Thursday 9 April 2015

When time is not essence of contract?


This has been enunciated in the Law of Contract in Halsbury, Vol.9, page 481 at page 338 which lays down the settled law thus:-
The modern law, in the case of contracts of all types, may be summarised as follows. Time will not be considered to be of the essence unless : (1) the parties expressly stipulate that conditions as to time must be strictly complied with; or (2) the nature of the subject matter of the contract or the surrounding circumstances show that time should be considered to be of the essence; or (3) a party who has been subjected to unreasonable delay gives notice to the party in default making time of the essence.

Bombay High Court

Basf India Ltd vs Landcom Properties Pvt. Ltd on 30 June, 2010
Bench: R. S. Dalvi
Citation;2010(6)MHLJ681
1.The parties entered into an Agreement dated 5.3.2002 under which the Respondent had to develop and let out to the Petitioner on leave and licence basis a premises of upto 40,000 sq. ft. The leave and licence agreement was to be from 1.8.2002. Under Clause 8 of the said agreement, the Respondent was to hand over possession of the premises to the Petitioner on 1.6.2002. Under Clause 9 of the said agreement, the possession was to be handed over upon the construction duly completed in all respects on 25.7.2002. Several facilities and services were to be provided as mentioned in the said agreement. Under Clause 30 of the said agreement, the Respondent was to pay the Petitioner penalty charges as compensation, if there was any delay in handing over possession beyond 25.7.2002. Under Clause 31 of the said agreement, time was made of the essence. If, however, the Respondent did not perform the covenants as stipulated in the agreement, it was to pay penalty of Rs.2 Crores to ig the Petitioner for the non-
performance of the covenants. This included not obtaining the requisite municipal approvals on or before 10.6.2002. The Respondent was also to give a Bank Guarantee and a corporate guarantee of Rs.1 Crore each. It was to be valid until 1.12.2002. The Petitioner agreed to refer its disputes to arbitration under Clause 36 of the said agreement.
2.The Petitioner was to be provided this accommodation since its own tenanted premises were handed over to its landlord and the Petitioner required an alternate premises for its business.
3.A reading of the aforesaid agreement shows that it is a composite agreement to develop the premises which were to be acquired by the Respondent for such development and then to hand it over to the Petitioner under a licence for 8 years. The agreement further shows that the dates for handing over possession mentioned in Clauses 8 and 9 are different, being 1.6.2002 and 25.7.2002. The agreement further provides payment of penalty charges for an alternative premises to be obtained on rent till the Petitioner can move in the agreed premises including the cost of shifting and the amenity charges payable to the Petitioner specified in Clause 30 as well as a penalty of Rs.2 Crores specified in Clause 31 in the event of delay in handing over possession and non-performance of the covenants in the agreement, respectively. The dates for giving the Bank Guarantee as well as corporate guarantee are not specified in the agreement. Hence, though time was stated to be of the essence, there are specific stipulations with regard to the Petitioner being compensated in case of delay in handing over possession and for one of the acts no time limit was specified.
4.The Petitioner s seminal case is that time was made of the essence. The covenants in the agreement had to be complied by 25.7.2002. That having not been done, the Petitioner terminated the agreement. The termination was 3 weeks after the date of performance by notice of termination dated 13.8.2002.
5.The case of the Respondent has been that time was not of the essence. That was because two dates were specified for handing over possession in the agreement itself and compensation as well as penalty are provided in case of delay in handing over or non-performance of the covenants. Consequently, it has been its case that the notice of termination is invalid and has caused it prejudice.
6.The Respondent had to develop the entire property which required various acts on its part to be done, several of which the Respondent did prior to the termination. The Respondent, however, did not adhere to the time specified in the agreement for handing over possession. For the aforesaid reasons, the Respondent contends, that termination was invalid and hence, sought reference of the dispute between the parties to the arbitration. The reference was made to arbitration by way of damages suffered by the Respondent upon the wrongful termination of the Agreement dated 5.3.2002. The Petitioner filed its counter claim which has come to be dismissed. The Award, which came to be passed granting some of the amounts claimed by the Respondent, has been challenged by the Petitioner.
7.The agreement between the parties did specify several dates for performance of the covenants thus:-
