Contracts: how judges decide disputes

If time is "of the essence" in a contract, even a slight delay can allow the innocent party to terminate and claim damages. Usually, the parties will expressly make time of the essence and it will be hard to imply the condition into a contract.

In Pharmapac (UK) Ltd v HBS Healthcare Ltd a contract entered into between the parties (for the supply of face masks during the pandemic) was made via email. The words "time is of the essence" were not used and nor was it explicitly said that that the delivery time was a condition of the agreement. Instead, the contract provided for a first shipment on a particular date and then "9 further weekly shipments".

The first shipment was made in time, but no further shipments were made for the next four weeks. The judge agreed that this was a repudiatory breach because the contract should be construed as meaning time was of the essence.

Although "weekly" has a certain vagueness, the judge construed it as meaning that delivery must take place by, or before, the end of each weekly period. This was a definite deadline. Furthermore, given the unfolding pandemic and high demand for masks, plus the short and repeated delivery intervals, the contract should be construed as meaning that time was of the essence: "The goods were not perishable, but against the background of the developing coronavirus pandemic there was plainly an urgent commercial need to acquire them with a view to selling them on…. The point was not just to get the masks as soon as possible, but to be able to cancel the contract if they had not arrived in time".

Accordingly, the use of the term "weekly" in the circumstances made time expressly of the essence. It was unnecessary for the judge to imply in a term that time was of the essence and he said that he would not have done so had that been the case (because the contract would have been effective without it, with damages being a sufficient remedy for breach).

This was bad news for the party in breach, which might have been surprised that "weekly" was interpreted in this way. So, if you want to be sure that your contractual terms might not be construed in the same way, you need to spell that out in your contract.

In Lombard North Central Plc v European Skyjets Ltd, there was a dispute over whether a lender was entitled to terminate a loan and enforce its security under the terms of the loan.

Some interesting points that were covered in the judgment including:

1. If your contract provides for termination on late payment (by giving notice), the defaulter can't avoid termination by paying up (late) before notice is served. No requirement for the amount to still be outstanding at the date of termination will be implied into the contract.
2. The contract in this case provided that "no failure and no delay [in exercising a right to terminate]…shall operate as a waiver" but that did not work here as there wasn't just a failure to act: instead, there had been a positive statement from the party with the right to terminate (here, the lender) that "as a gesture of goodwill, we will allow more time to bring the balance of the arrears up to date". Nor did it help that that letter had included the following wording: "This correspondence is without prejudice and [the lender] fully reserves its rights in respect of the…arrears". As the judge put it: "I do not accept, however, that the ritual incantation of this language can prevent anything said or done in the preceding letter from having its objective effect".
3. However, the lender was entitled to rely on other grounds to terminate the contract, even though those grounds were not identified in the notice of termination.
4. One of those grounds was the Material Adverse Change clause. That clause operated if there was a MAC "in the opinion of the lender" and although that opinion had to be honest and rational, it did not have to be objectively true or correct.
5. The decision whether to exercise the right to terminate is not a contractual discretion requiring that decision to be made in good faith.