Time, the essence of Contract?

When I order some 1000 pieces of satay for a wedding, I expect the caterer to deliver on the exact date of the occasion. If the caterer delivers the satay one day late, the items are of no value to me. Here, time is of the essence of the contract.

In a construction contract, though it has often been said, and routinely reproduced as a boilerplate clause (see PWD203 cl 41.3 “Notwithstanding the provision of Clauses 42 and 45, time shall be the essence of this Contract”), it is strictly not accurate to state merely that “time shall be of the essence of the contract”: it would be more accurate and reflective of the intention of the parties to state that time would be of the essence with respect to which provision or provisions of the contract.

The possible legal consequences that can flow from the Contractor’s failure to complete the Works within the contractual time can be inferred from the provisions of section 56 Contracts Act 1950. The material part of section 56 Contracts Act 1950 is reproduced below:

“56(1) When a party to a contract promises to do a certain thing at or before a specified time, …, and fails to do any such thing at or before the specified time, the contract, or so much of it as has not been performed, becomes voidable at the option of the promisee, if the intention of the parties was that time should be of the essence of the contract.

56(2) If it was not the intention of the parties that time should be of the essence of the contract, the contract does not become voidable by the failure to do the thing at or before the specified time; but the promisee is entitled to compensation from the promisor for any loss occasioned to him by the failure.

56(3) If, in case of a contract voidable on account of the promisor’s failure to perform his promise at the time agreed, the promisee accepts performance of the promise at any time other
than that agreed, the promisee cannot claim compensation for any loss occasioned by the non-performance of the promise at the time agreed, unless, at the time of the acceptance, he gives notice to the promisor of his intention to do so.”

The insertion of a clause declaring time to be of the essence in a construction contract, unlike its insertion in other contract forms, will not normally, in and of itself, allow the innocent party to rescind or terminate the contract for any breach of a time condition. In determining the party's intentions, the court will look to all the particular terms and circumstances and may well import little meaning to the "time is of the essence" clause.

It can be said that in construction contracts, with the presence of extension of time and liquidated damages clauses, time is, more often than not, NOT of the essence with respect to completion date. That is to say, for the legal consequences flowing from a delay to the completion date or extended completion date in most construction contracts, the applicable provision in Contracts Act 1950 would be section 56(2).

Case Law

In Tan Ah Kian v. Haji Hasnan [1962] MLJ 400., Gill CJ identifies the following three situations when time would be of the essence:

(a) the parties expressly state in the contract that it shall be so;
(b) where it was not originally stated to be of the essence but it was subsequently made so by one party giving reasonable notice to the other who has failed to perform the contract with sufficient promptitude; or
(c) where from the nature of the contract or of its subject matter time must be taken to be of the essence.

ENTIRE CONTRACT, SUBSTANTIAL PERFORMANCE

The older reported cases such as Appleby v Myers (1867)LR CP651 and Whitaker v Dunn (1887) 3 TLR 602 require complete performance by a promisor as a condition precedent to his right of recovery under an entire contract.

However the rigours of the common law has since been modified by later judicial pronouncements. It is now established by the doctrine of substantial performance that a promisor who has substantially performed his side of the contract may sue on the contract for the agreed sum, though he remains liable in damages for his partial failure to fulfill his contractual obligations.

At common law, substantial performance is an alternative principle to entire contract. This principle is relevant when a contractor's performance is in some way deficient, through no willful act by the contractor, yet is so nearly equivalent that it would be unreasonable for the owner to deny the agreed upon payment. If a contractor successfully demonstrates substantial performance, the owner remains obligated to fulfill payment, less any damages suffered as a result of the deficiencies in workmanship by the contractor.

Case Law:

Zainun Ali, JCA observed in Nirwana Construction Sdn Bhd v JKR NS(2008) that in the absence of express provision to exclude Substantial Performance, a contract cannot be regarded as Entire Contract

Gunn Chit Tuan, J. observed in KP Kunchi Raman v Goh Brothers Sdn Bhd (1978) 1 MLJ 89 in considering whether there had been substantial performance, it was relevant to take into account both the nature of the defect and the proportion between the cost of rectifying them and the contract price.

Obligation

Architect’s Contractual Obligation

1. Empowerment as Employer’s agent
2. Empowerment as Independent certifier

Employer’s Contractual Obligation

1. Make site available
2. Effect payment
3. Appoint Architect

Contractor’s Contractual Obligation

1. To carry out and complete works
2. To comply with specifications and instrructions
3. To preceed regularly and deligently