The standard form agreement of purchase and sale used by the Ontario Real Estate Association includes language that reads, “Time shall in all respects be of the essence.” Vendors and purchasers often wonder what this clause means. The legal effect of this and similar language has been litigated many times, both in a real estate context and in the broader context of contractual interpretation.
Clause Automatically Allows Innocent Party to Rescind the Contract in the Event Other Party Misses Contractual Deadline
What does this phrase mean? The Ontario Court of Appeal has explained that “a time limit in an agreement is essential such that breach of the time limit will permit the innocent party to terminate the contract” (Di Millo v. 2099232 Ontario Inc.). In other words, when a party fails to meet the timeline imposed in the contract, it automatically allows the innocent party to rescind the contract, no matter how minimal the failure. Including this phrase in an agreement does not impose a time limit. Instead, it determines the consequences of failing to meet it.
As the Court of Appeal pointed out in Di Millo, including a “time is of the essence” clause in the agreement imports a “series of rules of law” into the agreement. One such rule is that an innocent party can only rely on the clause if they are “ready to perform” their obligations under the contract. As such, the meaning of the clause does not generally hinge on the parties’ intentions.
Intention May Matter in Determining Whether Particular Wording Constitutes a “Time is of the Essence” Clause
As a starting point, there is no general presumption that time is of the essence in a contract (per Sail Labrador v. Challenge One (The)). The parties must intend that such a clause apply. In determining whether or not a particular clause in a contract constitutes a “time is of the essence” clause, a court will examine the actual wording used by the parties to determine whether “it was their intention to make time of the essence expressly” (see 1473587 Ontario Inv. v. Jackson).
Strictly Applying “Time is of the Essence” Clauses Ensures Commercial Certainty and Avoids Litigation
In general, courts will strictly hold parties to the timelines set out in an agreement if the agreement contains such a clause. There is a good reason for this – namely, the “practicalities of business.” In the Jackson case, the Ontario Superior Court of Justice referenced the reasoning of a U.K. case with approval in noting that
“in many forms of transactions, it is of great importance that if something happens for which the contract has made express provision, the parties should know with certainty that the terms of the contract will be enforced.”
If courts had the discretion to refuse to enforce such a term, this would create room for litigation, which could then be used as a “negotiating tactic.” If parties were free to argue that they were entitled to relief because they were only a little bit late in meeting a deadline, that would create endless arguments over “how late is too late.”
Immediate Notice of an Election to Rescind is Generally Not Necessary
If a party fails to meet a timeline, such a clause applies. Is it entitled to immediate notice of whether the innocent party elects to rescind the contract? In Jackson, the answer was no. Absent something more, an innocent party does not lose the right to rescind merely by failing to give such notice. Having said this, the innocent party “must not use his position unfairly.”
The “Time is of the Essence” Clause Must Generally Be Related to a Specific Timeline in the Contract
What if an agreement includes such a clause but does not specify a timeline to which it applies? This was one of the issues in More v. 1362279 Ontario Ltd. (Seiko Homes). In that case, the Ontario Court of Appeal affirmed the lower court decision that the innocent party could not rely on the “time is of the essence” clause. This was for various reasons; however, the Court noted that such a clause “is of limited assistance to courts interpreting a contract where the contract is otherwise silent on the deadline to perform the obligations” under it.
Failure to Meet a Timeline Generally Will Not Be Excused
Where a contract contains a “time is of the essence” clause, it appears that the failure to meet a deadline will not be excused just because the failure is inadvertent or the innocent party suffers no prejudice as a result (see Jackson as referenced in 6844987 Canada Inc. v. The United People of Canada/Les Peuple Unis du Canada).
Vendors Must Act in Good Faith and Take Reasonable Steps to Complete Contract
One exception to the principle that a “time is of the essence” clause should be strictly applied relates to the party’s conduct that wishes to rely on the clause. For example, where a seller does not act “in good faith” in the performance of its obligations under the agreement and as a result the buyer does not meet the deadline, the seller may not be permitted to rely on such a clause. It should be noted that a seller “is under a duty to act in good faith and to take all reasonable steps to complete the contract” (see 801 Assets Inc. v. 605446 Ontario Limited).
Absent something more, simply requiring a buyer to comply with a time limit in a contract does not constitute “bad faith” (per Deangelis v. Weldin Properties (Haig) Inc.).
The “Time is of the Essence” clause is an essential feature of standard form agreements of purchase and sale. Where a contract contains such a clause and imposes deadlines on a party, that party would be well-advised to ensure it meets the deadline. Where a party is at risk of missing a deadline, it should immediately seek to obtain a properly executed written amendment with the other party to ensure a missed deadline does not result in the contract being rescinded.
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