Time as essence of
Commercial Contracts – Latest position of law as stood by Supreme Court of
India:
INTRODUCTION:
India,
being an economically fast growing Country, is making way for various
multinational Companies to enter into Indian Market. The basis for these
establishments is Contracts. In fact, Contract can be defined as a meeting of
minds with the understanding and acceptance
of reciprocal legal rights and duties as to particular actions or obligations, which the parties intend to exchange or a mutual assent to do or refrain from doing something. The negotiation of these establishments is the birth place of commercial contracts. The commercial contract defines the whole legal relationship and governing rules of the two parties entering into such contracts. Presently, there are numerous growths in commercial contractual relationships, which had also eventually increased the count of disputes.
of reciprocal legal rights and duties as to particular actions or obligations, which the parties intend to exchange or a mutual assent to do or refrain from doing something. The negotiation of these establishments is the birth place of commercial contracts. The commercial contract defines the whole legal relationship and governing rules of the two parties entering into such contracts. Presently, there are numerous growths in commercial contractual relationships, which had also eventually increased the count of disputes.
TIME
- AN IMPORTANT ASPECT
“Time”
is one of the aspects which give rise to disputes amongst the contracting parties
which are of commercial nature. In present-day business world, which has become
highly complex and competitive, time is the most important asset for any
business entity. It is rightly said “Time and Tide wait for none” as business
world considers Time is Money and in-fact, time is more valuable than
money. Time once past cannot be brought back by any means. As time is
considered so, every corporate entity has started practicing in making time
bound commercial contracts. When time bound contracts are entered by the
contracting parties, it requires one of the party to do the promised act within
scheduled period as time becomes deciding factor of the contract. In India,
Contracts are governed by the provisions of the Indian Contract Act, 1875 and
Section 55 of the Indian Contract Act deals with the consequences of such time
bound contracts.
Section
55 of the Indian Contract Act
deals with a contract, in which time is essential. When a party to a contract
promises to do a certain thing at or before specified time, or certain things
at or before specified times, and fails to do any such thing at or before the
specified time, the contract, or such of it as has not been performed, becomes
voidable at the option of the promise, if the intention of the parties was that
time should be of the essence of the contract.
Section 9 of Specific Relief Act: which states as, Defences respecting
suits for relief based on contract - Except
as otherwise provided herein, where any relief is claimed under this Chapter in
respect of a contract, the person against whom the relief is claimed may plead
by way of defence any ground which is available to him under any law relating
to contracts.
The
Supreme
Court in the Citadel Fine Pharmaceutical Vs. M/s Ramaniyam Real Estates Pvt.
Ltd., and Another[1]
– The suit for specific performance was filed for the performance of acts as
under the Agreement for Sale. The Defendant took a stand that time was the
essence of Contract and the breach was committed by the petitioner and the contract
seized to exist by efflux of time. One of the questions arose for consideration
before the Supreme Court was, “whether in the said agreement time is of the
essence of the contract”. The Supreme Court, while answering the issue,
observed and held as follows,
“The settled
law seems to be that in case for specific performance of contract relating to
immovable property time is not normally of the essence. However, this is not an
absolute proposition and it has several exceptions”
The
court also relied on the decision of the Privy Council in
JamshedKhodaram Irani vs Burjorji Dhunjibhai[2]
– The Privy Council held that in cases relating to specific
performance, equity which governs the
right of the parties, does not look always at the express term of the agreement
but at the substance of it in order to ascertain whether parties named specific
time within which completion was to take place and whether the parties in
substance intended that the completion should take place within a reasonable
time. The legal position was as “a Court of equity will indeed relieve against
and enforce specific performance, not withstanding a failure to keep the dates
assigned by the contract- either for completion or for the steps towards
completion, if it can do justice between the parties, and if there is nothing
in the express stipulation between the parties, the nature of the party or the
surrounding circumstances, which would make it inequitable to interfere with
and modify the legal right ....”
The
Supreme Court also observed that the principle laid down by the Privy Council
was accepted by the three bench judge of this court in the case of Gomathinagam Pillai
& Others Vs. Palaniswami Nadar[3].
