What Is the Agreement Effective Date?
The "Agreement Effective Date" generally refers to the effective date(s) of an agreement. The "Effective Date" or "Agreement Effective Date" is the date that contracts are released by a contracting authority and become available for public review. [The term "Agreement Effective Date" ("AED") is often used in the context of agreements for professional services such as agreements issued by a local agency for architecture, engineering, surveying and/or landscape architecture services required for a project.]
In the case of a contract for construction of a public improvement , the "Effective Date" or "Agreement Effective Date" is the date on which the agreement was entered into between the contracting authority and the party performing the work on the public improvement. The date is typically entered into the agreement on the first page and sometimes, depending upon the wording in the contract boilerplate, may be annotated as the date upon which the applicable statute of limitations/MDL/GPML/etc. commences to run.
Both terms are used similarly for other types of agreements, such as agreements for services, including but not limited to agreements for professional services, and are used to define the date on which the contract/agreement document is issued. For example, the AED is the date on the cover of a certificate of insurance or the date on which an auditor’s opinion letter is issued.
Why Is the Effective Date Important?
The effective date in an agreement determines when its terms go into effect and carry with them the full force of law between the parties and against the outside world. So it is hard to overstate just how important it is to have the right time that an agreement, or indeed an amendment, actually becomes operational. Indeed, the effective date often makes all the difference as to whether a given term will be valid for some time in the future, or whether it will have gone by the boards by virtue of the manner in which the parties ended up executing the agreement.
Which leaves another important question, which is whether the effective date is the date that the document is signed or whether it is the date that is specifically stated in the body of the agreement. The answer lies somewhere in between. That is, if the agreement does not state a different effective date, then it is the date that the agreement is executed. However, that is not necessarily the date that an agreement takes effect, especially if the agreement relies on a contingency in order to be enforceable. For example, a lease may take effect as of the date that possession is turned over from the landlord to the tenant, or a contract may not be enforceable until the requisite conditions precedent are fulfilled. In those circumstances, the effective date is not necessarily the date that the documents were executed.
At the same time, mistakes can be very costly and are self-defeating if a party fails to note the effective date of an agreement. Not only is it clear that an agreement itself will ultimately end on the termination date set forth in the document, it will also end on the effective date set in the agreement. Consequently, an agreement that seeks to run for a number of weeks, or months, in future must so specify. Otherwise, you might just find yourself stuck in a similar circumstance that recently occurred when a California court, although you don’t need to be in California watch the case, turned on the effective date of an employment agreement to a January 2013 date and not a later date in February 2013. The distinction makes a huge difference in that criminal law actions (a brand new employment agreement that was terminated almost immediately) have no statute of limitations, while civil actions would have had a one year limitation.
How Is the Agreement Effective Date Determined?
When determining the appropriate effective date of an agreement, the starting point is usually the date on which the agreement is signed by all parties. From there, there is a short negotiation process, and ultimately the parties agree on a mutually acceptable date that is one of the following:
• the date on which the agreement is signed by all parties, or
• a date that is earlier than the date on which the agreement was signed by all parties.
An earlier effective date may be appropriate because the parties want the agreement to take effect at the time that the negotiations were completed, rather than on the date that the agreement was signed by all parties. A party seeking an earlier effective date may wish to provide for that earlier effective date in the contract, in order to trigger certain rights for which the effective date of the contract (rather than the date on which the contract is signed by all parties) will control. Naturally, it is important to draft the contract carefully, so that the contract rights will not inadvertently end before the agreed-upon effective date.
Effective Date – The Difference from the Execution Date
The effective date and execution date of an agreement are frequently two different dates. The difference is the effective date is the date applicable to the agreement. The execution date is the date on which at least the final party executes an agreement.
The example of an exploration and development agreement in the oil and gas industry is helpful. There may be multiple parties to an exploration and development agreement. The agreement could be effective as of February 1. However, only the first party that signed the agreement may have executed it on February 22. Only the last party that executed the agreement may have executed it on March 14. The execution date of the agreement, therefore, may be March 14. But the effective date of the agreement is February 1. That’s the date applicable to the agreement.
Why does it matter? Suppose the agreement allows for one party to make payments on activity conducted by other parties following the effective date. But that party is allowed to make those payments only through and including the execution date? In such a case, it matters that the execution date is different from the effective date. The payments must be made within that range. A party would want to work out any potential confusion over the effective date and execution date at or before executing the agreement. While it is the parties’ responsibility to ensure they understand the terms of the agreement, without clarity, it can have an adverse impact.
Biggest Mistakes and Pitfalls
The most common mistake parties make regarding effective dates is not including them, thinking they are not necessary. Having an effective date can be critical, however, considering it is generally the date a contract goes into effect for the benefit of the parties. It can be important for consistency, as what happens if there’s a gap in the events? What if one side is ready to start work before the other? The effective date can affect the risk and liability allocation in contracts and can also be important in copyright and trademark assignments , for example, both of which are concerned about when exactly rights are assigned. If there’s an ambiguity, you might end up with a "battle of the forms," where one party’s agreement puts responsibility on the other, and the other party’s form makes them responsible, and you can’t tell who’s supposed to take on the risk (causing unintended litigation and expensive legal fees).
When You’re Dealing with Agreements Outside Your Country
Issues of effective date become more complex when multi-national or international agreements are involved. It’s common in international agreements, for example, to have a governing or applicable law clause that indicates which country, state, or locality’s law will govern the interpretation of the agreement.
