How Do Time of Essence Clauses Work?

The phrase "time is of the essence" is often used in common parlance to communicate that something is urgent. In law, however, "time shall be of the essence of this Agreement," or similar language, means that "where a time limit is stipulated in a contract ... breach of the time limit will permit the innocent party to terminate the contract" (as stated by the Ontario Court of Appeal in Di Millo v 2099232 Ontario Inc.).

Examples of contractual obligations caught by a TOE clause would be a covenant to submit a request for regulatory approval "within 15 business days of the date of this Agreement," and an obligation in a purchase agreement to tender the purchase price by 5:00 p.m. on the closing date. If the parties do not specify a time for the performance of an obligation, the law generally implies a requirement to perform such obligation within a reasonable time frame. The TOE clause, therefore, does not itself impose any time limits or otherwise obligate the parties to expedite performance of their obligations. Instead, it provides a (potentially draconian) remedy to the innocent party if a stipulated time limit is breached.

The innocent party will generally be permitted to terminate the contract on the basis of a TOE clause only if it is "ready, willing and able" to perform at the stipulated time. This is often evidenced, particularly in the real estate context, by "tendering" on the party in default, or its lawyers, at the closing time.

At common law, time is not presumed to be of the essence of a contract (except in special circumstances). Contracting parties, the SCC held in Sail Labrador Ltd. v Challenge One (The), "must use very precise words if their intention is to make time the essence of a contract." Precise, but not complex, words. As parties committing immaterial defaults have discovered to their surprise, "time shall be of the essence of this Agreement" is enough to render every stipulated deadline essential. Sail Labrador Ltd. v Challenge One (The), "must use very precise words if their intention is to make time the essence of a contract." Precise, but not complex, words. As parties committing immaterial defaults have discovered to their surprise, "time shall be of the essence of this Agreement" is enough to render every stipulated deadline essential.

The case law evidences the harsh reality that a TOE clause can allow a party to take advantage of the other party's trivial delay in performance to terminate the transaction. In 3 Gill Homes Inc. v 5009796 Ontario Inc., the Ontario Court of Appeal held that the vendor of a property was permitted to terminate the deal because the purchaser delivered the closing funds 35 minutes after the deadline specified in the purchase agreement. A nine-minute delay entitled the vendor to walk away from a deal in Correa v Valstar Homes (Oakville Sixth Line) Inc. Although much of the case law relates to closing deadlines in real estate transactions, where market fluctuations between signing and closing can prompt buyers and sellers alike to look for ways to get out of deals, the clause should be used only with caution in all contracts.

Although some courts have recently considered whether they have an equitable discretion to grant relief against the strict enforcement of a breach of a TOE clause, this is likely to apply only where the non-delaying party has in some way contributed to the breach.

"Time of the Essence" Clauses Head to the Supreme Court