The
Supreme Court also relied on the case of K S Vidyanadam and others Vs Vairavan
[4], wherein
this court explained how discretion is to be exercised by the court before
granting specific performance. This court held that in cases of urban
properties in India it is well known that prices are going up sharply over the
last few decades particularly after 1973. This court also did not agree with decision of the Madras High Court, which
held that mere rise in price is no ground for denying the Specific Performance
and held that the court cannot be oblivious of the reality of constant and
continuous rise in the value of urban properties. In that contest the time
limit set in the contract has to be strictly construed. In Vidyanadam case,
there is no such strict stipulation as time being of the essence of the
contract, even then the court refused to grant the relief of specific
performance. In this regard reference was made to decision of Constitution bench of
this Court in Chanda Rani (dead) by LR’s Vs Kamal Rani (dead)
by LR’s[5]
- The same question whether time was of essence of the contract was discussed.
The Constitution bench while dealing with the same referred to the decision of
this court in M/s Hind Construction Contractors Vs State of Maharashtra[6]
and various other judgements and then formulated
the proposition that
“even
where partiers have expressly provided time to be of the essence of the
contract, such a stipulation will have to be read along with other terms of the
contract. Such other terms, on a proper construction, may exclude the inference
that the completion of work by a particular date was meant to be fundamental.
The learned judges indicated the following circumstances which may indicate a
contrary inference; (a) If a contract includes clauses providing for extension
of time in certain contingencies, or (b) If there are Clauses for payment of
fine or penalty for every day or week the work undertaken remains unfinished
after the expiry of time. The
constitution bench held that such clauses would be construed as rendering
ineffective the express provision relating to time being of the essence of
contract”.
The
Apex Court while discussing various judgments of this Court, has also extracted
the relevant explanation of various learned authors as well, which is produced
as follows,
“Consequences”
if time being of the essence: In determining the consequences of a stipulation
that a time is to be of the essence of an obligation, it is vital to
distinguish between the case where both parties agree that time is to be of the
essence of the obligation and the case where, following a breach of non
essential term of the contract, the innocent party serves the notice on the
other stating that time is to be of the essence. In the former case the effect
of declaring time to be of the essence is to elevate the term to the status of
a “condition” with a consequences that a failure to perform by the stipulated
time will entitle the innocent party to; (a) terminate performance of the
contract and thereby put an end to all the primary obligations of both parties
remaining unperformed; and (b) Claim damages from the contract–breaker on the
basis that he has committed a fundamental breach of contract (‘a breach going
to the root of the contract’) depriving the innocent party of the benefit of
the contract (damages for the loss of the whole transaction)[7].
Time
is originally of the essence of the contract, in the view of a court of equity,
whenever it appears to have been part of the real intention of the parties that
it should be so, and not to have been inserted as a merely formal part of the
contract. As this intention may either be separately expressed or may be
implied from the nature or structure of the contract, it follows that time may
be originally of the essence of a contract, as to any one or more of its terms,
either by virtue of an express condition in the contract itself making it so,
or by reason of its being implied....... [8]
Time
may be implied as essential in a contract, from the nature of the subject
matter with which the parties are dealing. If therefore, said Alderson B, the
thing sold be of greater or less value according to the effluxion of time, it
is manifest that time is of the essence of the contract and a stipulation as to
time must then be literally complied within equity as well as in law.........[9]
It
is very clear that in a contract relating to commercial enterprise the court is
strongly inclined to hold time to be
essential, whether the contract is for the purchase of land or for such
purposes or more directly for the prosecution of trade.[10]
If
the parties have expressly agreed that time is to be of the essence, the courts
will generally if not always give effect to that stipulation. An intention that
a stipulation as to time should be of the essence may be implied from the
circumstances. In the absence of agreement to the contrary, time will generally
be considered of the essence in mercantile contracts and in the contracts for
the sale of a business or of a property which has a fluctuating or speculative
value..........[11]
In
the present case on hand, the SC had applied all the aforesaid principles while
considering the point of time being the essence of Contract.
CONCLUSION:
The
parties to the Contract should clearly have consensus ad-idem of making time as
the essence of the Contract, reflecting in the Agreement. Further, the Parties should
also emphasize on the fact of making time as essence as stipulated by issuing a
notice to the other side otherwise it shall be considered as waiver of the
clause in the Contract. The disputes arising out of breach of clause of Time
limit in the Contract has increased in the present day leading to litigation
before Courts as well as before the Arbitral Tribunal.
What a "timely"advice!Very good presentation.All the best.
ReplyDeleteThank you mam...
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