Suppliers in the tech sector (and their customers) need to agree delivery and payment dates and clearly understand the risks they run when delivery or payment is late.
Many contracts mask what is a crucial issue with the seemingly pat phrase “Time for delivery/payment is of the essence”. The informed know there is real risk here because failure to perform any contractual term stated to be “of the essence” entitles the innocent party to terminate the contract without compensation or notice.
What is less often understood is that a court may imply into a contract that a term is of the essence if it determines that that must have been what the parties meant. For example, where the contract is for perishable goods or for goods whose prices fluctuate (e.g. securities), the law is likely to imply that non-delivery on time causes a right to terminate.
This issue arose in the High Court this year in Pharmapac (UK) Ltd v HBS Healthcare Ltd [2022] EWHC 23 (Comm). You can see why. A bargain was struck in March 2020 for the supply of several million masks by ten weekly instalments. Only the first instalment arrived. The customer terminated even though the contract was imprecise. The judge decided that, because there was a “scramble for supply”, the innocent party must have been intended to have a right to terminate and look elsewhere if the supplier let it down.
For tech companies, this risk comes most obviously where the timing of the supply is understood to be crucial to the customer.
The lessons are clear:
- always agree clear terms for delivery and performance;
- if you accept that any term is “of the essence”, understand the risk; and
- better still, exclude the possibility of a judge intervening by appropriate wording or a different remedy.
