Avoid Delay or Get Ready to Pay: The Risks of “Time-Is-of-The-Essence” Clauses

Like death and taxes, construction delays are inevitable. Even the most cautious, diligent contractor may face subcontractor disputes, supply shortages, or inclement weather which slows down a project. Even if the contractor avoids unexpected problems, the sheer complexity of a job may cause a contractor to exceed the deadlines proposed in a contract.

Fortunately, courts recognize the practical reality of construction projects and the unavoidable delays which may arise. Therefore, as a general rule, a contractor is only liable for delayed completion of a project if the delay resulted from the contractor’s unreasonable performance of his or her work. Reasonable performance will typically serve as a defense to a claim of delayed completion. This defense is a vital asset when a contractor surpasses the project’s expected timeframe.

Like many defenses, however, a contractor can contractually waive his or her right to rely on reasonable performance. This type of waiver is referred to as a “time-is-of-the-essence” clause. The American Institute of Architects provides an example of such a clause:

Time limits stated in the Contract Documents are of the essence of the Contract. By executing the Agreement the Contractor confirms that the Contract Time is a reasonable period for performing work.

In its commentary to the example, the AIA explains that this clause makes timely performance an “express condition” of the contract. Any delay by the contractor constitutes a material breach. This clause precludes the contractor from asserting that the deadlines within the contract were unreasonable or that the contractor acted reasonably in attempting to prevent delays.

In light of this, contractors should proceed with caution before agreeing to a “time-is-of-the-essence” clause. Under such an agreement, a contractor’s failure to meet deadlines could excuse the owner’s financial obligations under the contract. Additionally, the owner may pursue a claim for any foreseeable damages stemming from the delay, including expenses, lost revenue, and lost business opportunities. In the context of commercial properties, these damages can be significant.

If a contractor does proceed with a “time-is-of-the-essence” clause, he or she should also consider a liquidated damages clause establishing the specific damages which the owner would recover in the event of a breach. This clause provides certainty to the owner, who avoids the burden of proving actual damages at trial. The clause also minimizes risk for the contractor, who can assess the consequences of a breach prior to commencement of the project. In any contract which identifies time as an express condition of performance, the contractor should consider liquidated damages as a means of mitigating risk.

A contractor should also consider insurability prior to entering into any time-contingent contract. Courts regularly interpret a failure to comply with “time-is-of-the-essence” clauses as a breach of contract rather than an act of negligence. Many insurance policies provide coverage for negligent performance of a contract, but expressly exclude coverage for breach of contract. Other policies may provide coverage only for “wrongful conduct,” which is generally limited to the ream of tortious conduct. Therefore, while an insurance policy may provide coverage for delays caused by a contractor’s unreasonable performance (i.e., negligent performance), the same policy may not provide coverage for a contractor’s failure to comply with a “time-is-of-the-essence” clause.

In the context of litigation, time-contingent contracts expose the contractor to additional theories of liability, reduce the plaintiff’s burden, and limit the contractor’s defenses. The plaintiff can still assert a claim of negligence for unreasonable delay. The plaintiff can simultaneously assert a claim for breach of contract. Even if the jury does not find negligence, it can still award damages under a theory of breach. In defending such a claim, the contractor is limited to contractual defenses such as waiver or impossibility.

Unfortunately, owners often set time-contingent clauses as non-negotiable terms in a contract. In particular, government contracts frequently contain such clauses. Before entering into this type of an agreement, the contractor should carefully evaluate his or her potential exposure as well as applicable insurance coverage in order to mitigate risk.

As a final note, particularly cautious contractors can also consider a “no-damages-for-delay” clause. Under this clause, the owner waives any damages arising out of delays in completion, even if the delays result from unreasonable performance. Courts generally uphold such agreements, which provide further protection to the contractor in the event of a delay.