court, in deciding that time was not of the essence in relied on two clauses in the contract. First, there was a power to grant extension of time on reasonable grounds on an application by the contractor/appellant. Second, there was a provision to recover penalty/compensation from the appellant at specified rates during the time the work remains unfinished. These two provisions, as per the court, exclude the inference that time was intended to be of the essence of the contract.
Time, when it is not of the essence, can be subsequently made so, by notice by the party not in default. The notice must, however, contain clear stipulation that it wants to make time of the essence, with express provision or necessary implication. Any such notice ought to fix a reasonably long time requiring the other side to perform his part of the contract. In the notice for making time of the essence of the contract, the party can be intimated that in default of compliance with the requisition, the contract will be treated as cancelled. The party who serves such a notice must himself be bound by it.
Extension of time
Since one party to the contract cannot unilaterally alter or vary the terms thereof he also cannot extend the time thereof without the other party’s intimating its consent or agreement thereto by any of the methods stated in section 4 of the Contract Act. Therefore, time for performance can be extended only by an agreement arrived at between the promisor and promisee. A mere extension of time and nothing more is only a waiver to the extent of substituting the extended time for the original time and not an utter destruction of the essential character of time. Where one party intimated to the other about the extension of time, but the other party did not communicate any acceptance, time for performance was not extended.
When time is not of the essence
Time is not of the essence where the contract provides for damages for delayed completion, or for extension of time in certain circumstances, despite express provision making time of the essence, or provision of a default clause. These provisions are inconsistent with the intention to make time of essence. Time was not of essence where the time for performance was extended twice and the object of a purchase was not a commercial undertaking.
Time is not of the essence when the contract did not specify a date for the completion, but merely provided for completion to take place as soon as reasonably expected. A party’s general right to have the contract performed within reasonable time is unaffected by the fact of time not being of the essence. Time was held to be not of essence where in a contract for import and supply of sugar, the port of discharge had not been named and the surveyor not been appointed without whose certificate the question of payment did not arise.
Acceptance after the specified time and Waiver
When a party waives his right by taking benefit under a contract after the fixed time, he cannot rely on time being of the essence of the contract in order to avoid a contract. A claim for compensation under this section would be barred, if the promisee accepts performance after stipulated time unless he had given notice to the promisor of his intention to do so. In the case of State of Kerala v. M.A Mathai , it was held that if there are any delays in the performance of reciprocal obligations by an employer, the contractor gets the right to avoid the contract but if he does not avoid the contract and accepts the belated performance, he cannot claim compensation for any loss sustained to him due to delay in performance, unless he gives a notice of the same to the delaying party.
From the above analysis of the concept of time as the essence of the contract, in light of the provisions of the Indian Contract Act, it may be concluded that the question as to whether time is of the essence of the contract or not, can only be answered by looking at the intention of the parties. Clauses such as extension of time and imposition of liquidated damages or penalty etc. may go against the intention of the parties to make time of the essence since the parties find an adequate remedy in the way of penalty or LD. It may also be concluded that in case of a commercial or mercantile contract, time is presumed to be of the essence.