December 2008

IN THIS EDITION OF THE MDA REPORT:

Time is of the essence

We are often asked what the inclusion of time of the essence clauses means to a contractor and what rights, if any, accrue to the employer and his engineer or architect when these are included in a contract. Are some employers and their agents missing a trick by not including such clauses in their contracts?
RH Christie, on page 846 of his work The Law of Contract (4th edition), states: “when we say time is of the essence in a contract, we mean that failure to perform by the time specified must be regarded as a breach of such magnitude as to justify the other party in cancelling the contract”. A clause fixing a time for performance and stating that time is of the essence (under South African law) is, undoubtedly, therefore, a forfeiture clause. Refer Louw v Trust – Administrateurs Bpk 1971 (1) SA 896 (W) at 903D.
The primary advantage of incorporating such a forfeiture clause (or a “time is of the essence” provision) into a contract is that, in the event of a party failing to perform on the date specified in the clause or within the time for completion of the works as specified, the aggrieved party is immediately entitled (as a matter of contractual right and in his sole discretion) to cancel the contract without first having to demand the breach be rectified (and affording opportunity to rectify) and thereafter institute action to recover damages.

When is time of the essence?
Time is of the essence either where there is an express clause in the contract specifying a date or period by or within which performance is to be completed or where it ought to be concluded from the nature of the contract and the surrounding circumstances that the parties intended for time to be of the essence – there is a tacit term. In the absence of an express term specifying time is of the essence, whether or not time is of the essence is a question of fact and not law to be determined in each set of particular circumstances.
The simple inclusion of a specified time for completion of the works – a clause stating the period within which the works will be executed – in a construction contract may not be sufficient provision to make time of the essence in the contract. Usually, the time for completion is determined from a fixed commencement date (which is determinable) and it is agreed the works will be completed within a specified period – a definite time for performance is agreed upon. However, in the absence of a specific provision and/or agreement that, in the event of the works not being completed within that period, the aggrieved party would be entitled to terminate (without notice placing the other party in mora) the issue to be determined would be whether or not there is, on the particular facts, “cogent evidence that the parties had in fact agreed that ‘time is of the essence’..”.

Essence of construction contracts
In most construction contracts, there is an agreed programme, which is at the discretion and volition of the contractor and there are usually remedies provided for slow progress and late completion. There are also, invariably, provisions by which contractors may be awarded extensions of time and for the engineer to instruct variations; all of which may or may not have an impact on the contractor’s ability to finish by the date for completion. Obviously, where a contract contains a penalty provision (as in South African law) or an entitlement for the employer to deduct liquidated damages (contracts outside South Africa) when contractors complete their work late, the damages for completing late would be limited to these damages – either the penalty or liquidated damages as both are intended to be a genuine pre-estimate of the damages that the employer will suffer if the work is completed late and the contractor would be under no greater risk than if the contract contained no “time of the essence” clause but still had either a penalty or a liquidated damages clause.
In these circumstances, it could be concluded that such a clause making time of the essence is superfluous to requirements as the contractor is liable anyway for damages if he finishes late.
Time of the essence became an issue under UK law when contracts (not necessarily construction contracts) may not include a completion date or a time within which a service was to be provided. Time of the essence became an issue when the service was provided late. If time is not of the essence, then time is said to be “at large” and the service supplier has to provide his service within a reasonable time. A delay by the employer on a contract where time is of the essence puts time at large and the contractor must then complete within a reasonable time.
In our environment, the inclusion of a time for completion would make time of the essence automatically. Only in circumstances where the contractor had been delayed and no extension of time had been granted notwithstanding the occurrence of an admissible delay, provision of notices and compliance with all the requirements of the contract could we, perhaps, say that time was at large and the contractor may consider that he has a reasonable time for completion. The trouble with this situation is that, under South African law, the date for completion remains the date for completion until it is changed in terms of the contract either by the engineer, employer’s representative or an arbitrator. So we don’t get a time at large situation. You have to work to the date for completion as it exists at the time. Employers often include a time of the essence clause probably because they perceive that it gives them greater leverage over contractors when they are late in completing the works, perhaps, in the mistaken belief that they can under such circumstances demand that the contractor accelerate the works at his own cost. They do not have such a right. Time of the essence clauses work both ways. In other words, if the contractor must be seen to doing everything reasonable in his power in terms of the contract to complete on time, the employer and his agent cannot be seen to be acting in another, less urgent manner.
Time of the essence clauses have greater relevance in other types of contract rather than construction contracts. This is so because construction contracts have provisions that duplicate and, indeed, enhance the common law remedies available to employers rather than relying on clauses making time of the essence. They could be perceived, therefore, as being superfluous to requirements. It is all very well to include a time of the essence clause on the assumption that this will entitle you, as the employer, to cancel the contract if and when the contractor defaults but most contracts contain such a provision anyway and the choice to cancel can never be taken lightly. The ramifications of appointing another contractor and the possible delay that this might incur would make this, under normal circumstances, an unattractive alternative.