Why is ‘time is of the essence’ a scary concept for a Supplier in a contract?

I am sure you, as Supplier of IT Services, have come across this terminology at least once in your life if not multiple times. How many of you have disregarded it as not an issue?

If the answer is, we always regard it as an issue, then well done. You are very much in the minority.

If the answer is, is it an issue? Well don’t fret too much- you are in the majority of Suppliers who do not have an understanding of the gravitas of this small phrase.

Time is of the essence was established in contracts to hold the Supplier to the exact timing of delivering the Services. Many customers needed something concrete in their contracts which went beyond a normal expectation that you will deliver on time. Time is of the essence goes one step further- it not only obligates the Supplier to meet the exact time and date the Customer has specified in a Scope of Work, it will effectively allow more remedies to the Customer at law if the Supplier goes, even just one minute over, the time it agreed to deliver the Services by.

Think we are exaggerating on being a few minutes late?  Well, we’re not. Union Eagle Ltd v Golden Achievement Ltd [1997] 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 y the Privy Council.

What remedies does a Customer get if the Supplier is delayed under ‘time is of the essence’? Case law has concluded that it gives the Customer two remedies: (1) a right to terminate the contract; and (2) and right to claim damages for the loss of the contract.

Let’s take each of these two remedies in turn to understand the impact this has on a Supplier whether small or big (although if you are an SME Supplier the extent of these remedies are grave indeed)

Right to Termination the Contract- The Impact

Let’s say you are providing a professional or managed service with ‘time is of the essence’ in the way you deliver. Let’s say you delayed a milestone time and date by a few minutes and have consequently triggered ‘time is of the essence.’

For Professional Services that could mean pens down (if the Customer so chooses to trigger its remedy at law to terminate) which is a knock-on effect with the cash in your business. Most IT Suppliers will use contractors (or subcontractors) at some point in their lives. You may schedule them in for 1/2/3 weeks’ worth of work on a particular Customer project. You may have issues terminating the arrangements with them which will mean you are left paying for a resource which you may not be able to reschedule onto another project. Even if you’re not using contractors or Subs, the re-scheduling of resources will leave you exposed. To complicate things- you may not have carved out that delays could be caused by the Customer or third parties, so you really are left with an open cut issue here.

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 with the notion of this? Much in the same way as explained above- if you fail to respond within the time you say you will for a certain priority issue, the Customer may be able to lean on a breach event. The cost to your business is perhaps more prevalent than in Professional Services as you may have a 3-year contract which you have forecasted for and within a few months lost the deal. It’s really not a phrase which should ever be overlooked- right?!

Claim for damages

As with most remedies at law, if the contract has been breached then there is a potential claim depending on circumstances which can come from the Customer indicating the loss of the contract to its business. Already you have lost cash in your business through the Customer’s ability just to be able to terminate, but now we are looking at potentially losing more cash to a damages claim. Damages claim need to be assessed fairly against what the damaged actually was, the wording in the contract and other external and internal factors the courts will have to assess. Damage claims can be big or small depending on the severity of the breach and the damage actually caused due to that breach- it is something your lawyers cannot put a price on at the start of a contract but one in which a court will ultimately decide.

Phew! Who would have thought that such a small phrase can have such a large and financial consequence on a Supplier?

Law 365 was a big supporter of the EU; it won’t deny this but alas now is not the time to grieve but a time to ‘Carry on and Keep Calm’.