Merely having an explicit clause not sufficient to make time the essence of the contract: SC

Supreme Court: On the question as to ‘whether time is of the essence in a contract’, the bench of NV Ramana, CJ* and Surya Kant, J has held that merely having an explicit clause may not be sufficient to make time the essence of the contract. The same has to be culled out from the reading of the entire contract as well as the surrounding circumstances.

Factual Background

A global tender was floated by the ONGC for purchase of aggregate quantity of 3,93,297 metres of seamless steel casing pipes. Remi Metals was a successful bidder who had bid to supply pipes as a supplier on behalf of Volski Tube Mills, Russia. In furtherance of the same, 4 purchase orders (POs) No. 275, 276, 277 and 286 were issued.

During the execution of contract, there were certain delays in meeting the obligation as required under the contract. In this context, various extensions were given by the ONGC to fulfil their obligation.

The ONGC had deducted an aggregate amount of US $8,07,804.03 and Rs.1,05,367/- as liquidated damages from various bills submitted by the Remi Metals. There were other claims which were disputed by the Remi Metals which were claimed before a panel of arbitrators.

Arbitral Tribunal’s observations

The Arbitral Tribunal, at the outset, held that merely having a clause in the contract making time the essence of it would not be determinative; rather, an overall view having regard to all the terms of contract are to be taken into consideration. Further, contracts containing provision 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. Additionally, the Arbitral Tribunal also noted that generally, under construction contracts, time is not the essence.

Basic principles 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. [Percy Bilton Ltd. v. Greater London Council, [1982] 1 WLR 794]
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. [Holme v. Guppy, (1838) 3 M & W 387]
3. These general principles may be amended by the express terms of the contract as stipulated in this case.

“‘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.”

Ruling on facts

Upholding the award of the Arbitral Tribunal, the Court noticed that as the contract was spread over a long tenure, the intention of the parties to provide for extensions surely reinforces the fact that timely performance was necessary. The fact that such extensions were granted indicates ONGC’s effort to uphold the integrity of the contract instead of repudiating the same. Further, Clause 9(i) of the Purchase Order reproduced made clear that time is the essence of the contract, subject to extension granted without prejudicing the right of ONGC to recover damages.

Applying the aforementioned principles and considering the facts of the case, the Court, hence, concluded that the Arbitral Tribunal’s interpretation of contractual clauses having extension procedure and imposition of liquidated damages, are good indicators that ‘time was not the essence of the contract’.

[Welspun Specialty Solutions Limited v. ONGC, 2021 SCC OnLine SC 1053, decided on 13.11.2021]

For Remi Metals: Senior Advocate Shyam Divan

*Judgment by: Chief Justice NV Ramana