(i)The work was to be commenced by 15.4.2002.
(ii)Possession was to be handed over to the Petitioner on 1.6.2002.
(iii) Approval of various authorities was to be obtained by 10.6.2002.
(iv) Possession of the buildings ig duly completed in all respects was to be given by 25.7.2002.
(v) The licence was to commence from 1.8.2002 for a period of 8 years.
8.It is essential to see whether because of these dates specified for performance of the aforesaid covenants, which the Petitioner called deadlines , time which was stated to be of the essence, was indeed of the essence. Even if it was, it would have to be seen whether the Petitioner allowed further time by its own act so that time, which was of the essence, ceased to be of essence until a future date was specified by the Petitioner to make the time of essence. It would then have to be seen whether if that is not done, the agreement could be validly terminated as having been breached upon the covenants not having been performed on the dates / deadlines specified in the agreement and if the agreement could not be validly terminated whether the Petitioner itself breached the agreement and in those circumstances, whether the Petitioner could be paid any damages as claimed by it in its counter claim and whether the Petitioner would be required to reimburse the Respondent the costs incurred by the Respondent upon the extensions granted by the Petitioner itself for performance of the covenants even after the due dates / deadlines had long passed.
9.The parties have led evidence and the learned Arbitrator has considered these aspects. Hence, if the Award was to be challenged, in essence only the aforesaid aspects would have to be looked into. If it is seen that despite the aforesaid dates for the performance of certain covenants, deadlines for which are mentioned in the agreement, the time was not of the essence and was not treated to be of the essence and it was allowed not to be of the essence, the conclusion of the learned Arbitrator in that regard would not be faulted and the consequent damages / reimbursement granted to the Respondent would not come up for challenge. Similarly in that event the entire case of the Petitioner for recovery of its own damages under the counter claim would fall and would not require to be considered so that dismissal of its counter claim could not then be challenged.
10.It is upon such premise that the agreement itself would be required to be interpreted. It would be required to be read as a whole.
11.Upon such reading it is seen that the agreement was not an agreement of leave and licence.
ig It was an agreement to develop the premises and let it out on leave and licence upon its development. For developing the agreement the property would be required to be conveyed from its original owners to the Respondent who would develop the property and renovate the premises. Upon such renovation the licence would commence from 1.8.2002 for a period of 8 years. Under Clause 8 of the said agreement, the Respondent was required to hand over possession on 1.6.2003. Under Clause 9 of the said agreement, the Respondent was to hand over possession of the front and rear building duly completed in all respects to the Petitioner on 25.7.2002. Under Clause 30 of the said agreement, if there was delay in handing over possession enjoined under Clause 9, the Respondent was to pay the Petitioner compensation as penalty charges for:
(a) compensation being the charges for the space to be rented by the Petitioner until such period that it can move into the premises to be constructed and renovated by the Respondent.
(b) The costs incurred from moving and shifting to such alternate premises.
(c) One month s gross compensation for inconvenience caused to the Petitioner.
12.Consequently, it is seen that a remedy is provided for the breach of the covenants to hand over possession of buildings completed in all respects by 25.7.2002.
Hence, 25.7.2002 was not the date of essence.
13.Though time is stated to be of the essence in Clause 31 of the agreement, the said clause itself further provides that if there was non-performance of the covenants mentioned in the agreement, a penalty of Rs.2 Crores was provided. For the said penalty, a Bank Guarantee of Rs.1 Crore and corporate guarantee of Rs.1 Crore was to be given. The time for giving these guarantees has not been specified in the agreement, except that the Bank Guarantee was required to be valid till 1.11.2002.
14.This clause shows that though time was stated to be of the essence, yet a penalty was provided in case of non- performance making the time not of essence. This is essentially held by the learned Arbitrator which cannot be faulted.
15.The Respondent acted upon the agreement thus :
(a) The Respondent executed corporate guarantee on 15.3.2002.
(b) The Respondent applied for sub-division of plot to the Mumbai Municipal Corporation (MMC) on 2.4.2002. MMC approved the sub-division of the property on 29.5.2002 subject to certain conditions, including showing a Recreation Ground (RG) on the sub-divided plot which would be required to be removed.
