2 September 2010 | By Lorna Kelly

How effective is a “time is of the essence” clause in a contract?

The Case

Dominion, the owners of a shopping centre, entered into a lease with Debenhams. Under the agreement Dominion was to build an extension to the centre after which Debenhams would carry out the internal fitting to the unit. Following this, Debenhams would be granted a lease for the unit.

Dominion was under an obligation in the agreement to make a number of payments to Debenhams. Dominion failed to make one of these payments on time, after which Debenhams sought to terminate the agreement. Dominion claimed Debenhams was not entitled to terminate, and by attempting to do so had committed a repudiatory breach of the deal.

Debenhams argued that it was entitled to terminate due to, among other things, time being of the essence in the payment clause. The agreement did not expressly provide that time was of the essence. Debenhams argued the circumstances of the case (in particular a close linkage between Dominion’s payment obligation and Debenham’s obligation to fit out the unit) were such that deeming time to be of the essence would fulfil the intention of the parties.

The question before the Court was whether “time of the essence” should be implied in the contract. 

The Court held that time was not of the essence, and therefore Debenhams was not entitled to terminate the agreement due to Dominion’s failure to make the payment on time. The judge did not accept that the surrounding circumstances, nor the other terms of the agreement, made compliance with the deadline in the payment clause essential to the contract.

He also concluded that a failure to perform the payment obligation on time would not deprive Debenhams of the benefit of the agreement, nor render it incapable of performing its own obligations.

The Court also took into account the fact that interest was payable on late payments under the agreement, thereby giving Debenhams an express remedy for failure by Dominion to make the payment on time.

What this means

A clause stating that “time is of the essence” in an agreement enables the party relying on that clause to terminate the agreement, and potentially claim damages, if the time limit is not met.

However, you cannot guarantee that “time of the essence” will be implied into a contract. It will depend on the facts and circumstances of each case. If you want to be sure that the timing of performance of a contractual obligation will be “of the essence”, the contract should expressly say so.

Making the timing of an obligation of the essence will give the party relying on the clause the right to terminate the agreement if the relevant deadline is not met. As such, careful consideration should be given to whether time is genuinely of the essence in respect of individual obligations.

In addition, you should ensure that this right of termination is co-ordinated with any other remedies which are provided under the agreement.

By Lorna Kelly, senior associate, Dundas & Wilson