How effective is your contract’s Effective Date?

It’s usually one of the first things in an agreement – the Effective Date.   The Effective Date is sometimes defined as a specific date, e.g., “This Agreement, effective as of October 21, 2013 (the ‘Effective Date’)…”  In other cases, a contract becomes effective once signed by both parties.  In that situation, most attorneys contractually define the Effective Date of an agreement as “the date last written below”, put a “Dated” line in the signature block, and don’t think twice about it.  It’s worth a second look.  The Effective Date can be critical to a company for a number of reasons, incuding revenue recognition and performance of contractual obligations tied to it.

In an era where exchanging signature copies or signature pages via PDF (or more rarely these days, fax) followed by an exchange of signed originals is more common, using “the date last written below” to define the Effective Date can have unintended consequences.  In many cases, once the parties have exchanged signed copies by PDF, performance begins and they leave it to the contract administrators to follow up with originals if requested by one or both parties.  But when the originals are signed by the parties, they can create a new Effective Date for the agreement.  This is because of the integration clause in the agreement boilerplate – an argument can be made that the newly signed original version of the agreement supersedes the previously signed PDF version of the agreement, creating a new Effective Date.

For example, suppose you have an agreement where the initial term runs for 1 year from the Effective Date, subject to automatic renewal for subsequent 1-year terms unless a party provides notice of non-renewal at least 30 calendar days prior to the end of the term.  Suppose the date of last execution by PDF was January 1, 2014, and the date of last execution of the originals was January 9, 2014.  Party A is hoping for a renewal as the minimums under the Agreement double in year 2, but Party B sends notice of nonrenewal on December 4, 2014.  Party A claims that the notice is invalid as improperly given, since it was received less than 30 days prior to December 31, 2014 (the end of the initial term).  However, Party B claims that Party A is relying on the wrong Effective Date, and matinains that the correct Effective Date is January 9 (the date last written on the originals), and thus notice of non-renewal was properly given.

A few years ago, I made two changes to my contract templates to eliminate the possibility of this problem.  First, I redefined the Effective Date as “the date on which this Agreement first becomes fully executed by all Parties hereto.”  Second, I added two date lines to the signature block – “Date PDF or Facsimile Signed” and “Date Original Signed.”  This approach ensures that even if originals are exchanged after PDFs, the date on which the agreement first became fully executed will be the Effective Date, and the signature block in the agreement will show clearly when a PDF or fax version was signed versus when an original was signed.  This makes it easier for not only attorneys to determine the correct Effective Date of an agreement, but for contract administrators, business owners, and others to ensure that they are recognizing revenue, and tracking and measuring performance, under the Agreement from the correct Effective Date. By implementing a more robust definition of the Effective Date in an agreement, parties can ensure that what is often considered a standard term doesn’t become a point of contention later on.

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