When one party to a contract is in breach by not having performed their obligations on time, a number of options may be open to the other party to that contract.  Depending on the circumstances, they may be entitled to withhold performance of their obligations under the contract until the defaulting party is ready to perform.  Or they could raise court proceedings to enforce performance by the defaulting party.  But what if they no longer wish to proceed with the contract?  Can they found on the defaulting party's breach to terminate the contract?

Termination of a contract by one party, on the basis of a breach by the other, is known in Scotland as rescission.  Generally, rescission is only possible if the breach in question is material, or if the contract provides a right to rescind in response to the breach.  Where the breach in question is a failure to perform an obligation on time, it will be material, and will justify rescission, if punctual performance is an essential condition of the contract.  If it is not, the defaulting party must be given a reasonable period of time to perform.

Is time of the essence of the contract?

Whether time is of the essence depends on the circumstances.  In a contract for the sale of land, time is not normally of the essence unless the contract provides that it is, or if it is clear from the circumstances that the parties intended it to be so.  If time is not of the essence, a right to rescind will not immediately arise if, for example, the seller fails to give possession of the land, or the purchaser fails to pay the price.

East Dunbartonshire Council v Bett Homes Limited

This was confirmed in the recent Scottish case of East Dunbartonshire Council v Bett Homes Limited [2012] CSIH 1, in which we acted for the Council.  The parties had entered into a contract for the sale of an area of land by the Council to Bett.  In terms of the contract, the sale was to take place in three phases, with the Council giving possession of a tranche of the land at each phase in exchange for payment of an instalment of the price.

Problems arose at the third phase, when Bett did not pay the final instalment of the price, and the Council did not give possession of the final tranche of the land.  Immediately after the phase three completion date, Bett attempted to rescind the contract, alleging that the Council were in material breach of contract by not giving possession of the final tranche of the land on time.  The Council argued that, in the circumstances, Bett were in breach of contract and not the Council, and they raised proceedings to enforce the contract in the Court of Session.

One of the arguments made on behalf of the Council was that, even if they were in breach of contract by not performing their obligation to give possession on time, Bett were not entitled to rescind the contract, because time was not of the essence in respect of that obligation and any such breach was not material.  This was the issue on which the case was decided.  At both first instance and in an appeal by Bett, the court agreed with the Council, deciding that the contract had not been validly rescinded by Bett and could be enforced by the Council.

Making time of the essence

Parties to a contract can reduce uncertainty by making it clear in the contract when breach of an obligation will be material, giving rise to a right to rescind.  In relation to the time for performance, this is often done by expressly providing that time is of the essence, or by providing that performance by a particular date is an essential condition of the contract.  In the East Dunbartonshire Council case, the parties had expressly provided that time was to be of the essence in relation to a number of obligations in the contract, but not the obligation to give vacant possession of the final tranche of the land.  This implied that the parties had not intended time to be of the essence in respect of that obligation, and it was a major factor in the court’s decision.

Finally, an element of certainty can also be achieved after a breach, by using a process known as the “ultimatum procedure” to make time of the essence.  Generally, this involves giving notice to the defaulting party requiring them to perform the obligation within a specified period of time.  The period of time must be reasonable in the circumstances.  If it is, and if the defaulting party does not perform the obligation in that time, the breach becomes material and the contract may be rescinded.

To read the decision in East Dunbartonshire Council v Bett Homes Limited click here.