Time as the Essence of the Contract

A State amendment worth knowing about, though it does not apply in Maharashtra. Uttar Pradesh, by Act 57 of 1976, section 26, substituted in the third paragraph the words "where at the time of such acceptance he has waived his right to do so" for the notice requirement. A student who consults a bare Act online may meet that text; for a Mumbai University paper the Central text set out above is the one to write.

Broken down: three paragraphs, three rules

Paragraph one: where time IS of the essence

The contract, or so much of it as has not been performed, becomes voidable at the option of the promisee. Note two things. It is voidable and not void, so the promisee chooses; and the words "so much of it as has not been performed" allow a part performed contract to be avoided only as to the unperformed part.

Paragraph two: where time is NOT of the essence

The contract does not become voidable. The promisee must accept the late performance, and his remedy is compensation for any loss occasioned by the failure. So delay is a breach either way; what changes is whether it is a repudiatory breach.

Paragraph three: accepting late performance

Where the contract was voidable for delay and the promisee accepts performance at another time, he cannot claim compensation for the delay unless he gives notice of that intention at the time of acceptance.

This is a trap for the unwary and a favourite of examiners. A buyer who takes the late delivery without saying anything has given up his claim for the delay. He must say, at the moment of acceptance, that he intends to claim.

How the court decides whether time is of the essence

The section makes it a question of the intention of the parties, and it does not say how to find that intention. The courts have settled the approach, and the leading Indian authority is a Constitution Bench.

Chand Rani v. Kamal Rani, (1993) 1 SCC 519, Supreme Court of India, Constitution Bench.

Facts. A suit for specific performance of an agreement to sell immovable property, in which part of the price was to be paid by a fixed date and was not.

Held. In the case of a sale of immovable property there is no presumption that time is of the essence of the contract. Time may be made of the essence by an express stipulation, but even an express clause is not by itself conclusive: the court must look at the real intention of the parties, the nature of the property, and the surrounding circumstances, and the intention is to be gathered from the contract as a whole.

Why it matters here. It is the authority for the two propositions students most need. First, a date in a land sale agreement does not by itself make time of the essence. Second, even a clause saying that time is of the essence must be read against the whole contract and the circumstances, so a party cannot manufacture the result by a form of words alone.

The recognised indicators

Time is ordinarily of the essence where:

• the contract is commercial, and particularly where the goods have a fluctuating market price;
• the subject matter is perishable, or is wanted for a specific occasion;
• the parties have expressly said so, and the surrounding circumstances bear it out;
• the nature of the property or the transaction requires promptness, for example an option to purchase.

Time is ordinarily NOT of the essence where:

• the contract is for the sale of immovable property, on Chand Rani;
• the delay causes no real prejudice and the subject matter is stable in value.

Making time of the essence after a delay

Where time was not originally of the essence and the promisor is dragging, the promisee is not helpless. He may serve a notice fixing a reasonable time for performance and stating that he will treat the contract as at an end if it is not met. A reasonable notice of that kind makes time of the essence from then on. The notice must give a genuinely reasonable period, judged on the facts.

A worked example

Vikas agrees on 1 June to sell a flat to Wasim for one crore rupees, the balance to be paid and the sale deed executed by 1 September.

• Wasim does not pay by 1 September. Is the contract at an end? Not automatically. On Chand Rani there is no presumption that time is of the essence in a sale of immovable property, so the date alone does not do it. Vikas's remedy is compensation under the second paragraph of section 55.
• The agreement adds "time shall be of the essence". Even that is not conclusive on Chand Rani. The court will read it with the nature of the property and the surrounding circumstances. It is strong evidence and it may well decide the case, but it is not a formula that settles it.
• Vikas waits until 1 November, then serves a notice giving Wasim thirty days and saying he will treat the contract as ended if payment is not made. A reasonable notice of this kind makes time of the essence from then on, and if Wasim still does not pay, Vikas may avoid the contract.
• Wasim pays on 15 September and Vikas accepts, saying nothing. Even if time had been of the essence, Vikas has accepted performance at another time and, under the third paragraph, he cannot claim compensation for the delay, because he gave no notice of his intention at the time of acceptance.
• Vikas accepts on 15 September and says, as he takes the money, that he reserves his claim for the loss caused by the delay. He has given the notice the third paragraph requires, and his claim survives.

