Does the presumption “Time is not of essence in the Contracts of immovable property” require a re-visit?

Does the presumption “Time is not of essence in the Contracts of immovable property” require a re-visit? written by Garvit Daga student of NALSARUniversity of Law

WHAT IS A “TIME IS OF ESSENCE” CLAUSE?

The phrase “time is the essence of contract” is an expression that implies that performance by one party within a contractually determined period is crucial to enable that party to require performance. The significance of making time the substance of a contract is that parties have consented to perform their contractual obligations at a given time which shall not be extended. Section 55 of the Indian Contract Act states that mere failure to perform the contractual obligations before the specified time makes the contract voidable at the option of the promisee if time is of the essence. The promisee is only entitled to compensation for any loss incurred by him on account of such failure but he cannot avoid the contract if time is not intended to be of the essence. Moreover, if the contract becomes voidable at the option of promisee yet he accepts performance at any other time, no compensation for any loss caused by the non-performance within the stipulated time can be claimed unless notice of such intention is given to the promisor. Courts look into various factors such as express clause, circumstances, nature of the contract, type of goods, and services involved – to determine whether the time is of essence or not. It is a well-settled principle that the mere fact of a date being mentioned for the performance of the agreement does not conclusively prove that time was intended to be the essence of the contract.

HISTORY OF PRESUMING TIME NOT TO BE OF ESSENCE IN IMMOVABLE PROPERTY CONTRACTS

With the developments in common law, a distinction between immovable property contracts and other contracts arose around the 19th-century Common law. This distinction hasn’t been drawn by Section 55 of the Contracts Act or any other related law. This distinction has been created by the Indian courts, following the English law. The Supreme Court of India has long been presuming that time is not of the essence in real estate transactions and specific performance may be granted in case of default if having regard to express clauses, nature of the property, and case facts, it is not inequitable to grant such relief.
In the cases of Gomathinayagam Pillai v. Pallaniswami Nadar and Govind Prasad Chaturvedi v. Hari Dutt Shastri the Supreme Court held that even if time is not the essence of immovable property contracts, it may be inferred that performance should be within a reasonable period of time depending upon the contractual terms, nature of property and circumstances. The court can, thus, after having examined the relevant facts and factors even hold that time is of the essence in that particular contract.
The Hon’ble Supreme Court, in the case of Chand Rani v. Kamal Rani, reiterated the statement of the Judicial Committee of the Privy Council in Jamshed Khodaram Irani v. Burjorji Dhunjibhai, which observed that “Under the law equity, which governs the rights of the parties in cases of specific performance of contracts to sell real estate, looks not at the letter but the substance of the agreement in order to ascertain whether the parties, notwithstanding that they named a specific time within which completion was to take place, really and in substance intended more than that it should take place within a reasonable time.”
In N. Srinivas v. Kuttukaran Machine Tools Ltd, the Supreme Court held that in a contract for the sale of immovable property, it is generally presumed that time is not of the essence. The aforesaid presumption can be rebutted even when there is an explicit stipulation to that effect. In order to ascertain whether or not time is of the essence, the terms and conditions of the contract should be looked into.
In the case of Saradamani Kandappan & Ors. v. S. Rajalakshmi & Ors. , the Hon’ble Supreme Court held that where a contract relates to the sale of immovable property and a specific time is agreed for payment of sale consideration but no specific time is fixed for the execution of sale deed, time will become the essence only with reference to payment of sale price but not with respect to the execution of the sale deed. Though the court reiterates that time is not generally of essence in contracts of an immovable property unless such an intention can be gathered, the court raised certain important questions for consideration. It further held that “In a contract relating to the sale of immovable property if time is specified for payment of the sale price but not in regard to the execution of the sale deed, time will become the essence only with reference to payment of sale price but not in regard to the execution of the sale deed.” A crucial inference that can be drawn from the aforementioned dictum is that the contracting parties should insert “time is of the essence” clause along with every contractual stipulation where they consider the time to be of the essence.

DOES THE AFOREMENTIONED PRESUMPTION REQUIRE A RE-VISIT?

The presumption of time not being of the essence in contracts related to immovable property was adopted by the Indian courts during a time when the market prices of immovable properties were quite stable and there wasn’t any marked change in property prices even over a span of few years. Therefore, the time agreed to in the contract for performance was presumed to be not so material, or after having considered all the factors, it was presumed that the contract should be performed within a reasonable period. The then logic was that granting the relief of specific performance would not prejudice the vendor. This principle was logically sound until the third quarter of the 20th century after which there occurred a drastic change in the economy. Inflation levels rose and the market value of properties shot up steeply, by leaps and bounds. Property worth a few lakhs of rupees became worth crores especially in urban areas and this is a reality.

