Merely Having An Explicit Clause Not Sufficient To Make Time The Essence Of The Contract: Supreme Court

The Supreme Court observed that merely having an explicit clause may not be sufficient to make time the essence of the contract.

The contractual clauses having extension procedure and imposition of liquidated damages, are good indicators that 'time was not the essence of the contract', the bench comprising CJI NV Ramana and Justice Surya Kant observed in a judgment delivered on Saturday. The court added 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

In this case, the Arbitral Tribunal (considering a dispute between Welspun Specialty Solutions Limited (formerly known as Remi Metals Gujarat Ltd.) and Oil and Natural Gas Corporation Ltd.) 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. It was noted that 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. That generally, under construction contracts, time is not the essence. Therefore, the Arbitral Tribunal held that liquidated damages, which are pre-estimated damages, cannot be granted as there was no breach of contract due to the fact that time was not the essence.

In the petition filed under Section 34 of the Arbitration and Conciliation Act, the District Court upheld this view of the Tribunal holding that time was not the essence of the contract and only the losses actually suffered could be granted. Allowing the Arbitration Appeal, the Uttarakhand High Court disagreed with this view and set aside the Arbitration award.

In appeal before the Apex Court, the appellant contended that the view taken by the Arbitral Tribunal that the time was not the essence of the contract, as the contract provided for extension of time as well as for liquidated damages, was reasonable and can be sustained. The respondent ONGC contended that the reading of the contract makes it clear that the time was of the essence, which was also signified in every extension given.

The court observed that the Arbitral Tribunal's reliance on the contractual conditions and conduct of parties to conclude that existence of extension clause dilutes time being the essence of the contract, was in accordance with rules of contractual interpretation. The court noted the following principles regarding 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. [Refer to 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. [Refer 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.
4. 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.
5. 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. 

Referring to Section 55 of the Contract Act [ Effect of such failure when time is not essential], the bench further observed:

The Arbitral Tribunal construed the aforesaid provision to interpret the term 'loss' to mean actual tangible loss provable by evidence, instead of pre-estimated loss. Such interpretation, in the facts and circumstances, could be held to be a reasonable interpretation, as the other party was not able to impugn the same by pointing to any documents or correspondence to the contrary. When a standard form of a contract is utilised, ONGC is assumed in law to have the larger bargaining power to enter into a contract, unless clear intention is shown to the contrary. In this case at hand, a reasonable interpretation against ONGC may be utilised.

The court noted that, in this case, ONGC waived liquidated damages twice before giving extension with pre-estimated damages. Allowing the appeal, the bench restored the Arbitration award and observed:

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'. The Arbitral Tribunal's view to impose damages accrued on actual loss basis could be sustained in view of the waiver of liquidated damages and absence of precise language which allows for reimposition of liquidated damages. Such imposition is in line with the 2nd para of Section 55 of the Indian Contract Act. The Arbitral Tribunal was correct in distinguishing the dictum of this Court in Saw Pipes (supra), which validated imposition of liquidated damages in a similar contract

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