(c) The Respondent obtained the approval of the income-tax authorities under Section 37-I of the Income Tax Act, as was then required for conveyance of the property to commence construction on 23.4.2002.
(d) The Respondent made its application to the MMC for repairs on 23.5.2002.
(e)The Respondent applied for shifting electric sub- station on 31.5.2002.
(f) The Respondent paid part consideration of Rs.1.11 Crores for obtaining the conveyance of the property on 23.4.2002 and obtained sanction for a loan of Rs.13.05 Crores for obtaining the conveyance on 14.6.2002.
(g) The Respondent forwarded the leave and licence agreement to the Petitioner on 25.7.2002, though the draft conveyance was not forwarded.
16.The Respondent, however, failed to : (a) give the Bank Guarantee, (b) obtain the conveyance in its name, (c) commence the construction work, (d) obtain the ultimate approval of the MMC.
17.Parties entered into extensive correspondence by E- mails. The Petitioner has referred to various E-mails, showing dereliction of the covenants by the Respondent in a bit to justify the termination of the contract by the Petitioner.
18.As aforesaid, there was no deadline for giving of the Bank Guarantee. The Petitioner has sent numerous E- mails to the Respondent to provide the Bank Guarantee by specified dates in those E-mails right from its E-
mail sent on 6.3.2002 to provide the Bank Guarantee by 31.3.2002 until its E-mail sent on 24.6.2002. These E-
mails show that the Bank Guarantee, which was to be given, though not by a specified date, was consistently insisted upon by the Petitioner throughout this period giving various dates by which it required the Bank Guarantee to be furnished to the Respondent.
19.The Petitioner further sent E-mails to the Respondent for matters not mentioned in the agreement as covenants to be performed by the Respondent. These were :
(a)to give a project schedule broken up activity-wise in the manner asked for,
(b) to give a detailed bar chart for repairs while detailing the specifications of material for furnishing the building, providing the layout, plans and bar chart,
(c) to arrange a meeting with the landlord of the building where the Petitioner had its office on lease which was terminated to grant an extension, etc.
20.Even after the due dates of the covenants / deadlines mentioned in the agreement for commencement of the work, obtaining of approvals and handing over of possession, the Petitioner had e-mailed the Respondent after those due dates requesting the Respondent to perform those covenants and setting out new dates for such performance as also inquiring by which date those aspects would be performed.
21. 15.4.2002 was the scheduled date for commencement of the work. The work was not commenced. On 18.4.2002, the Petitioner e-mailed the Respondent regarding non-commencement of the work and called upon the Respondent to provide the lay out plans and the bar chart. These aspects were outside the scope of the covenants but were called upon by the Petitioner to be given by the Respondent for commencement of the work after its due date. Even as late as on 9.5.2002, the Petitioner e-mailed the Respondent to commence the work of construction and inquired when the work would commence by its e-mail dated 14.5.2002. On 14.5.2002 also the Petitioner called upon the Respondent to carry out the work which was until then not commenced. In the e-mail dated 28.5.2002, the Petitioner asked for the bar chart from the Respondent and reminded the Petitioner again by its e-mail dated 29.5.2002.
22.1.6.2002 was the due date / deadline for giving possession of the property. Even after that date on 3.6.2002 the Petitioner e-mailed the Respondent, confirming the date of commencement of the work.
23.Upon the notice to vacate being issued by the landlord of the building where the Petitioner had leased its premises on 7.6.2002, the Petitioner inquired of the Respondent the realistic final date by which construction would be complete to be given as an undertaking by the Respondent. This was the date by which all the requisite approvals were to be obtained, none of which is alleged to have been obtained. Despite the same, a future final date was inquired by the Petitioner. This was the date from which the penalty of Rs.2 Crores would become applicable for non-
performance of the covenants, including obtaining the requisite approvals of the Municipality. Even thereafter on 13.6.2002, the Petitioner required the Respondent to give in writing the approvals received and pending from the various authorities and the proposed date of the execution of the sale deed. The Petitioner required the Respondent to give an undertaking that before 15.10.2002 at the latest the premises would be given to the Petitioner duly completed.
