July 3, 2007 “Effective Date”
It’s commonplace to refer in a contract to effectiveness of something or other—a merger, perhaps, or a registration statement. That’s unobjectionable.
But I’m dubious about using the defined term Effective Date in a contract to refer to effectiveness of that contract.
This occurs in various ways.
First, Effective Date is sometimes used to refer to the date stated in the introductory clause, as in this example—which I haven’t cleaned up, although I did change the names—from the SEC’s EDGAR database:
THIS MANAGEMENT SERVICES AGREEMENT (this “Agreement”) is made and entered into this 4th day of May, 2007 (the “Effective Date”) by and among Acme Holding Corporation, (“Acme”), Astute Advisors LLC (“Contractor”) and Don R. Jones (“Jones”).
I’d rather just refer to the date of this agreement. Why inflict an unnecessary defined term on the reader?
When a contract is dated by having the parties date their signatures rather than by including a date in the introductory clause (something I discuss in this blog post), one sees Effective Date used to refer to the date when all the parties have signed:
This Contract shall become effective (the “Effective Date”) upon the date this Contract is signed by both Parties.
But as I note in this blog post, I find it simpler to arrange matters so that in this context, too, I can use the date of this agreement.
Sometimes the parties use Effective Date to refer to a future date when some or other arrangement kicks in. For example, the following is from an employment agreement dated January 2004 and refers, presumably, to the date the employee will actually start work:
The term of this Agreement shall commence on the first day of the Company’s fiscal year commencing in the year 2004 (the “Effective Date”) and shall terminate on the last day of the Company’s fiscal year ending in the year 2007, subject to prior termination as set forth in Section 7 below (the “Term”).
But it’s misleading to tie effectiveness of the agreement to the date the employee starts work, as the agreement is effective once the parties have signed it. Instead, it’s the company’s obligation to pay the employee, and the employee’s obligation to work for that pay, that commences later, and that’s what I’d say in the contract. If you need a defined term to refer to that later day, I’d use something like Start Date.
Finally, sometimes you see Effective Date used in a contract to refer to some date in the past. For instance, the parties to a distribution agreement signed on March 31, 2007, might want sales from January 1, 2007, to be included for purposes of determining 2007 sales. It would be simpler and clearer to say as much instead of using the term Effective Date and defining it to mean January 1, 2007.
April 14, 2008 at 4:29 am
[...] a related discussion, see this post on use of the defined term Effective [...]
March 8, 2010 at 8:02 am
Although the post is with regard to drafting an Agreement that is not confusing (with regard to defining “Effective Date”), my concern is in regards to contracts that do have this anomaly.
You have mentioned in most of your blogs that “the contract is effective when it was signed, whatever alternative reality the parties elect to reflect in the contract”. If we take that the parties have consensus ad idem, wouldn’t a contract that defines Effective Date also be valid?
In the first example provided above “THIS MANAGEMENT SERVICES AGREEMENT (this “Agreement”) is made and entered into this 4th day of May, 2007 (the “Effective Date”) by and among Acme Holding Corporation, (“Acme”), Astute Advisors LLC (“Contractor”) and Don R. Jones (“Jones”).”, if we presume that the parties signed the Agreement of 30th June, wihout making any change to the date mentioned in the introductory clause, is it not presumed that the parties mutually agree to bind themselves at an earlier date?
Shouldn’t effectiveness be linked with either party’s obligation or right (which begins on an earlier date) rather than the signature date which is the execution or validation of the Agreement?
Contract Law does not mention that an Agreement becomes effective only when signed. Hence, though I agree that the correct practise of drafting would be to make each party’s intentions clear, I would want more clarification on your statement that “the contract is effective when it was signed, whatever alternative reality the parties elect to reflect in the contract”, which is not what the law states.