“Time is of the Essence”

I’m fond of invoking two overarching rules of drafting—“be consistent” and “use standard English.” I periodically mull adding a third. Possible candidates come and go, but a current favorite is “say what you mean.” In other words, don’t use stock phrases in the hope that a court will construe them in the way you intended. Instead, address issues head-on.

A case in point is “time is of the essence.” Its widespread use by nonlawyers makes it, in Bryan Garner’s phrase, a popularized legal technicality, but it also remains a fixture of contract language. For instance, 292 contracts filed on the SEC’s Edgar system in April 2006 used the phrase. (By way of comparison, in the same period 991 contracts filed on Edgar used the phrase “material adverse change” or “material adverse effect.”)

The meaning attributed to “time is of the essence” in Garner’s Dictionary of Modern Legal Usage reflects the conventional wisdom among practitioners: “When a contract stipulation relating to the time of performance is ‘of the essence’ of a contract, a party’s failure to meet that stipulation automatically justifies the other party’s rescinding the contract—no matter how trivial the failure.”

Drafters use the phrase because courts tend to hold that late performance doesn’t constitute grounds for termination unless the purpose of the contract or the circumstances surrounding it indicate that the parties intended for that to be the case. See Am. Jur. Contracts § 471.

But for various reasons, “time is of the essence” isn’t up to the task.

First, the phrase is generally used in a provision stating—the exact wording varies—that “Time is of the essence of this agreement.” This formula is entirely too vague: “A contract may contain many promises for sundry performances, varying in amount and importance. A general provision that ‘time is of the essence’ should not apply to all of the promises for performance.” 8-37 Corbin on Contracts § 37.3.

And even if it happens to be clear what particular performance the phrase applies to, the phrase is silent as to the exact consequences of untimely performance.

So it’s unsurprising that courts have proved willing to ignore “time is of the essence” clauses on the grounds that you can’t assume that the parties to a contract understood and agreed on the ostensible meaning of the phrase.

For example, Restatement (Second) of Contracts § 242, comment d. (1981), says that “stock phrases such as ‘time is of the essence’” do not necessarily have the effect of making failure to timely perform grounds for discharge, although such phrases “are to be considered along with other circumstances in determining the effect of delay.”

In the same vein, 8-37 Corbin on Contracts § 37.3 says, “The provision ‘time is of the essence’ may be inserted in a contract without any realization of its significance. Other terms contained in the agreement, interpreted in the light of the conduct of the parties, may show that the provision has no legal effect.”

So how can you more effectively convey in a contract that you really mean it when you specify a time for performance? It depends on the context. Assume that you represent the buyer and you’re drafting an acquisition agreement that specifies that either party can terminate if the transaction hasn’t closed by a specified date—the “drop-dead date.” You want to make sure that a court wouldn’t cut the seller any slack if the buyer terminates because the transaction hasn’t closed by the drop-dead date and the seller sues, claiming that a missing consent in fact materialized a day later and that the buyer should have been willing to close. What do you do?

I’d address this concern by adding the following provision, perhaps as a subsection of the “Termination” section: “The parties acknowledge that due to [describe time constraints on the parties], if a party wishes to terminate this contract in accordance with section __ [the drop-dead-date provision], that party will not be required to give the other party any time beyond the Drop-Dead Date to allow that party to satisfy any condition or perform any obligation under this agreement.”

The above analysis considers the effect of the phrase “time is of the essence” under U.S. law only. During my recent contract drafting workshop in Toronto for the Professional Development Program of Osgoode Hall Law School, someone asked me about the effect of the phrase under Canadian law; I’ll offer my thoughts on that subject in a blog posting down the road.

By the way, I’m unlikely to add “say what you mean” as a third rule of drafting. I think that in the final analysis it, like a number of other potential third rules, is subsumed within rule number two, “use standard English.”