Sometimes a contract says that ‘time is of the essence’ in relation to some or all of the contractual obligations. This may be specified in the provision that imposes the obligation or it may be a ‘boilerplate’ term.

What does the law say?

Where a contract stipulates that ‘time is of the essence’ in respect of an obligation, timely performance of that obligation is likely to be considered an essential term (or a ‘condition’) of the contract.

If a term of a contract is an essential term, the party relying on the term may be able to terminate the contract at common law (in addition to any termination rights specifically drafted into the contract) if the other party breaches that term.

Where a contract stipulates that ‘time is of the essence’ with respect to an obligation, late performance of that obligation may entitle the non-defaulting party to terminate the agreement.

The phrase ‘time is of the essence’ need not necessarily be included in the agreement for parties to agree that timely performance is an essential term. Other drafting can have the same effect – for example, where a contract expressly states that, where a time stipulation is not met, a party may terminate the agreement.

In certain circumstances ‘time of the essence’ may also be implied into a contract in respect of obligations. However, for certainty, it is always preferable to use an express term like ‘time is of the essence’.

If a contract does not specify that ‘time is of the essence’, unless express termination rights in the contract apply, a mere failure to comply with a time period specified in the contract does not generally entitle the other party to terminate. However, delays can impact a party’s ability to exercise rights that are specified as applying only within a specific window of time. For example, in Chevron (Tapl) Pty Ltd v Pilbara Iron Company (Services) Pty Ltd [2021] WASCA 193 the Western Australia Court of Appeal considered whether a party was prevented from initiating a price review outside of the prescribed time period in a gas supply agreement even if the agreement did not provide that time was of the essence. Based on the construction of the agreement (and, in particular, the time periods involved in the complicated price review process once initiated), the court held that the time period in the price initiation clause was an essential term. So the price review could only be initiated within the time period provided for in the relevant term of the agreement.

What are the practical implications?

If timely performance of some or all obligations is important in your contract, you should consider expressly providing that ‘time is of the essence’ in relation to those obligations.

Certain types of agreements typically provide that time is of the essence for key obligations, for example, agreements for the sale of real estate or the supply of perishable goods. This makes sense where the benefit of the contract will be difficult or impossible to realise if performance is delayed.

There may be good reasons why the timing is important. It may be helpful to provide that ‘time is of the essence’ to provide leverage (in the form of a right to terminate the agreement) in the event of a delay. However, you should consider whether a right to terminate is right for your circumstances or whether the contract can include more specific remedies or consequences to deal with delays to critical milestones. If you exercise your right to terminate your contract, you may be no closer to getting what you need done on time.

If you need to protect yourself from delayed performance, you may have better-suited tools at your disposal such as:

1. liquidated damages clauses; or
2. requiring the delayed party to develop and implement a remediation plan if they are delayed (e.g. by reprioritising work or deploying additional resources to make up for the delay).

Counterparties may be reluctant to agree to make time of the essence, especially if the right to terminate is a disproportionate remedy for a short period of delay in meeting what an unimportant delivery obligation.

Consider the value of a termination right to you in the event of a delay, and whether there are other options you should consider instead of, or as well as, making time of the essence.

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