While it may be tempting to leave the effective date of an agreement to the law specified in the agreement, this can be problematic if that country’s laws differ from those of the parties’ own country (or if the specified country is not a country at all). Different jurisdictions might have different rules for determining whether a contract has become effective and who is authorized to terminate a contract. And just because the laws of a particular jurisdiction presume different rules for interpretation does not mean that the parties would want those rules to apply.
Parties can easily manage these concerns, of course, by specifying the effective date or rule for determination expressly in the agreement. But doing so can be unnecessarily complicated if the parties need to address then-prevailing law of another country (or countries). The parties may also not have as much time to negotiate an agreement as they would like, and an effective date that is specified expressly becomes an additional negotiating point. An easy solution for international agreements is to establish the effective date as the execution date of the agreement, a fixed passage of time after execution, or some date occurring in the future that is indeterminate at the time of entry into the agreement but that can easily and predictably determine.
It’s one thing to know that the effective date, if determined as the date when the agreement was executed, would be a certain date. It’s another to know whether any particular change to the terms could delay the effective date. To address this issue, some international agreements take the unusual step of providing that the agreement will automatically take effect when parties execute the agreement, regardless of whether the parties are able to provide evidence of their intent that the effective date was a specific date. A similar approach is to set out the particular contingencies that need to take place before the agreement takes effect.
As discussed previously (here), including a term such as "condition precedent" or "condition subsequent" in an agreement does not necessarily have the effect of making that particular provision an integral part of the contract, but instead makes those provisions "bare conditions." Indeed, this may be particularly true if the parties intend or expect that someone will later deed the condition into an incorporated document. Because those provisions purport, on their face, to modify the effect of the effective date, there may be a good argument that these provisions should be subject to the doctrine of contra proferentem.
A recent case illustrates the difficulty that an effective date can present when the parties have not specified expressly the terms for determining the effective date or the rule for handling disputes regarding effective date. In Heniser v. Arriva Medical, LLC, the plaintiffs and the defendant entered into a series of agreements, each of which included a provision that the agreement would be effective for a period of 4 years (subject to renewal). Each agreement started with these words:
This Agreement is effective as of [insert date].
The inserted date for each agreement, however, was different. When the plaintiffs sought to enforce the first agreement in the series, the other contracting party contended that the agreement had expired and that the plaintiffs were not entitled to any more compensation (including equity) that was contingent on the agreement. The court found that the language in these agreements required looking to the inserted date to determine whether the agreement was effective, meaning that the date of the first agreement was January 1, 2006.
By the time the plaintiffs sought to enforce that first agreement, however, only the last of those contracts had not yet expired, having expired on October 4, 2011, meaning that the plaintiffs’ claim for compensation should have been made prior to that date. The court also found that the terms and provisions in the agreement might not have specified all contingencies that needed to take place in order for the agreement to have taken effect, such as the parties’ ability to object to any change in control. Because the agreement would have taken effect only if there were no objections to the change in control that occurred in the future and because it would be unreasonable to demand payments immediately following the change in control (which was the statute of limitations), the court found that the agreement was too indefinite to enforce.
Had the parties specified the effective date or the rule for dispute resolution, it’s possible that the second agreement might have survived the first one. Had the parties specified the duration precisely, it’s possible that the court might have reached a different conclusion about the enforceability of the claims. But all of that depends on whether those issues are governed under the laws specified in the agreement and whether the parties could foresee all of the contingencies that could arise.
Changing and Updating Agreement Effective Dates
There are a number of reasons why it may be prudent to revise the effective date of an existing agreement. The most common reason is that the effective date of the original agreement has been lost, misplaced or forgotten and parties to the new agreement want to acknowledge a new effective date, without canceling the original agreement or creating a new agreement. Another reason is that in drafting an amendment to an existing agreement, the parties inaccurately restate an earlier effective date result from a typographical error or miscalculation. In either case, the parties may need to restate one or both parties’ effective dates, without creating a new agreement.
Although the process for changing an effective date is relatively simple, the timing may be crucial. If a document is deemed to "require recording" (such as a mortgage), the effective date of the recorded document could create problems if a subsequent unrecorded loan has been considered perfected, with a later priority date.
The strict requirement that agreements with a future performance be in writing could prevent recourse to a signed document that states a present effective date. In fact, if a party wishes to avoid an issue with an unrecorded mortgage , the safest course would be to record a memorandum of an amendment to the original agreement that accurately restates the prior effective date.
Rule 1. Date Document Voluntarily Placed in Chain of Title Rule – Optional Procedures Adopted by General Rule (a) of Rule 30(a)(2). "(2)(i) and (ii)" at any time before the effectiveness of Rule 30(a) may alter the simply stated rule by permitting a party voluntarily to place in the chain of title of real property any document that is not a subdivision plat or condominium declaration, thus making the interest created by the document effective as of the date in the document, but also providing an optional procedure by which an interested person may have the effective date of the document established. The Court Rules Committee Comment to Rule 30(a) refers to "the ample time period (almost four years)" provided by Rules 14(c)(2)(i) and (ii) "for an interested person to establish the effectiveness of the document prior to the growth of a competing interest" as "…proceeding pursuant to the time-honored and generally reliable principles of actual notice and accountability." If a party does not wish to use the Option Procedures to establish an effective date, there may be a problem in determining priorities with regard to a document with an inaccurate date.