My Brief Critique of an Article on the Concept of Contract Term

I noticed this article on JD Supra. It’s by two lawyers at the law firm Morgan Lewis, and it’s about the concept of “term” in contracts. I have a different take on some aspects of it, so I offer to the gods of the marketplace of ideas my thoughts on three extracts.

First Extract

The first issue in establishing the start date is determining the actual date that the parties agree that the terms of the contract will become applicable. Typically, this date should be specifically set forth as the “Effective Date” of the contract, and all other potentially applicable dates/blanks should be removed, including the common blanks for dates under signature lines.

This extract confuses two issues, the date of the contract and the timing of performance. Whether you state the date or not, there will always be a date when the contract becomes a contract, namely the date when all the parties have signed it. By contrast, it’s necessary to state the start of performance only if it’s different from the date of the contract. So the idea of deleting all dates other than the date performance starts doesn’t make sense.

In particular, you date signatures when there’s a lag between when the first party signs and the last party signs; the date the last party signs is the date of the contract. If you don’t date the signatures or you don’t state in the introductory clause the date the parties signed the contract (if they all sign at roughly the same time), then you’ve failed to state a date for the contract.

And I don’t state an “effective date.” Instead, if the timing of performance is different from the date of the contract, I explain why that is. For example, if performance started before the contract was signed, I’ll explain that in the recitals, giving all relevant facts. And I’ll state in the body of the contract that the contract governs pre-contract performance. That’s clearer than giving giving an earlier date the label “effective date” but offering no other explanation. See MSCD 2.35–.43.

If I need a defined term for the date performance starts, I’ll use a term such as Start Date. A contract becomes a contract when it has been signed, not when performance starts.

Second Extract

The best practice is to determine the actual date the parties desire the contract to end and specifically set out that date in the contract so the term begins on the defined Effective Date and terminates on the defined End Date.

It’s perhaps worth noting that not all contracts have a term. If, say, you’re assigning something, the act of signing the contract accomplishes the main function of the contract. You might have continuing liabilities or obligations under the contract, but normally you wouldn’t refer to the contract as having a term.

Third Extract

However, frequently, the term is defined to last for a number of years, months, quarters, weeks, days, etc. This formulation can raise issues for determining the actual end date (e.g., whether a “year” spans calendar years vs. a contract year vs. a fiscal year).

In my experience, that’s unlikely to be an issue. If you say the term of a contract is X years, the only reasonable interpretation is that the first year runs from the date of the contract or any other start date that’s specified. What year means can create confusion if you’re apportioning quantities per units of time, but that’s a different issue. See MSCD 10.63.

About the author

Ken Adams is the leading authority on how to say clearly whatever you want to say in a contract. He’s author of A Manual of Style for Contract Drafting, and he offers online and in-person training around the world. He’s also chief content officer of LegalSifter, Inc., a company that combines artificial intelligence and expertise to assist with review of contracts.

5 thoughts on “My Brief Critique of an Article on the Concept of Contract Term”

  1. Ken:

    It seems to me that MSCD has it right on the first point. If the opening paragraph states an effective date, and that’s when everyone signs, great. Otherwise, put dates int eh signature blocks. The reason is that the finance department will need to know when we made the commitment to do whatever it is we committed to do. That’s when they might have to take a reserve or recognize some other impact. That might get unwound over the period of performance, but it doesn’t change the fact that the financial statements might have to change right away. An having those dates on the face of the contract is usually sufficient evidence for the auditor.


  2. A couple of things.

    I agree that having clear evidence as to when the parties actually put signatures on the contract is important (with real dates indicated in addition to the “effective date”). I recall reading cases where there are multiple versions of agreements floating around and there is a reason that the court needs to figure out when the document they are reading was actually signed (not just the effective date). There are many reasons in litigation why it is important to know when an agreement was actually signed (i.e. the parties actually came together) and a backdated effective date does nothing to inform that inquiry. I also find that it gets very confusing when there are many (maybe even dozens) of drafts in a negotiation that spans months and every one of the drafts has the same date.

    I am aware that under some accounting (and tax) rules, when a contract is “backdated” with a purported effective date (i.e. that precedes the actual time of meeting of minds and signing of paper by the parties) there can be real consequences. For example, if a contract relates to the sale of an income producing property, the “backdating” of an effective date in the agreement might at first blush appear to move income from the vendor to the purchaser (with the resultant obligation to pay tax moving to the purchaser as well). However (except for very short periods of time), tax authorities can take the position that income does not accrue to the purchaser until the property is really agreed to be transferred (i.e. the time that the contracts is signed and closing occurs or at least the agreement is signed and unconditional). In such circumstances the monetary benefits that the purchaser receives from the backdating of the contract (i.e. an amount equal to the net income that the property generates between the effective date and the actual date the sale is unconditionally agreed to) is treated as a purchase price reduction for tax and accounting purposes (and the vendor still has to record the income on its financial statements and income tax returns up to the actual time the agreement is entered into). Because of such rules (I have only provided 1 example, I am sure there are many others) it is important to know not just the effective date but the actual date of agreement.

  3. A few more offerings to the gods of the marketplace:

    1/ At first I thought you were going to talk about your preference for ‘provision’ over ‘term’. Another day, perhaps.

    2/ Neither ‘effective date’ nor ‘contract date’ precisely expresses the point in time at which the contract takes effect. Sometimes the time of day matters, eg when a signer’s authority starts or ends at noon, when the signer enters or leaves public office.

    3/ One consequence of the position that ‘the contract becomes a contract [only] when all the parties have signed it’ is that ‘unsigned contract’ is a contradiction and ‘signed contract’ a redundancy. To be strictly correct, the assertion must be ‘a proposed contract becomes a contract only when all the parties have signed the proposed contract’.

    4/ But even then not all contracts take effect upon signing. In some jurisdictions, a contract for the sale of realty is ineffective unless the signatures of the parties are witnessed and the instrument is acknowledged. All parties may sign on the same day and the witnessing and acknowledging take place on a later date. In such cases the date of signing is not the date of the contract, unless one defines ‘signing’ expansively. It’s commonplace to use ‘signing’ to mean adding signatures, and ‘execution’ to mean completion of all the formalities necessary to make the instrument effective.

  4. I like the expression “Start Date”. For the reasons you say, it explains the intention better than Effective Date.

    For practitioners in the UK who are faced with US-style contracts, there is often an issue of what to do about the date inserted in the first line, usually preceded by the words “as of”. This is the place that UK contracts usually state the date of execution. It is considered bad practice (and in the worst case, a criminal forgery) in the UK to misstate the date of (execution of) the contract, and best practice is to write this date in after all parties have signed. It should be the date of last signature. Typing it in before signature runs the risk of misdating.

    If one accepts the argument that “as of” is a signal that the date is not necessarily the date of execution but rather a start date, then in my view this needs to be more clearly flagged than by use of the words “dated as of”. If one is trying to work with the draft prepared by the other side, a quick fix may be to delete these words and replace them with a phrase such as “takes effect from”. In light of your comments, this may not be the best solution, but I am struggling to think of a better short phrase. Perhaps a more radical redraft is required?

    • Forget about fake dates, whether designated with as of, dated as of, effective as of, or something else. I’d be inclined to revise the other side’s draft so that it’s clear what happened when.


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