What is an Effective Date?
It is common for contracts to include a sentence or paragraph at the beginning of the document that states "This Agreement is made as of [insert date]" or that it "shall be effective as of [insert date]." Contract lawyers often spend time in negotiation working out which date to insert and the significance of various dates which may be used. Sometimes the effective date is very important and sometimes it is not. Sometimes the effective date is presumed but not expressly stated, and sometimes it is expressed but not quite what the parties thought it was (see, e.g., Contracts create interest and effect outside terms).
Sometimes the parties assume that "as of," "effective," and "made" are interchangeable, but they are not. The language will be interpreted according to its plain meaning, so it is essential to use the right words. In particular, an effective date means that the contract has legal effect as of that date. The parties intend to bind themselves to the document as of that effective date. Thus, a party acquiring a contract to purchase property wants to acquire the benefit of the deal as of the effective date, not as of the date on which it is signed.
The two most common methods to link an effective date to an existing circumstance are to use a "heads-up" precedent method or to use the "per the memo" method. In the former , the date is determined by some outside pre-existing circumstance. For example, the parties may decide on a date based on the date on which the last of the parties needed to execute the document did so. Or it may be the day following the signing of all parties to a contract. In other cases, the heads-up mechanism looks to a triggering circumstance. The memorandum of understanding or letter of intent may state that the contract will become effective upon the receipt of third-party shareholder consent if no such consent is required. The hurting party may hope that the effective date will be that of the MOU rather than later when the consent is received.
Another mechanism is more explicit about the time course of events, or the life of the contract. Instead of a date, such contracts may state that the contract is effective until a triggering event — the delivery of a deed, the first payment, etc. — occurs. Similarly, a contract may state that it is effective until a certain date…
The above language explains the placement of the effective date. It is common to see it at the top of a body of language, the title, the introduction, or in an introductory paragraph. It also may be placed at the end of a subparagraph or a provision.
Legal Importance of the Effective Date
As a general matter, parties to a contract are bound by that contract from its effective date forward. However, because the effective date could conceivably precede or follow executing a formal agreement, the precise effective date of an agreement can become significant.
For example: Suppose that Party A and Party B sign an agreement effective May 1st but do not sign and date the formal agreement until July 15th. If the written agreement contains a choice of law provision, specifying which state will govern any legal questions concerning the agreement, the choice of law provision will not become effective until the date of signature. This could create an issue if a party were to try to enforce that contract before the date of signature, for example, by seeking to recover legal fees incurred between May 1st and the signing of the written agreement.
More directly, if a contract includes a period of performance, such as an option period or the length of an agreement, the parties will not be able to exercise that period or discontinue the option until the effective date has arrived.
This could alternatively tie the hands of a contracting party with a requirement to get a particular notice, fulfill a condition or make a payment on or before the effective date of the contract. Even if a party may believe that they have the right to take these actions before the effective date, a written agreement will control.
Determining When a Contract Becomes Effective
When determining the effective date of a contract, the simplest and preferred method for calculating the date is to have a clear provision in the contract stating the date. The parties may wish to insert the date right into a "Effective Date" section or in the "Date" of the preamble. If a specific effective date is not stated, the next best option is to have the parties sign the contract on the date when it should become effective. However, if neither of these two methods have been used by the parties, then the determination of an effective date will depend on the county where the contract is being enforced. In Davidson and Jones Development Group, Inc., v. Elmore, 2009-CA-00906-COA (Miss. Ct. App. 2010), the Mississippi Court of Appeals discussed the different methods for determining the effective date of a contract. The Court held that if there is a stated effective date within the contract, then the contract will not be considered effective until the stated date. If there is a provision in the contract that works to determine the date on which the contract is effective, then the effective date will be determined from that method. However, the Court noted that when there is no effective date stated, nor is there a method in the contract to determine the effective date, then the effective date would be calculated based on the county rule. The county rule states that the contract becomes effective as of the time the contract is delivered and becomes effective, and the time will be determined based on the preponderance of the evidence. To reduce the risk being exposed to the county rule, an unambiguous statement of the effective date in the contract and signatures on the effective date are the preferred methods.
Effective Date v. Execution Date
While the effective date is often the same day as the parties’ signatures, it does not have to be, and often is not. The following are some common examples of when the execution date and the effective date are different:
Example #1: Contract is executed on March 1, 2014, effective August 1, 2014.
Example #2: The contract states that it is effective 60 days from the date of signing, and is executed on March 1, 2014. The effective date would then be April 30, 2014.
Example #3: The agreement is executed at closing on December 15, 2014, for a residential real estate transaction and provides the transaction is effective as of 12:01:00 AM on January 1 , 2015.
Example #4: The agreement shows a signature date of October 11, 2014, but is executed by the other party on October 15, 2014 and becomes effective on November 1, 2014, six days after the latter party signed.
The execution date is the date when the last party to sign the contract executed it, regardless of the date shown on the signature line. The effective date is the date or mechanism stated in the contract for the contract to become effective (e.g., the date shown in the signature line of the contract for the last party to sign). This is a key component of a contract and mistakes, such as incorrectly backdating a contract, may have unintended consequences.
Common Effective Date Problems
Given how crucial the effective date can be in determining parties’ rights and obligations, it is not uncommon for there to be misunderstandings surrounding its meaning and effect. The following are some common issues that arise with respect to the effective date, as well as how those issues can impact the enforceability of a contract:
• A contract override may call for certain rights or obligations (such as payment) to take effect earlier than the effective date. The enforceability of the contract can be called into question if the parties were not actually obligated to perform those obligations prior to the effective date.
• If a contract does not have a written effective date where the parties intended (such as for a contract that is effective upon signature), the failure to include the effective date could be avoided if the parties act as if the contract became effective on the date they intended.
• Where a contract has a written effective date but was not signed until months after the effective date, the enforceability of the contract can be called into question if the parties were not actually obligated to perform under the contract until the date of signature.
• Where a contract has an effective date that falls on a date that is not possible (such as a February 30th effective date), the effective date may be read as the last day of the month prior, which could cause the commitment, prepayment, or other obligation dates to fail.
• Where a contract amended an earlier contract (for instance, regarding payment under a work order) but did not contain an effective date, courts have held that the effective date will be the date that the contract was executed by the parties instead of the date of the original contract.
Effective Date Best Practices
To avoid disputes over when the contract came into existence, we suggest you include a provision in your contract tracking agreement that controls the effective date. A carefully drafted effective date provision will disarm a potential dispute. Here are some tips:
It is best to include an explicit effective date provision in the contract. Consider including something akin to the following: "Effective Date. This agreement is effective as of [insert date], unless otherwise specified in the body of the contract."
If specifying the effective date in the contract poses a problem, consider using the date of the last signature, or the first date a party performs under the contract if performance occurs on the same day as execution. It is not uncommon for the parties to sign the contract on different dates; therefore , the reference to the execution date is ideally for situations when the parties sign on the same date.
It is best not to interpret "date of this agreement" in a way that creates ambiguity. Courts have found that "date of this agreement" means the date of execution. So, for clarity and to avoid unnecessary litigation, do not use vague or ambiguous language in your contracts.
Unless you take steps to include an explicit effective date provision in your contract tracking agreement, the contract will be effective immediately on the date the last party executes the contract. Depending on how quickly the signature pages get delivered back to the contract tracking firm, it could be the parties knew the signatures were outstanding and there could be a dispute over whether the contract was effective before the signature pages were delivered to the contract tracking firm. By including an explicit effective date provision, you can eliminate the potential for an argument or dispute regarding the effective date.