While stock phrases and other boilerplate are often standard inclusions in agreements (including agreements regarding M&A transactions), the proper use and interpretation of such stock phrases are vital and can implicate the execution of a deal.
A "time is of the essence" clause is an example of one such boilerplate provision.
The purpose of a "time of the essence" provision is to make clear that any delay in performance of a contract may support an action for the inconvenienced party and relieve the non-breaching party from the performance of his her or its duties. In other words, the clause signals that the essence of the entire contract depends on the timely fulfilment of its terms.
At law, there is no general presumption that time is of the essence. A court will consider the intention of the contracting parties to establish whether time is essential to a contract. Practically, where an express statement of timeliness is included in an agreement, a court would not be required to discern intention. Alternatively, where there is no express statement, timeliness may be implied based on the nature of the property involved in the contract. Leaving said implication to the court is a transactional risk, which is best mitigated by inclusion of an express time of the essence clause.
A court will typically implicate timeliness when the property being sold in a particular transaction is of fluctuating value. According to the Supreme Court of Canada, this is because a buyer faces the possibility of prejudice if the seller does not deliver in the specified time. The sale of goods is treated differently than the sale of fixed assets, such as land. Goods generally fluctuate more in value than land. On this basis, a private acquisition of goods is more likely to imply time being of the essence than an acquisition of land.
Similarly, variability in the value of shares creates reason for timeliness in a share purchase deal. This type of transaction involves the purchase of the shares of a target, subjecting a buyer to a risk of price fluctuations of the target's shares. Absent an express time of the essence clause, this risk would be absorbed by the contracting parties, ultimately affecting the purchase price.
In the case of an asset purchase deal, an implication of timeliness by a court depends on the market variability of the goods. If the purchased assets are generally not subject to resale (e.g., land), there is less essentiality of timeliness and an implication thereof. That being said, best practice would be to include an express "time is of the essence" clause to avoid the risks associated with reliance on the court to imply timeliness and any resulting effect on the purchase price.
It is noteworthy that the inclusion of a timeliness provision is sometimes inconsistent with the terms of an agreement. Typically parties may agree that time is not of the essence where there is expected variability in the execution of the contract.
In few circumstances, intention may prevail over an express "time of the essence" clause. This is the case where other terms of an agreement show the true intention of the parties as being otherwise. However, typically when time is expressly made essential to a contract, a breach of any term of which time is limited may entitle the non-breaching party to rescind. As a result, including a "time of the essence" clause as a formality without an understanding of its consequences may create substantial implications for the contracting parties.
The author wishes to thank Lauren Day, summer student, for her assistance in preparing this legal update.
Norton Rose Fulbright Canada LLP
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