Terra Law San Jose California

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Terra Law focuses on implementing solutions that achieve the strategic legal and business goals of their clients in practice areas including business and commercial law, corporate law, intellectual property law, and real estate law.

Missing a contract deadline not a breach despite a time is of the essence clause

In the recent case of Magic Carpet Ride LLC v. Rugger Investment Group LLC (2019 DJDAR 9998) the Court addressed the question of whether a short delay in performance constituted a breach justifying a damage award. On summary judgment, the Trial Court determined it did. The Trial Court rejected applicability of the substantial compliance doctrine and in part relied on a “time is of the essence clause.” In short, the Trial Court held that an eight day delay in providing a lien release to escrow in an aircraft sales transaction, justified an award of damages to the party entitled to the lien release in part because of the presence of such a clause.

The appellate Court reversed the grant of summary judgment. Quoting the restatement of Contracts, the Appellate Court held triable issues of fact existed on whether the substantial compliance doctrine negated breach. This was so because the injured party received what it had bargained for, the short delay could be compensated and the defaulting party had cured its failure to perform. Of particular interest to all those who draft contracts, the Court refused to uphold summary judgment on the basis of the “time is of the essence clause.” The Court noted that “to give effect to such a cryptic provision,” the Court must know “what performance at what time is a condition of what party’s duty to do what?” The Court also noted that California law does not require strict performance of contractual deadlines in real estate contracts where there is a potential forfeiture. The Court determined that this rule should be applied to contracts generally. Here the defaulting party stood to lose $90,000 in hold back monies and the 38,000 paid to get the required lien release while the supposedly injured party suffered no significant detriment. In short, the Court also held that a triable issue of fact existed as to whether the defaulting party would suffer an unjust forfeiture under the facts in question.

Stating contractual purpose aids interpretation

In Regency Midland Construction v. Legendary Structures Inc. (DJDAR 10344) the Appellate Court addressed an ambiguous contractual clause in a sloppily worded contract. The applicable contract, containing various drafting errors, entitled a subcontractor to payment of a %10 retention 35 days after completion of “subcontractors work.” The Court noted that no possessive designation apostrophe was included in this sentence. Because of disputes the subcontractor did not complete its work. Another subcontractor was brought in to do so. The original contractor claimed that once the new contractor completed the work the original contractor became entitled to payment.

The Appellate Court looked to the purpose of the retention clause. The Court noted that the purpose of a contract, in the absence of extrinsic evidence, is determined from the contract’s words. Here the Court determined that the contract’s purpose was to insure performance. Since performance was not completed by the original subcontractor, the subcontractor must suffer the loss of its %10 retention. The Court emphasized that the parties would “do well” to explain the purpose of a contract to Court. What better vehicle for doing so exists than inclusion of a reference to purpose in the contract clauses themselves?

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