Therefore, it seems inequitable and unjust to grant relief of specific performance to a vendee, who is the defaulter and where the vendor isn’t responsible for any delay caused whatsoever. However, in cases where the vendor causes a substantial delay in performance of his contractual obligations (for example, satisfying the vendee about his legally valid title to the property) due to which the vendee was unable to perform his contractual obligation, it is in the interests of justice that relief of specific performance is granted to the vendee.

This holding of the Hon’ble Court is valid in my opinion. Today, development and infrastructure projects undertaken are much more in number and more frequent than those undertaken in earlier decades due to rapid advancement in science and technology. Therefore, whenever a new developmental project is undertaken in an area, the market value of the properties in that area, and those surrounding that area, rise exponentially. Furthermore, the inflation rate in the country has on average been around 7% in the 2010-2019 decade. According to the property consultant Anarock, property rates have increased by an average of 38% and 52% across 7 major cities in the decades of 2010-2020 and 2000-2010 respectively. Therefore, where the vendor has received consideration partly and the vendee delays the payment of the remaining consideration, the vendor will be unjustly constrained by cases related to specific performance as suits and appeals therefrom normally take a decade or two to attain finality. During that period of a decade, the market value of that property may have arisen from lakhs to crores. Ordering the vendor to execute a sale deed in favor of the vendee for the original low consideration (despite no fault of the vendor) is highly inequitable.

Furthermore, the Hon’ble Supreme Court has consistently been holding that laws and principles which may be reasonable, valid, and logical when made and applied, can, with the passage of time and changes in the circumstances, become arbitrary and unreasonable. (Rattan Arya v. State of Tamil Nadu, Motor General Traders v. the State of A.P., MalpeVishwanath Acharya v. the State of Maharashtra, Anuj Garg and Ors. v. Hotel Association of India and Ors., John Vallamattom v. Union of India) Furthermore, the constitution bench of the Supreme Court, in the case of Modern Dental College and Research Centre and Ors. V. State of Madhya Pradesh and Ors. , observed: “69. …It is rightly said that the law is not an Eden of concepts but rather an everyday life of needs, interests, and the values that a given society seeks to realize in a given time. The law is a tool that is intended to provide solutions for the problems of a human being in a society…. 92. …Law is not static, it has to change with changing times and changing social/societal conditions.” The same logic of laws getting outdated can, thus, be applied to principles and presumptions evolved through judicial activism, keeping in mind the socio-economic and political changes over a span of time.
An apt view over the issue of whether the time is or is not of the essence of the contract in immovable property contracts was given by the Hon’ble Supreme Court in the case of K.S. Vidyanadam and Ors. v. Vairavan, where the court observed that – “In the case of urban properties in India, it is well-known that their prices have been going up sharply over the last few decades particularly after 1973. …. We cannot be oblivious to the reality and the reality is a constant and continuous rise in the values of urban properties – fuelled by a large-scale migration of people from rural areas to urban centers and by inflation…. Indeed, we are inclined to think that the rigor of the rule evolved by courts that time is not of the essence of the contract in the case of immovable properties – evolved in times when prices and values were stable and inflation was unknown – requires to be relaxed, if not modified, particularly in the case of urban immovable properties. It is high time, we do so.”
The court in the aforementioned case, further opined that: Where parties stipulate a time for the completion of certain contractual obligations, such limit cannot be ignored; a tougher test to check the readiness and willingness of the purchaser to perform his contractual obligations should be adopted; every suit for specific performance may not be decreed merely because it has been filed within the period of limitation, having ignored the contract-stipulated time limits.

CONCLUSION

It is apparent that the presumption of time not being of essence is subject to a few reasonable and recognized exceptions: (i) where the court is of the opinion that decree of specific performance may lead to injustice; (ii) where one party is guilty of undue delay in performance and the other party has given a notice requiring performance within a reasonable period of time ; (iii) where non-performance within the time stipulated causes loss to the other party, or, in other words, operates as an injury and the defaulter was reasonably expected to be aware of / informed about well in advance.
According to India Brand Equity Foundation (IBEF), a trust established by the Department of Commerce, Ministry of Commerce and Industry, Government of India, the market size of the real state sector is said to rise to a whopping US$1 trillion by 2030 from US$120 billion in 2017. Some major investments and developments in the economy would be as follows – 100 new malls likely to open by 2022 (69 in top 7 metropolis and 31 in Tier 2 and 3 cities), TCS and DLF have been permitted to develop SEZs for the IT sector in Haryana and Uttar Pradesh, numerous housing projects by builders and Government – are among the few. Besides these new projects, inflation will play a major role in the rise in prices of real estate property. IMF’s estimated inflation rate in India till 2025 is around 4-4.5% every year. Thus, in today’s world, prices of real estate property have become unstable and there is a dire need for the courts to consider the current socio-economic conditions before presuming that time is not of the essence in immovable property contracts. Furthermore, the parties should be more watchful and express their intention of making time the essence of the contract explicitly as far as possible, feasible, and negotiable.