February 14, 2024
Tick Tock
What “Time is of the Essence” means in a contract
BY ROB KENNALEY
Commonly, parties will enter into contracts which provide that “time is of the essence.” Here, we will explore what that means in the context of construction and supply contracts.
The clause was developed primarily for use in agreements for the purchase and sale of real estate, where it has been interpreted to say that either side can refuse to close the transaction if the other is not ready to close at the stipulated time. Recently, in 3 Gill Homes Inc. v. 5009796 Ontario Inc. (Kassar Homes), 2024 ONCA 6, 2024, the Ontario Court of Appeal allowed the vendor to rely on such a clause and refused to close where the purchaser’s lawyer had confirmed that it had the money but was 30 minutes late in sending it to the vendor’s lawyer. The Court confirmed that “time is of the essence” means that a time limit set out in the agreement is essential, such that any breach of that time limit will allow the innocent party to terminate the agreement, no matter how trivial the failure and regardless of how harsh the result might seem.
It has been noted that the clause does not impose a time limit but, rather, dictates the consequence for failing to meet a specified timeline. Where, under such a clause, no time is specified, a reasonable time will be implied, based on the facts of the particular case.
Our Courts also recognize, however, that the ability to rely on such a clause is limited. As the Alberta Court of Appeal confirmed in Digger Excavating (1983) Ltd. v. Bowlen, 2001 ABCA, a party may only rely on a “time of the essence” clause where three conditions are met: that it was itself ready and able to carry out the agreement, that it was itself not the cause of the delay and that it did not, subsequent to the stipulated time frame being set-out, waive the clause by recognizing that the agreement was still in force rather than exercising it to terminate. The cases also show that, more generally, the party seeking to terminate based on the clause must be acting in good faith.
All of the above leads us to consider how the principles apply in the construction and supply contexts. This, because while the clauses are generally considered and applied in the real estate context, there is no reason why the same principles can’t apply in other commercial agreements. The first thing we note is that where a party wants to terminate by relying on such a clause, it will (as above) have to establish that a schedule commitment which was either expressly or by implication stipulated in the agreement was missed. It will then have to show that the failure is attributable to the other side, and that it did not itself contribute to or cause the delays. Further, of course, other terms and conditions of the contract (such as force majeure clauses which forgive delays for certain events such as weather, strikes, lockouts, etc.) will have to be considered in this regard.
In addition, as above, the clause cannot be relied on by a party who has waived its operation. First, the parties might (of course) expressly agree to a schedule extension. It has been held, however, that a schedule extension only changes the stipulated time for performance and does not waive the clause’s application to that new date. Secondly, a party can waive the application of the clause by confirming (after the specified date has passed) that the contract is not terminated but is still in effect. It has been held, for example, that a party that unsuccessfully negotiates a new date after the expiry of the specified date will waive its ability to strictly apply the clause.
Practically speaking, we suggest that the ability to simply terminate based on the “time is of the essence” clause in the construction and material or equipment supply contexts is limited, relative to its use in the context of real estate transactions. This, because in the construction context, determining who is responsible for the delay can be a complicated task. In addition, once a project is underway a wronged party will rarely rely on the clause to immediately terminate upon the expiry of the specified date (in which case it can be said to have waived the application of the clause).
Those thinking of using such a clause to terminate a construction contract must also consider the consequences of being wrong: if the termination turns out to be improper, the wronged party can claim for the (potentially significant) costs of hiring someone else to perform the agreement, inclusive of all premium costs and delay impacts.
All of this having been said, however, there is no reason why the strict application of such a clause cannot apply beyond non-real estate transactions. In circumstances, for example, where a party cannot start (or allow the other side to start) on a date specified, a clean analysis of who is responsible might allow the wronged party to confidently rely on the clause and terminate without taking any steps to confirm that the agreement continues to be in force. The above analysis also suggests that construction participants should be careful to get schedule extensions approved, because while a formal extension will extend a deadline, a prior extension does not mean a “time is of the essence” clause is waived in relation to an extended date.
Rob Kennaley is with Kennaley Construction Law, a construction law firm with offices in Simcoe, Toronto and Barrie, Ont.