Now change the subject matter. Vikas agrees to supply two thousand kilograms of mangoes for a wedding on 1 September. Mangoes are perishable and the date is fixed by an event that cannot move. Time is of the essence, and a delivery on 3 September may be refused outright.

What it does NOT mean

"A date in a contract makes time of the essence." It does not, and Chand Rani says so for immovable property.

"An express clause settles the question." Chand Rani holds that even an express stipulation is not by itself conclusive, and the court looks at the real intention, the nature of the property and the surrounding circumstances.

"If time is not of the essence, delay does not matter." It matters: the promisee is entitled to compensation for the loss the delay caused. What he cannot do is treat the contract as at an end.

"Time can never be made of the essence later." It can, by a notice fixing a reasonable time and stating the consequence of not meeting it.

"Accepting late performance is harmless." It costs the promisee his claim for the delay unless he gives notice at the time of acceptance.

"Where time is of the essence the contract becomes void." It becomes voidable at the option of the promisee, as to so much of it as has not been performed.

Quick revision

• s.55, paragraph one: failure at the fixed time makes the contract, or so much as is unperformed, VOIDABLE at the promisee's option, IF the intention was that time be of the essence.
• Paragraph two: if time was not of the essence, the contract is not voidable, and the promisee gets compensation for the loss.
• Paragraph three: a promisee who accepts late performance cannot claim compensation for the delay unless he gives notice of that intention at the time of acceptance.
• Chand Rani v. Kamal Rani, (1993) 1 SCC 519 (Constitution Bench): in a sale of immovable property there is no presumption that time is of the essence; an express clause is not conclusive; look at the real intention, the nature of the property and the surrounding circumstances.
• Usually of the essence: commercial contracts, fluctuating markets, perishables, goods for a fixed occasion. Usually not: sale of land.
• Time may be made of the essence later by a notice fixing a reasonable period.
• A Uttar Pradesh amendment rewrote the third paragraph; the Central text applies in Maharashtra.

Test yourself

1. State the three rules in section 55. Where a party fails to perform at or before the specified time and the intention was that time should be of the essence, the contract, or so much of it as is unperformed, becomes voidable at the option of the promisee. Where that was not the intention, the contract does not become voidable but the promisee may recover compensation for any loss occasioned by the failure. And where the promisee accepts performance at a time other than that agreed, he cannot claim compensation for the delay unless he gives notice of his intention to do so at the time of acceptance.

2. Is time presumed to be of the essence in a sale of immovable property? No. In Chand Rani v. Kamal Rani, (1993) 1 SCC 519, a Constitution Bench held that there is no such presumption. Time may be made of the essence by express stipulation, but even an express clause is not by itself conclusive, and the court must gather the real intention from the contract as a whole, the nature of the property and the surrounding circumstances.

3. When is time ordinarily of the essence? In commercial contracts, particularly where the subject matter has a fluctuating market price; where the goods are perishable; where the performance is wanted for a specific occasion that cannot move; and where the parties have expressly said so and the circumstances bear it out.

4. A buyer accepts delivery three weeks late and says nothing. Can he later claim damages for the delay? No. Under the third paragraph of section 55, a promisee who accepts performance at a time other than that agreed cannot claim compensation for the loss occasioned by the delay unless, at the time of that acceptance, he gives notice to the promisor of his intention to do so.

5. Can time be made of the essence after the contract is made? Yes. Where time was not originally of the essence and the promisor delays, the promisee may serve a notice fixing a reasonable time for performance and stating that he will treat the contract as at an end if it is not met. Provided the period allowed is genuinely reasonable on the facts, time becomes of the essence from then on.