Extension Of Time In Service Contracts

The law of Contract is that part of the law which deals with obligations which are self-imposed. It pre-supposes a society and a legal system in which people have the right to choose what obligations they wish to assume. The Indian Contract Act, 1872 defines ‘contract’ as “an agreement enforceable by law”.[1] Essence of any contract is frequently described as a term that goes to the root of a contract. It is in a way a major term of the contract. The expression “time is of the essence” means that the contract is to be performed within a stipulated time mentioned in the contract and a breach of such condition as to the time for performance will entitle the innocent party to consider the breach as a repudiation of the contract.

The parties may expressly provide that time is of the essence of the contract but where the contract does not specifically mention, whether time is or not of the essence of the contract is a matter that has to be ascertained as a matter of fact.[2] Whether time is of the essence of the contract or not depends upon the nature of the property, upon the construction of the contract, and upon the objects which the parties had in entering into it.[3]

In contracts where time is of the essence of the contract, contracts may provide for an extention of time. But that does not mean that by extending the time for performance of a contract, time ceases to be of the essence of contract. Service contracts sometimes contain a provision that if in case the promisor is unable to complete the given work within the stipulated time, then in such a case the promisee will have an option to extend the time of performance along with imposition of liquidated damages. This the promisee can do only when it receives a request from the promisor as to the same effect.

Sec 55 of The Indian Contract Act, 1872 provides in its third clause that “if in case of a contract voidable on account of the promisor's failure to perform his promise at the time greed the promisee accepts performance of such promise at any time other than that agreed, the promisee cannot claim compensation for any loss occasioned by the non-performance of the promise at the time agreed, unless, at the time of such acceptance he gives notice to the promisor of his intention to do so.”

It has been held in the case of Muttayya v. Lekku, [4] that clause 3 of the s 55 of the Indian Contract Act means that the promisee cannot claim damages for non-performance at the original agreed time; at the same time it also means that he can claim performance at the extended time. It has also been held that the section does for not enable a promisee to keep alive a broken contract in the hope of being able to recover heavier damages for its breach.

Further, sec 63 of the Act provides that “every promisee may dispense with or remit, wholly or in part, the performance of the promise made to him, or may extend the time for such performance, or may accept instead of it any satisfaction which he thinks fit.” It was held in case of Lucknow Automobiles v. Replacement Parts Co., [5] that if time is originally of the essence of the contract, it does not cease to be so because a party agrees to grant a short extention. Indeed, a new agreement may lead to the presumption that the parties considered time of the essence.

It was held in the case of Kamal v. Chhatoorbhuj, [6] that a mere extension of time and nothing more is only a waiver to the extent of substituting the extended time for the original time and not an utter destruction of the essential character of time. In the case of Haji Fakir v. Abdulla[7], it was held that where a promisee extends the time for performance, it does not necessarily follow that time has ceased to be of the essence of the contract.

This extension of time can only be done at the request of the promisor.[8] The Supreme Court has held in the case of Keshavlal Lallubhai Patel v. Lalbhai Trikumlal Mills,[9] that the promisee cannot by unilateral act extend the time of performance of his own accord and for his own benefit and that consent of that party is necessary. It was held in case of Pulgaon Cotton Mills v. Gulabai, [10]that if a purchaser applies for an extension of time, the very fact shows that time was of the essence. It was also held that where time is of the essence and is extended, the extended date is also the essence of the contract.

Where in a contract between the State Government and a contract for construction of an aqueduct across a river within the stipulated period of 12 months, power was conferred upon the Executive Engineer to grant extension of time for completion of work on reasonable grounds and further provision was made for levying and recovering penalty compensation from the contractor at specified rates for the unfinished work after the expiry of the fixed date, it was held that such provisions do not affect the basic nature of the contract and time still continues to be of the essence of the contract.[11]

The promisee, while extending the time, retains the right to claim liquidated damages for the extended period. It has been held in the case of Ratilal v. Dalmia Cement and Paper Marketing Co., Ltd.,[12] that a party to a contract may at the request of the other party, forbear from insisting upon delivery at the contract time and may allow time to be extended, without binding himself to do so, or may expressly contract for an extension of time, so that he may claim damages for non-performance at the extended time.

Therefore, the conclusion that is derived from the above mentioned statutory provisions and case laws is that extending the time of contract does not mean that time ceases to be of the essence of contract, if the promisor is unable to complete the work within the stipulated period then at the request of the promisor, the promisee can extend the time of the contract on the condition of imposing liquidated damages. And that since time continues to be of the essence of contract, the imposition of liquidated damages for the period of extension is perfectly legal and valid.
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[1] s 2(h) of The Indian Contract Act, 1872.
[2] A. P. State Electricity Board v. Patel & Patel, AIR 1977 AP 172.
[3] Fakir v. Abdullah, ILR 12 Bom. 658.
[4] (1914) 37 Mad. 412
[5]AIR 1940 Oudh 443
[6] 78 IC 962
[7] (1887) 12 Bom. 658
[8] Sec 55 of The Indian Contract Act, 1872.
[9] AIR 1958 SC 512
[10] AIR 1953 Nag. 345
[11] Anand Construction Works v. State of Bihar, AIR 1973 Cal 550 555.
[12] AIR 1943 Bom 229

The  author can be reached at: nidhi.nliu@legalserviceindia.com