24.It is the contention of the Respondent that time for performance of the covenants came to be extended till 15.10.2002 by the Petitioner requiring the Respondent to give an undertaking in that behalf. It is the contention of the Petitioner that the undertaking was required by the Petitioner from the Respondent to show its landlord that the Petitioner requires an extension of time upon a legitimate acquisition of its alternate premises by that time. Whatever be the reason for obtaining the undertaking, the Petitioner did thereby extend the time for performance of the agreement and allowed the Respondent to perform it after the deadlines for giving possession as well as obtaining approvals of theig Municipality had passed. The Respondent did furnish such a letter with the requisite undertaking by 17.6.2002.
25.It is the Petitioner s contention that nothing can be constructed as the approval for sub-division of the MMC was subject to obtaining the approvals of the MMC, and in view of the RG being shown on the suit plot, the construction could not have been commenced or completed until the plans were modified and hence, duly constructed premises required by the Petitioner could not be given by the Respondent also by that date. It must be remembered that the MMC sanctioned the sub-
division of the plot subject to the provision for RG since 29.5.2002, but the Petitioner, despite knowing the consequence of the RG, called upon the Respondent to do the various acts and things stated above to perform its part of the contract as also things analogous thereto which were strictly not the reciprocal covenants of the Respondent thereafter. The Petitioner, nevertheless, by e-mail sent the next day on 18.6.2002 to the Respondent, called upon the Respondent to execute conveyance deed and commence the work at the earliest. Hence, though the Petitioner apprehended that work could not be completed or even commenced by the further due date or the deadline of 15.10.2002, the Petitioner yet required the Respondent to perform its contract and hence, kept the contract alive for performance.
26.The Petitioner requested a meeting from the Respondent to discuss the issues relating to completion of work on 26.6.2002 and called upon the Respondent to give a final date for commencement of work on 24.6.2002.
27.Similarly the Petitioner, though complaining of the fact that the conveyance was not executed by payment of the balance consideration called upon the Respondent to execute the conveyance by 9.7.2002 in its e-mail dated 1.7.2002. As late as on 11.7.2002, the Petitioner sought to confirm whether such conveyance was executed by the Respondent and even on 19.7.2002 called upon the Respondent to execute the conveyance.
28.It is true that on 25.7.2002, the conveyance was not executed, work was not commenced and possession could not be given to the Petitioner. Yet instead of allowing the Respondent the time granted in the agreement to perform its part on the scheduled dates and to take recourse to the agreement to lawfully terminate it upon the covenants not being performed, the Petitioner has itself by needless correspondence sought further additional work from the Respondent. It inquired of and granted extensions for the various work, including the commencement of work, handing over possession, obtaining of approvals even after the the scheduled dates.
29.A reading of the Agreement, which must be read as a whole, shows that the Petitioner did allow the Respondent extension of time for various covenants to be performed by the Respondent and which the Respondent failed to perform. Once that was done, the time which was of the essence ceased to be of essence. Hence, the Petitioner had to again make the time of essence in specific terms after which alone it could terminate the contract. (See : (1) Govind Prasad Chaturvedi vs. Hari Dutt Shstri & anr., AIR 1977 SC 1005 and (2) Swarnam Ramchandran (Smt.) & anr. vs. Aravacode Chakungal Jayapalan, (2004) 8 SCC 689).
30.This has been enunciated in the Law of Contract in Halsbury, Vol.9, page 481 at page 338 which lays down the settled law thus:-
The modern law, in the case of contracts of all types, may be summarised as follows. Time will not be considered to be of the essence unless : (1) the parties expressly stipulate that conditions as to time must be strictly complied with; or (2) the nature of the subject matter of the contract or the surrounding circumstances show that time should be considered to be of the essence; or (3) a party who has been subjected to unreasonable delay gives notice to the party in default making time of the essence.
In this case, despite the granting extension of time as aforesaid until 15.10.2002, for whatever reasons, the Petitioner almost abruptly terminated the agreement on 13.8.2002. This was when the Respondent had intervened in the interest of the Petitioner to obtain an extension for the Petitioner to vacate its initial tenanted premises, an aspect completely outside the purview of the Respondent s functions, duties and covenants under the Agreement dated 5.3.2002.
31.It is the case of the Respondent that this was done mala fide and on purpose. That was because the Petitioner obtained another premises a mere 3 days thereafter at a lesser price. The termination of the contract appears to be completely out of place given the other letters and e-mails of the Petitioner which required and called upon the Respondent to perform its functions repeatedly.

