Can ‘time is of the essence’ be bad for me, as a Supplier in a contract?
As a Supplier of IT Services, you’ve probably come across this terminology at least once in your life, perhaps multiple times.
Our clients seem to have one of 3 reactions to the 'time is of the essence' clause:
- Not an issue for us, I’ve never paid much attention to it
- Is it an issue? (Don’t fret too much – We’re here to help!)
- Always an issue (Well done! You are very much in the minority.)
The majority of Suppliers do not have an understanding of the gravitas of this small phrase.
What does time of the essence mean?
Time is of the essence was established in contracts to hold you (the Supplier) to the exact timing agreed. Time is of the essence goes one step beyond a normal expectation that you will deliver on time, it not only obligates you to meet the exact time and date your Customer has specified in the Scope of Work, it allows the Customer at law to penalise you if you’re even just one minute over the agreed delivery time.
Think we are exaggerating on being a few minutes late?
Well, we’re not. Union Eagle Ltd v Golden Achievement Ltd  UKPC 5 concerns a contract to buy a flat in Hong Kong completing by 5pm on 30th September. The contract stipulated ‘time is of the essence’ for this deadline and stated that any breach of the buyer would lead to forfeiting the deposit and allow the seller to end the contract. The buyer tendered the purchase 10 minutes late. The seller declared the deposit forfeited and the contract ended. This was sanctioned by the Privy Council.
So, case law has concluded that your customers have two options under “time is of the essence”:
- The right to terminate the contract.
- The right to claim damages for the loss of the contract.
Neither is going to be good news for you.
Let’s look at them separately to understand how these can impact your business – though you may already realise that if you are an SME the implications could be grave indeed.
Right to Terminating the Contract – The Impact
Let’s say you are providing a professional or managed service with ‘time is of the essence’ and you delay a milestone time and date by a few minutes.
- For Professional Services, if the customer chooses to trigger its remedy at law to terminate, that could mean pens down, with an immediate knock on effect to the cash in your business. If you’ve hired in contractors (or subcontractors) for 1/2/3 weeks’ worth of work you may have issues terminating the arrangements with them which will mean you are left paying for a resource you’re unable to use. Even if you’re not using contractors, the re-scheduling of your own resources will no doubt leave you exposed. To complicate things, what if the delays were caused by your Customer or third parties? Your contract needs to protect you for all these possible scenarios, which arise frequently.
- For Managed Services, it’s slightly more complicated. Typically support contracts will have Service Level Agreements with a priority and response matrix. How does ‘time is of the essence’ work here?
Much in the same way as explained above, in that if you fail to meet a deadline the Customer can claim a breach event. However, the cost to your business is perhaps more significant than for Professional Services because you may have a long term, multi-year contract and within a few months lost the deal!
Claim for damages
As with most remedies at law, if the contract has been breached then there is a potential claim. Not only will you have lost cash in your business and future earnings because your Customer has terminated the contract, but now you’re looking at potentially losing more cash to a damage claim.
Damage claims need to be assessed fairly by the courts, the amount will be dictated by the wording in the contract and other external and internal factors. Damage claims can be big or small depending on the severity of the breach and the damage actually caused due to that breach.
It’s impossible to put a price on this at the start of a contract but you can see the costly implications of not paying attention to the “time is of the essence”. Phew! Who would have thought that such a small phrase could have such a massive impact on the function and finances of your business?
This is the first blog in the series, contracts for beginners, please look at the others available.
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- Force Majeure.
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