Recently, noted swashbuckler and longtime comrade-in-arms Alex Hamilton issued me a challenge: Why not give a contract just an “effective date” without worrying about whether effective date refers to the date of the contract or timing of performance?
Confusion
In A Manual of Style for Contract Drafting, I say you should distinguish between the two concepts. In particular, don’t give a contract a fake date that refers to timing of performance. And in a session of my online course Drafting Clearer Contracts: Masterclass, we discuss how if a contract refers just to an effective date, you have no way of knowing what that date signifies.
Why does that matter? Because the date of a contract matters. Here are some scenarios:
- Acme issues stock options. The only date stated in the related contracts is an effective date of 1 May 2024. But the contracts were signed on 1 October 2024; the lower stock price on 1 May 2024 works to the benefit of those granted the options.
- Acme and Acme Holdings sign a contract. The only date stated in the contract is an effective date of 1 January 2024. But the contract was signed on 1 December 2023. Giving the contract a date in 2024 would allow Acme Holdings to postpone for one year a significant tax liability.
- Acme and Widgetco are party to a license agreement. The term of the license agreement ended on 1 October 2024. Acme and Widgetco had planned to amend the license agreement to extend the term, but they forgot. Termination of the license agreement would benefit a nonparty, Excelsior. On 5 November 2024, Acme and Widgetco sign an amendment extending the term of the license agreement. The amendment is given an effective date of 30 September 2024.
In each of these examples, giving a fake date to the contract benefits the parties and works to the disadvantage of others. That might well lead to unpleasantness of a civil or criminal variety.
And in each of these examples, using an effective date muddies the issue of when the contract was signed. Instead of explicitly saying the contract was signed on a date other than the date it was actually signed, and thereby appearing to commit fraud, using an effective date allows the parties to act unwitting. “The effective date? Oh, that just refers to timing of performance!” But it’s still not a good look.
The prime directive of the contract drafter is to reflect reality. One way to reflect reality is to make it clear when the parties signed the contract and when performance starts (on the date of the contract or on some date in the future), or started (on some date before the date of the contract). You do that because something might be at stake, in the manner of the above scenarios, and because it’s part of the orderly managing of affairs that you track when something begins and something ends.
Expediency
Perhaps Alex likes the idea of using effective date as the only way of dating a contract because it’s expedient. In the chaotic world of contracts, you can’t always rely on the parties including a real date in the introductory clause or giving a real date to their signature. Giving each contract an effective date and dispensing with the need to give the contract an actual date allows you to sweep human messiness under the carpet.
But the mess is still there, to resurface whenever someone has occasion to wonder when the contract was actually signed.
I can’t work up too much sympathy for those organizations that can’t get people to date their signature and don’t want to invest in esignature software. Instead of indulging them by applying to contracts a confusing dating convention, the fix is for them to clean up their act.
Get Rid of “Effective Date”
Stating both the date of the contract and an effective date is better than stating just an effective date, as you will have avoided confusion over the date of the contract. But get rid of effective date and don’t use in the intructory clause and is effective as of.
Instead, say whatever you’d be groping at by using effective date.
For example, you think it’s meaningful that the parties reached oral agreement two months before they got around to signing the contract? Instead of referring to that fateful day as the effective date, say in the recitals that the parties reached oral agreement on the date in question.
You want to focus on when performance starts in the future? Sure, but address the issue directly, instead of insisting on applying to it the label effective date.
There’s no reason to make a fetish out of effective date. You have the date of the contract and timing of performance. Just express those concepts like a regular human instead of a legalistic bot.
If we are talking about stock options issued by a corporation to its employees, there isn’t a lot of wiggle room in this area if you do it in a compliant way, because it is governed by the tax code, accounting standards and the stock plan. Stock option agreements have a “grant date”, which is the date that the corporation’s board of directors (or the person/committee to whom the board has delegated this authority) approves the issuance of the stock option and its key terms. This is documented in writing either through a signed written consent or signed meeting minutes. For private companies, the board must also establish the fair market value of the stock on the grant date. The recipient will accept/sign the stock option agreement at a later date – after the grant date – but it is the grant date that is the key date for accounting and tax purposes. The fair market value of the stock on the grant date is typically used as the exercise price (purchase price) of the stock option grant. There is an accounting standard that requires the key terms of the stock option grant to be communicated to the recipient promptly after the grant date in order to rely on that grant date for accounting purposes.