It is typical for construction contracts to provide that “time is of the essence.” And while these clauses clearly signify that time is important, their practical impact on parties to an agreement may be less clear. Luckily, the Arizona Supreme Court addressed the effect of “time of the essence” provisions in this state in Foundation Development Corp., v. Loehmann’s, Inc., 163 Ariz. 438 (1990).
Time as a material element of a contract.
Before addressing the holding in Loehmann’s, it should be noted that the general aim of “time of the essence” clauses is to make time a material requirement of the parties’ performance under an agreement. Of course, even in the absence of a “time of the essence” provision, time can be rendered a material requirement of a contract if it is implied by the type of obligations assumed.
Generally speaking and subject to the other terms of the agreement, rendering time a “material term” of a construction contract may impact the parties’ legal rights and responsibilities in significant ways in the event of a breach relating to time. First, it may allow the non-breaching party to recover delay damages. Second, it may affect the non-breaching party’s obligation to continue to perform, insofar as material breaches can excuse further performance. In fact, as was the case in a matter that I recently arbitrated on behalf of an owner, a contractor’s material breach as to time can result in the contractor being properly terminated from a project for cause.
Loehmann’s arose from a dispute over payment of common area charges associated with a commercial lease containing a “time of the essence” clause— not a construction contract. Nevertheless, its holding is instructive. In Loehmann’s, the landlord filed a lawsuit against its tenant seeking termination of the subject lease, immediate possession of the leased premises, and payment of past due amounts as a result of the tenant’s alleged failure to timely pay an installment of common area charges. The day after the landlord filed suit, it received the tenant’s payment for the common area charges. The tenant argued in the trial court that it timely paid the charges, or, alternatively, that its breach was not material.
Before the Arizona Supreme Court, the landlord argued that the “time of the essence provision” had the effect of rendering an otherwise trivial breach, by untimely performance, material. Conversely, the tenant argued that such clauses must be weighed against other factors and there is no absolute rule that they give minor breaches as to time the legal effect of a material breach. Against this backdrop, the Arizona Supreme Court held in Loehmann’s that:
a time of the essence provision is merely one factor to be considered when determining if a breach is material. The mere incantation that “time is of the essence” works no magic to transform trivial untimeliness into a material breach; rather, the same factors we delineated in determining general materiality apply to evaluating the effect of a particular “time of the essence” provision.
163 Ariz. at 450. Stated differently, the Court found that if performance “at the exact time will not cause injury, time cannot be absolutely ‘of the essence,’ even though, technically, delay will be a breach.” Loehmann’s, 163 Ariz. at 449-450. Rather, the Court reasoned that “[t]he inquiry must always involve the facts of the individual case and the effect of the breach on the injured party.” Id. at 450.
Parties to a construction construction contract need to be mindful of whether time has been rendered a material term of the agreement. It can have significant implications as to the parties’ rights and obligations under the contract. As held in Loehmann’s, the presence of a “time is of the essence” clause is one factor to consider in this analysis. It is, however, not the only factor. Among other things, time can also necessarily be rendered material by the: (1) nature of the obligation assumed (i.e., completion dates, deadlines, delay provisions, and other time related terms); and (2) the effect of the breach on the injured party.