It is important for owners and contractors to understand the contractual provisions and requirements for the time of completion and minimize the risk of delay. Most construction contracts contain a provision stating that “time is of the essence.” An example of a “time is of the essence” provision is as follows:
Time is of the essence of this Agreement. The Contractor acknowledges and recognizes that the Owner is entitled to full and beneficial occupancy and use of the completed Work following expiration of the Contract Time, that the Owner may enter into binding agreements demising all or part of the premises where Work is to be completed, and that Owner may have entered into financing agreements based upon the Contractor’s achieving Substantial Completion of the Work within the Contract Time. The Contractor further acknowledges and agrees that if the Contractor fails to complete substantially or cause the Substantial Completion of any portion of the Work within the Contract Time, the Owner will sustain extensive damages and serious loss as a result of such failure.
The effect of a “time of the essence” clause in the construction context is generally to render a contractor’s unexcused delay in completing the project a material breach of the agreement permitting the owner to terminate the contract and seek damages for the delay.
However, under certain circumstances, an owner may waive its right to require adherence to the contract schedule. For example, in RDP Royal Palm Motel, L.P. ex rel. PADC Hospitality Corp. I v. Clark Const. Group, Inc., 168 Fed. Appx. 348 (11th Cir. 2006), the Court of Appeals for the Eleventh Circuit affirmed a judgment of the District Court for the Southern District of Florida finding that a developer and hotel owner waived the “time is of the essence” provision in a construction contract by continuing to perform after the expiration of the substantial completion date for the hotel. In the absence of a contractual completion date, the court held that the owner was not entitled to recover any damages, liquidated or otherwise. The Eleventh Circuit reasoned:
[the owner] allowed the substantial completion date…to pass without setting a new deadline and continued issuing change orders and construction change directives requiring [the contractor] to perform additional work. [The owner’s] conduct in issuing hundreds of change orders and construction directives after expiration of the substantial completion date … constituted waiver of the “time is of the essence” provision of the contract. In addition, [the owner] failed to set a new substantial completion date, thus it failed to preserve its right to enforce the liquidated damages provision for any date after [the contract’s substantial completion date].
In another case, an owner implicitly waived a “time is of the essence” clause in a contract for the construction of a building where the contractor continued work after the original contractual deadline on matters that were its contractual responsibility, and the owner never notified the contractor that it was in breach of the contract or that it intended to hold the contractor to the deadline, and never asked the contractor to cease work as of the deadline. (Banks Building Co., LLC v. Malanga Family Real Estate Holding, LLC, 102 Conn. App. 231, 239, 926 A.2d 1 (2007)).
Contractors should note that “time is of the essence” clauses can have a significant monetary impact, particularly if the contract allows the owner to recover consequential damages (e.g., lost rents, interest, finance charges, additional labor costs, and material escalation costs) and/or liquidated damages (i.e., pre-determined damages set at the time that a contract is entered into, based on a calculation of the actual loss the owner is likely to incur if the contractor fails to meet the completion date). Owners should understand that that “time is of the essence” clauses can be waived, thereby limiting or eliminated their right to recover damages, based upon their actions. For example, waiver may occur if the owner does not issue a formal notice stating that the contractor has failed to achieve the contractually required completion date, or issues change orders and directives for additional work scope after the substantial completion deadline without establishing a new completion date.