India: ‘Time Is Of The Essence Of The Contract', Or Is It?

The Supreme Court of India ("SC") in the case Welspun Specialty Solutions Ltd. vs. ONGC¹, ("judgement") recently held that, merely having an explicit clause in a contract may not be sufficient to make time the essence of the contract. The SC determined whether the contract between Welspun Specialty Solutions Ltd. ("Welspun") and the Oil and Natural Gas Corporation ("ONGC") was one where time is of the essence. Section 55 of the Indian Contract Act, 1872 discusses the voidability of a contract in which time is of the essence.

Section 55 of the Indian Contract Act, 1872

The Section states the following:

"When a party to a contract promises to do a certain thing at or before a specified time, or certain things at or before specified times, and fails to do any such thing at or before the specified time, the contract, or so much of it as has not been performed, becomes voidable at the option of the promisee, if the intention of the parties was that time should be of the essence of the contract."

If it is found that it was not the intention of the parties that time should be of the essence of the contract:

"...the contract does not become voidable by the failure to do such thing at or before the specified time; but the promisee is entitled to compensation from the promisor for any loss occasioned to him by such failure."

Therefore, the intention of the parties to a contract is important in determining whether time is of the essence of the contract as well as the effect of the same on the contract.

Background of the case

1. The ONGC issued a global tender for the purchase of seamless steel casing pipes, to which Remi Metals (now Welspun) was a successful bidder. Four purchase orders were issued that mentioned inter alia "the time and date of delivery is the essence of the supply order and delivery must be completed not later than the date specified therein".
2. Further, it was stated in their contract that the time and date of delivery shall be the essence of the contract. It is relevant to note that there were clauses in the contract that stipulated liquidated damages in case obligations were not fulfilled.
3. There were several delays by Welspun in the execution of the purchase orders and the ONGC granted extensions for the same. However, the ONGC deducted liquidated damages from bills submitted by Welspun. The dispute regarding these bills was raised before an arbitral tribunal.

The decision of the Arbitral Tribunal

4. The arbitral tribunal held that merely having a clause that states that time is of the essence of the contract would not be determinative and all terms of the contract have to be considered. It was also noted that contracts containing provisions for extension of time or payment of penalty on default would dilute the obligation of timely performance and render the clauses imbuing time as essence of the contract ineffective. The arbitral tribunal observed that generally in construction contracts time is not the essence.
5. Further, the arbitral tribunal held that since time was not the essence of the contract and there was no breach of the contract, liquidated damages cannot be granted. Thus, ONGC would not be entitled to claim liquidated damages for any damage for losses incurred during the extended period of delivery.
6. The case was brought before the District Court, High Court of Uttarakhand and then finally appealed before the SC. The District Court upheld the arbitral award. Whereas the High Court of Uttarakhand held that both the arbitral award and order of the district judge erred in construction of the contract with respect to whether time was the essence or not.

The Supreme Court's judgement

7. The SC upheld the arbitral tribunal's opinion that time was not the essence of the contract between the ONGC and Welspun. Further, it observed that the assessment of the conditions of the contract and conduct of the parties by the arbitral tribunal, to conclude that the existence of extension clauses dilute time being the essence of the contract was also consistent with rules of contractual interpretation.
8. The following principles were observed by the SC to consider the relevancy of time conditioned obligations:
   1. Subject to the nature of contract, general rule is that promisor is bound to complete the obligation by the date for completion stated in the contract.²
   2. That is subject to the exception that the promisee is not entitled to liquidated damages, if by his act or omissions he has prevented the promisor from completing the work by the completion date.³
   3. These general principles may be amended by the express terms of the contract as stipulated in this case.
9. In view of the above, the SC held that it is now settled that 'whether time is of the essence in a contract', has to be culled out from the reading of the entire contract as well as the surrounding circumstances. Merely having an explicit clause may not be sufficient to make time the essence of the contract.
10. On the facts of the case, the SC noted that as the contract was spread over a long tenure, the intention of the parties to provide for extensions reinforces the fact that timely performance was necessary. The fact that such extensions were granted indicates the ONGC's effort to uphold the integrity of the contract instead of repudiating the same.
11. Thus, the orders of the High Court and the District Court were set aside, and the arbitral award was upheld by the SC.

Conclusion

This judgement has clarified the principles that parties intending to make time the essence of a contract must consider. While having an explicit clause in the contract which states that time is the essence may be important, it is also necessary to examine clauses that provide extensions or penalties for breach of time bound obligations. Parties should ensure that their conduct in this regard is consistent with the understanding of the contract being one where time is of the essence.

Footnotes

1 Welspun Specialty Solutions Limited v. ONGC, LL 2021 SC 646

2 Percy Bilton Ltd. v. Greater London Council, [1982] 1 WLR 794

3 Holme v. Guppy, (1838) 3 M & W 387