In general, California courts will enforce business contracts as written. Indeed, generally, the courts will enforce all provisions even if the provisions work some sort of disadvantage or hardship on one party or another. This applies to “time is of the essence” clauses. These clauses provide that any time deadlines are in the contract, they are to be strictly enforced. An example of a “time is of the essence” clause might be something like this:

“TIME IS OF THE ESSENCE: Unless specifically stated to the contrary in this Agreement, time shall be of the essence for all dates, deadlines and events contemplated herein.”

If, for example, the delivery of the subject of the contract — say, machine parts — is due on the 15th of next month, a “time is of the essence” clause will make it a breach of the contract if the delivery is late, even a day late.

However, a recent California Court of Appeals decision suggests that there are limits on how strict courts will be when enforcing contract provisions. This is one reason that it is important to retain an experienced San Diego corporate attorney to custom draft your business contracts. A well-drafted contract will generally be enforced.

The case at issue is Magic Carpet Ride, LLC v. Rugger Investment Grp., LLC, Case No. G056896 (Cal. App. 4th Dist. October 25, 2019). Rugger and Magic Carpet Ride signed a contract for the sale and delivery of an airplane. The closing was done, as usual, through an escrow wherein documents and funding was delivered to an escrow agent for completion. Per usual custom, the contract required Rugger, the seller, to deliver the airplane on the closing date free and clear of all liens and encumbrances. The closing was originally set for February 23, 2016.

However, on that date, Rugger could not deliver clean title because it still had an outstanding mechanic’s lien that had been filed by an Arizona company against the plane. As a consequence, the parties agreed to give Rugger a 90-day extension to deliver the Release of Lien into the escrow. Title to the airplane was passed on February 23rd, but $90,000 was held back in the escrow with a forfeiture provision. Rugger failed to obtain the Release within the 90-day window, but obtained the release eight days later and deposited the Release into the escrow on the 98th day. Thereafter, Rugger asked for the $90,000 to be released. Magic Carpet refused claiming that eight days late violated the contract. Magic Carpet claimed that the $90,000 was forfeit. Rugger and Magic Carpet ended up in litigation.

At the trial level, the lower court ruled in favor of Magic Carpet in pre-trial motions. The trial court found that the “time is of the essence” clause was enforceable and, since the Release was put into the escrow eight days late, the $90,000 was forfeited pursuant to other provisions in the contract and amendment. As a matter of law, the award was given to Magic Carpet and the court held that a jury trial was not necessary.

On appeal, the Court of Appeals disagreed. The court held that a trial was necessary on the question of whether Rugger had “substantially” performed despite the “time is of the essence” clause. The key fact mentioned by the court was the continued possession of the airplane by Magic Carpet following February 23, 2016. That is, the eight-day delay did not impact Magic Carpet’s enjoyment of the benefit of its bargain. By contrast, to approve the forfeiture of the $90,000 escrow deposit would frustrate the bargain that was made by Rugger and provide Magic Carpet with a windfall. That result might be justified, said the court, but a jury would need to make that determination.

Contact San Diego Corporate Law

For more information, call Michael Leonard, Esq., of San Diego Corporate Law. Mr. Leonard focuses his practice on business law, transactional, and corporate matters, and he proudly provides legal services to business owners in San Diego and the surrounding communities. Mr. Leonard can be reached at (858) 483-9200 or via email. Like us on Facebook.

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