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When Does a Contract Take Effect?

by Vinay Jain When Does a Contract Take Effect?

When does a contract take effect? Some contracts clearly specify their effective date. Others don’t. Sometimes it makes sense for contracts to take effect when they’ve been signed; other times, it doesn’t.

Let’s take a look at the different possibilities, and what you need to know to understand the all-important “when” of an agreement.

If a contract does not specify its effective date, it goes into effect on the date it was signed by the person to whom the contract was offered for a signature.1 If this person’s signature is not dated, then the contract is effective the moment the agreement left his hands.2 For example, if the contract is being returned by mail, the acceptance would be valid the moment the signed contract was dropped in the mail.3

If a contract clearly specifies its effective date, then the contract is valid from the effective date regardless of whether its signatures are dated.4

Sometimes you will want the effective date to be different from the date of signing, either earlier (i.e., backdating) or later (i.e., predating). Either is acceptable, provided that both you and the other party intended it.5 You can manifest this intent by clearly stating your intended effective date in the contract. 6

For example, if you decide to loan money to a friend, you may draw up the contract after you’ve already made the loan, in which case you’ll want to backdate the contract, making it so that the interest started accruing the day you loaned the money. Likewise, if you haven’t made the loan yet, you may set the effective date to a future date, so that the interest only starts accruing when the actual loan has been made.

To be clear, having a later effective date does not mean that the contract will not be binding until that later date. The contract is binding when both parties have accepted the contract.7 In other words, if you sign that loan agreement today and its effective date is a month from now, you are bound to the agreement starting today even though you will not begin acting on it for a month.

Sometimes courts are asked to determine the effective dates of contracts that are completely undated. In those cases, the courts may look at surrounding circumstances to determine approximately when the contract went into effect.8 In addition to dated documents, courts may also look at the behavior of the parties, finding the contract to be effective when the parties proceeded as though they were under the terms of the contract.9

Recap
  • A contract’s effective date may or may not be the same as the date of signing.
  • When there is no stated effective date, the contract becomes binding when the party who was offered the contract signs it.
  • The contract may have an earlier or later effective date than the date of signing, but the terms of the contract only become binding when the party offered the contract signs it. The stated effective date applies the terms retroactively or prospectively.
  • If the contract is signed, but not dated, the contract goes into effect on the stated effective date. If there is no stated effective date, the contract goes into effect when the party offered the contract signs it. If that date cannot be determined, a court may determine the effective date by the surrounding circumstances, such as other documents and the behavior of the contracting parties.
Tips
  • If you’re not planning to start a job until some point in the future, put that in the contract. If you leave that out, the other party may proceed on the reasonable expectation that you’ll be starting immediately. You can set a future effective date or agree to set out the exact date in a future agreement.
  • Likewise, if you want the contract to cover work you’ve already done, put that in the contract or backdate the contract (setting the effective date in the past).
  • Of course, when setting the effective date, make sure it is lawful and is not a fraudulent misrepresentation to the other party (e.g. leading the other party to believe that an important work is covered by the backdated effective date when it is not).10
  • If you’re setting the effective date in the future and circumstances change, work with the other party to modify the contract. Modification of a contract requires mutual assent.11 If you’re using Shake, just draw up a new contract.
  • Date your signatures. (Shake does this automatically!)

 

  1. In order to form a contract, there must be acceptance of an offer. See 2 Williston on Contracts § 6:1 (4th ed. 2009-2010). With the signature of the offeree, both parties have accepted the terms of the contract, making the contract binding on both parties.
  2. Restatement (Second) of Contracts § 63 (1981).
  3. Id. at § 65-66. But note that if the offeree uses a medium outside the norm or doesn’t take proper care when dispatching the acceptance, then the contract is valid upon dispatch only if the other party receives the acceptance in the usual amount of time it would have taken a properly dispatched acceptance to arrive. Id. at § 67.
  4. See, e.g., In re Gallagher, 2:12-BK-10213-NB, 2012 WL 2900477 (Bankr. C.D. Cal. July 12, 2012) (debtors who had filed for bankruptcy claimed that the promissory note they had executed was not authentic, because they were not there at the time of the effective date; the court found this to be unpersuasive, as it is common practice for people to put their signatures on a document without dating the document, when they may not be able to be physically present on the document’s effective date).
  5. Fraudulent backdating or predating can void a contract. A contract is voidable when a party justifiably relies on a misrepresentation. Restatement (Second) of Contracts § 164 (1981).
  6. See Grubb & Ellis Co. v. Bradley Real Estate Trust, 909 F.2d 1050, 1054 (7th Cir. 1990) (finding that the a six-month term of agency for a real estate broker commenced on the effective date stated in the contract, rather than on the date the building owner signed the contract: “It is of common occurrence in connection with deeds, leases and other contracts that, while they are not in effect at all and have no legal existence until delivered, yet, in respect to the date of delivery, they, in point of commencement, relate back or commence in the future. Such relation back or forward contravenes no principle of law and is determined by the intent of the parties as deduced from the instrument itself.”) (citation and internal quotation marks omitted). See also Am. Guarantee & Liab. Ins. Co. v. Lexington Ins. Co., 517 F. App’x 599, 602 (9th Cir. 2013) (Bea, C., concurring) (noting that “parties to a contract may retroactively adopt prior acts or fix retroactive dates of execution for a contract.”) (citation and internal quotation marks omitted).
  7. 2 Williston, supra note 1, § 6:1.
  8. Seee.g., Kirkland v. Knox, 230 F. 806, 808 (4th Cir. 1916). (An undated contract provided a limited term of ten years from the “date of the lease and sale” to cut timber, leading to a dispute over the termination date of those rights. The court approximated the date of the contract by using the date the contract was probated (the process that occurs to enforce a will; the process includes inventorying the deceased’s property, which will be used to settle the deceased’s debts, then distributed to the deceased’s heirs), since other evidence–the amount deposited for the probated contract and the testimony of one of the witnesses–supported this theory.)
  9. In re King Enterprises, Inc., 678 F.2d 73, 76 (8th Cir. 1982).
  10. A contract is voidable when a party justifiably relies on a misrepresentation. Restatement (Second) of Contracts § 164 (1981).
  11. See Dallas Aerospace, Inc. v. CIS Air Corp., 352 F.3d 775, 783 (2d Cir. 2003); Elliott & Frantz, Inc. v. Ingersoll-Rand Co., 457 F.3d 312, 322 (3d Cir. 2006).
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Vinay Jain

As Chief Legal Officer, Vinay serves as Shake's general counsel, is responsible for the company's legal contracts and content, and leads efforts to educate consumers and small businesses about the law.

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