    32.The   Petitioner
                              
                               called      upon      the      Respondent               to      do
      various    additional           things      outside           scope           of       the
                             
      agreement.        The     Petitioner        gave       various           dates         for
      giving the Bank Guarantee.                The Petitioner inquired of
           

      the commencement of the work after its due date.                                       The
      Petitioner       required       confirmation            of        the       date         of
        



      commencement      of     work     after     the      date         on     which         the
      possession       itself     should        have       been         given.               The





Petitioner called upon the Respondent to execute the conveyance even after the date on which possession should have been handed over and the construction should have been completed. The Petitioner required the Respondent to meet with its own landlords over the aspect of handing over of its own possession of its tenanted premises. The Petitioner never claimed the penalty of Rs.2 Crores which was provided for in the agreement for failure to obtain the requisite approvals. The Petitioner did not obtain an alternate premises and claim compensation for the rent payable by the Petitioner until it could move into the premises to be constructed by the Respondent. The Petitioner also did not claim the moving and shifting charges or the one month s gross compensation for inconvenience caused to the Petitioner by having to move into such alternate premises. The Petitioner did not avail of any alternate premises at all. The Petitioner, therefore, did not ig act as per the agreement. The Petitioner did not avail of the benefits granted to the Petitioner in monetary terms under the agreement. The Petitioner needlessly corresponded and granted additional time to the Respondent to perform its obligations and abruptly terminated the contract.
33. The objections of the Petitioner in respect of the dereliction of the Respondent are for the following aspects which are seen to be met:-
(i)The Respondent failed to provide Bank Guarantee.
There was no deadline for providing Bank Guarantee. The Petitioner from time to time gave dates, by which the Bank Guarantee should be provided.
(ii)The Respondent did not obtain the requisite approval of the MMC before 10.6.2002.
A penalty of Rs.2 Crores was provided for the non-
performance. The penalty has not been sought.
(iii)The Respondent did not execute the conveyance.
No deadline was provided for executing the conveyance.
The conveyance could have been simultaneously executed and did not cause impediments in the construction.
(iv)The Respondent did not commence the development work.
The Petitioner granted time and inquired of whether the Respondent would commence the work well after the deadline of the commencement of the work was over.
34. The learned Arbitrator has correctly observed that though the Respondent did commit breaches, the Petitioner could avail of its rights under the agreement to claim penalty and compensation which were its entitlement thereunder. Instead, the Petitioner terminated the contract after extension of time and without making time of essence after extensions. Consequently, the termination has been correctly held to be invalidly made. The seminal aspect of the Award is, therefore, seen to be correctly made.
35. Once it is seen that the agreement was not validly terminated by the Petitioner, nothing further comes up for consideration as the Award is passed upon the correct a premise.
36. Consequently, the various judgments sought to be distinguished by Mr.Bharucha on behalf of the Petitioner do not even come up for consideration.

    37. Hence,   the
                            
                        Petition       is    without      merits           and       is
    dismissed.   No order as to costs.
                           
                                            (SMT.ROSHAN DALVI, J.)
            
         






 
 
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