Tuesday, January 21, 2014

What does “Time is of the Essence” mean and when would you use it?

In contracts you can have minor or major breaches. A minor breach provides only money damages. A major or material breach provides additional remedies and may include the right to terminate the agreement for cause. When you say that "time is of the essence", you are saying that delivery by a specific date goes to the heart of the agreement. For example there is a festival being held on May 15, 2014. You are purchasing goods for sale at that are unique for that festival. You order them and specify that they must be delivered on May 12, 2014. As part of the delivery language you include language that says that time of delivery is “of the essence” of this agreement. You do that to notify them that on-time delivery is critical. Collecting damages or liquidated damages is not adequate because if they are delivered late, you cannot sell them at the Festival and they have little of no value to you.

In drafting time of the essence language you want to make it clear. For example:

Supplier shall delivery the Product to X Location on or before May 12, 2014 ("On-Time Delivery"). On-Time Delivery is of the essence of this contract. Failure to make On-Time Deliver is not subject to cure under Section 12. Buyer shall have the right to reject delivery of and shall not me obligated to pay for any Product attempted to be delivered after the On-Time Delivery period. Supplier’s failure to meet the On-Time Delivery date shall be a major breach of this Agreement and in addition to Buyer’s rights specified in this section Buyer may terminate this agreement for cause."

In that:
•The use of the defined term Product identifies specifically the product that must be delivered.
•You have provided the acceptable window for delivery where On-Time Delivery has been established.
•You have established that On-Time Delivery is of the essence of the agreement.
•You have eliminated the right to cure the breach of the requirement for On-Time Delivery.
•You have made it clear that if On-Time Delivery is not made:
oYou can reject delivery of the goods
oYou do not have the obligation to pay for those goods.
•The failure to meet the On-Time Delivery requirement provides you cause where you may terminate the agreement and claim damages.

You have the right, not the obligation to terminate. If they were delivered to late to sell them, you could refuse to accept delivery of the goods and not pay for those goods because of the breach. If they delivered after the specified date but before the festival you may waive your right to terminate and still accept and sell them. If you decide to terminate, depending upon what your limitation of liability says, you could potentially claim other damages for the breach of that required delivery date. In most agreements the damages you could claim for breach would be limited to direct damages. Direct damage includes the excess cost of re-procurement (the cost of “cover”) if you were able to procure what you need from an alternative source.

Where damages or liquidated damages for delays are adequate you would never use time is of the essence. You use time is of the essence when those damages or liquidated damages are totally inadequate.

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