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San Diego Business Contracts: What is a “Time is of the Essence” Clause?
You sometimes see a clause in a California business contract that simply says: “Time is of the essence.” You may ask yourself: What does that mean? In basic terms, a contract provision stating “Time is of the Essence” (“TIOTE”) means that the dates or time frames set forth in other parts of the contract must be met, within reason. Put another way, failure to meet the deadlines will be considered breach of the contract and might lead to litigation or provide grounds for canceling the contract.
What are Common Types of Contracts with TIOTE Clauses?
A TIOTE clause can be included in any contract. But, such clauses are more common with contracts involving perishable goods (e.g., fruits and vegetables), goods that have a seasonal value (e.g., pumpkins) or where a time deadline is personally or commercially valuable. Common examples include:
- Real estate purchase contract
- Construction and building-related contracts
- Device-creation and other research-related contracts
- Shipping contracts
- Loan and financing documents
One can generalize and say that TIOTE clauses are used where the value of the contract to one party is severely diminished or reduced to zero if the other party performs after a certain date.
TIOTE can be Stated in Other Words and can be Imputed by Law
In general, if your contract does not contain a TIOTE clause, then courts will interpret the contract to mean that time is not important in terms of the parties’ respective performance. Time issues will not be valid grounds for asserting breach of the contract.
That being said, the courts will look to the whole of the contract and can discern that time deadlines are important even if a TIOTE clause is absent. Other words can be used to express the concept that time is of the essence. For example, in a purchase-goods contract, language like “failure to deliver the goods by the date specified shall constitute breach of contract” will make time of the essence for that part of the contract. A separate free-standing TIOTE clause serves to make time important for all duties and performances called for under the contract.
In rare circumstances, time will be deemed crucial even in the absence of a TIOTE clause. See Rosenaur v. Pacelli, 174 Cal.App.2d 673 (1959) (“The very nature of an option, which by its terms must be exercised within a specified time, compels the inescapable conclusion that time is of the essence, and no express provision to that effect is required.”)
Uniform Commercial Code
Under the Uniform Commercial Code (“UCC”), the default provision related to time is “reasonable time.” UCC § 2-309. See also Cal. Civil Code § 1657 stating that, in reference to how contracts are to be interpreted:
“If no time is specified for the performance of an act required to be performed, a reasonable time is allowed. If the act is in its nature capable of being done instantly—as, for example, if it consists in the payment of money only—it must be performed immediately upon the thing to be done being exactly ascertained.”
As discussed herein, that “reasonable time” default provision can be changed to TIOTE.
Contact San Diego Corporation Law Today
If you would like more information about TIOTE clauses, business contracts, business formation, or other aspects of business law, contact attorney Michael Leonard, Esq., of San Diego Corporate Law. In 2017, Mr. Leonard has been named yet again a “Rising Star” by SuperLawyers.com. This is three years running. Mr. Leonard has the experience and knowledge to help your business succeed. Mr. Leonard can be reached at (858) 483-9200 or via email.
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