Making Time of the Essence in Contracts: Can you Imply a Term When a Party Intentionally Delays Acting?
By Justin Cotton, Partner and Head of Practitioner Advocacy at Lovegrove Solicitors
October 2013
We have come across matters recently in commercial contracts, including construction related bargains, where a party may have intentionally delayed its carrying out of some key function under the contract.
Where the parties have not stipulated a time for performance of a key obligation, the courts may imply a duty to perform the task within a ‘reasonable time’.
To do this, the party that is not in default can make ‘time of the essence’ after serving a notice on the defaulting party. The procedure and requirements of how to do that are described more fully later in this article.
The question then becomes: what is a ‘reasonable time’? This will depend on all the circumstances of the case, including the terms of the agreement/contract and the intentions of the parties when they entered into the agreement.
If such a term as to performance within a reasonable time is implied, it would be a logical step to then argue that the non-defaulting party is outside what would be a reasonable time.
There could be an argument available that there is ‘intentional delay’ by the party in default. Possibly to avoid the activation of a ‘trigger’ that in turn gives rise to another obligation event under the contract, such as payment of money.
Making Time of the Essence
As mentioned, it may be possible for the non-defaulting party to serve a notice on the other that makes “time of the essence” under the agreement.
Previously the courts have held that these notices, while they have their genesis in notices to perform in property conveyance, can be of general application and be applied to any type of contract.
Such a notice must set out a reasonable time for performance of the outstanding obligation (say 30 days), and if the obligation is still not performed then the non-defaulting party can elect to terminate the agreement and sue for damages (based on the defaulting party’s ‘repudiation’).
There are three requirements for a valid notice under this procedure:
- The notice must specify a time for performance;
- The time allowed in the notice must be reasonable;
- The notice must clearly convey either that the time fixed for performance is of the essence; or
- That the party giving the notice will regard themselves as being entitled to terminate should that notice not be complied with.
Furthermore, the notice stipulating a reasonable time to complete the outstanding contractual duty should only be given after an initial period of unreasonable delay constituting the breach of contract.
In general, the notice procedure to make time of the essence would seem an avenue worth considering, even before any dispute mediation is considered, as it would place considerable pressure on the party in default.
If the notice is not complied with then the party that gave the notice would be at liberty to terminate the contract and potentially then sue for damages. Of course, the party said to be in default also has the opportunity to dispute the notice, and contest any later damages claim.
It then becomes a contested question of fact as to whether such a term as to timely performance should be implied, and if so, whether or not there has been a material non-compliance.
This notice procedure is an additional remedy that should be considered alongside the explicit contractual mechanisms. For example, there will be no need to imply terms where there is an express written term in a contract as to completion of a task within a specified time.
In those cases where there is an express contract term that has been breached, most contracts (particularly in construction) will allow for a notice of default, show cause notice or similar, that specifies the particular default and demands that the breach or non-compliance be rectified within a certain number of days.
The usual remedy following the non-rectification of any defaults in such a notice, is for the non-defaulting party to be able to terminate the contract and to later sue for any damages consequent upon having to terminate.
Of course, in building contracts such damages can include, if you are the Owner or Principal, any cost over-runs in having to engage a new Contractor to complete works, but if you are the Contractor who terminates, the damages could potentially be claimed for any unpaid works or even loss of profit on the balance of works.
For more advice and assistance concerning your rights, remedies and obligations in commercial contracts (including construction), or to assist in resolving contract disputes, do not hesitate to contact the experts at Lovegrove Solicitors.
By Justin Cotton, Partner, Lovegrove Solicitors
justin@lclawyers.com.au
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© Lovegrove Solicitors 2013
