Backdating Contracts: Everything You Need to Know
Backdating a contract should not be done lightly because it easily can be considered a criminal offense that carries quite hefty consequences.3 min read
2. Pitfalls and Practices of Backdating a Contract's Effective Date
Updated October 27, 2020:
Backdating contracts is a somewhat common practice. However, backdating a contract should not be done lightly because it easily can be considered a criminal offense that carries quite hefty consequences.
Backdating contractual documents can be one of the most complex issues that legal professionals have to navigate. While this issue only comes up now and then, when it does, it's important to have a solid understanding of how to proceed. In terms of private contracts, backdating isn't normally illegal. Where issues of legality come into play is when the parties involved in a contract, or their legal counsel, make use of backdated documents.
For legal reasons, you should avoid using backdated documents. In other words, the occasions in which it is appropriate to use backdated documents are rare. In practice, however, use of backdated documents happens, for better or worse.
In French law, Section One of the Forgery and Counterfeiting Act of 1981 states that a person can be considered guilty of forgery when he or she produces a false instrument, with the intent that he or she or another person will use it to convince another person that it is real. This can cause the person accepting the instrument (in this case, a backdated document) to either do something or not do something based on the assumption that the instrument is genuine.
According to Section 8(1)(a), an "instrument" can be defined as any document, whether that document is formal in nature or not. And according to section 9(1)(g), an instrument can be considered false if the document claims to have been created or modified on a date on which it was not actually created or modified. With this in mind, misdating or backdating a contract could be considered a serious legal offense. An offense of this nature is subject to trial in a magistrate's court or even indictment. According to Section 6(2), the maximum allowed penalty in the event of an indictment is 10 years in prison.
Pitfalls and Practices of Backdating a Contract's Effective Date
Decisions regarding the date that should be put on a document are likely to be something that has to be done on a regular basis in a practical business setting. This is true because of the fact that most business and legal documents take some time to come together, requiring drafts and negotiation before finally being executed. It is common for there to be days or weeks between agreeing to commercial terms and the official contract execution date.
Even in the case of something as simple as a Confidentiality Agreement, the involved parties may have legitimate intentions for the document to be effective before it was actually created. One common approach is to date the document only once all involved parties have signed it and to use a date that goes back no further than the date of the most recent signature. This will normally cover most cases that come across a corporate attorney's desk.
Many jurisdictions allow for contracts that have an effective date that is earlier than the date that the documents were signed. This is commonly known as "backdating." Just because you're able to backdate a contract in your area, though, doesn't always mean it's a good idea to do so. Backdating a contract can have some negative effects. Potential drawbacks can include:
- Liability issues that may arise because of discrepancies between the effective date and the signing date
- Potential breach of contract upon the signing
- Confidentiality requirements that might apply before employees were made aware of them
- Conspiracy issues
- Tax issues
- Assuming obligations that were not anticipated
- The potential for a badge of fraud
- Issues pertaining to compliance
- Prohibition in some jurisdictions and under certain circumstances
While backdating a contract's effective date might be appropriate in some situations, these issues, among others, should be carefully considered before you backdate any contractual documents. For example, if a contract is signed in counterparts, the parties could potentially execute it on completely different dates. In this scenario, using what is known as an "as of" formula might be appropriate. In addition, if contractual performance has occurred before the contract's execution, there may be sufficient reason to backdate the contract's effective date.
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