A simple “time is of the essence” clause can transform routine schedule delays into costly legal and insurance risks.
In recent months, more design firm contracts have been including the phrase, “time is of the essence.” While that language may appear simple, straightforward, and even innocuous (the project owners want their project done in a timely manner, right?) that doesn’t tell the whole story when it comes to potential exposures for design firms. In fact, there’s a lot more at stake when a contract contains “time is of the essence” language.
For starters, “time is of the essence” language has legal meaning – with potentially serious and costly consequences for the A/E firm both in terms of increasing exposure and creating coverage issues. Generally, failure to perform tasks outlined in the contract within the time frames spelled out may be a negligent breach of the contract, but it may not be a material breach depending on the circumstances.
The failure to meet such deadlines when a “time is of the essence” clause is included may result in a material breach of the contract and allows for its immediate termination. It also eliminates the necessity of proving negligence, which is what A/E professional liability insurance policies cover.
In effect, the insertion of this clause waives the design firm’s rights to perform a contract in a reasonable amount of time in accordance with the standard of care. This allows for time limits established in the contract to be waived for reasonable cause. Furthermore, a professional liability insurance policy covers breaches of the standard of care.
On the other hand, not only are the damages that may be asserted with a breach of a “time is of the essence” clause far greater than they are under contracts without the language, the design firm might find itself without insurance coverage because there is no negligence component associated with a related breach.
From an underwriter’s standpoint, the risks associated with “time is of the essence” clauses cannot be clearly quantified. To illustrate the potential for disputes that could arise in performing a design contract that contains such a clause, here are three examples of specific situations that may be familiar:
- The contract contemplates a date when the design will be complete. Suppose a design firm is working in a jurisdiction where it has been working for several years, and permit drawings are generally approved within 60-90 days. During the design process, the governmental entity responsible for that review has a complete change in personnel, and the process actually takes six months. The design firm agreed to the dates in the contract but doesn’t have any control over the authority having jurisdiction. That entity, over which the design firm has no control, caused the delay. Without the provision, the argument that the time limit should be waived appears valid as there was reasonable cause for the delay. However, with the “time is of the essence” provision, it’s anybody’s guess what a court will decide.
- Contract submittal schedule. During contract administration, the design firm generally has a certain amount of time to review shop drawings and submittals. There is supposed to be a submittal schedule, which may or may not be provided by the contractor. If the submittals come in out of the expected order, or worse, if they come in all at once on a Friday after construction has begun, is it reasonable to expect the design firm will be able to comply with the contract? The firm’s arguments may not exist or be difficult to defend if the contract includes a “time is of the essence” clause.
- Contractor delays. Additionally, the contract typically anticipates a construction completion date. The design firm is not the contractor and doesn’t have any control over the way the contractor executes the contract. What are the ramifications for the design professional if the project is not completed on time? There are no easy answers to these questions, but you should be aware of the potential liability consequences when you see this language in a proposed contract.
As mentioned, potentially serious insurance coverage questions arise when “time is of the essence” language is included in contracts. Most professional liability insurance policies exclude coverage for express warranties or guarantees, and an argument can be made that the “time is of the essence” language, which will be construed by the court, is a material provision and a guarantee.
Additionally, the contractual liability exclusion in the A/E professional liability insurance policy allows design professionals to enter into contracts if they don’t create liability that exists in absence of the contract. When there is no written contract, the design firm’s liability is tied to the common law and to the standard of care. Unfortunately, this seemingly innocuous language changes that exposure.
While exceeding the common law exposure may not result in a complete declination of coverage, receiving an onerous Reservation of Rights letter before the facts are developed is anxiety producing, and a difficult way to begin a claim. Understanding the terms that may give rise to such a letter, such as a “time is of the essence” clause, is helpful in understanding and managing your risk.
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Lauren Martin is vice president and a risk manager and claims specialist at Ames & Gough. She can be reached at lmartin@amesgough.com. |