1. Backdating the Contract Effective Date: Pitfalls and Practices
2. Pitfalls of Backdating: Liability Due to Misrepresentations Between Effective Date and Signing
3. Pitfalls of Backdating: Confidentiality Obligations
4. Pitfalls of Backdating: Conspiracy and Tax Matters

Backdating documents occurs for several different reasons. A performance or action listed in a contract may have been executed before the contract was dated, meaning it needs an earlier effective date. Sometimes contracts will be signed on different dates and an "as of" formula that's described in the paper may be used. Sometimes it's possible to describe a situation in the contract's body without needing to backdate it, which is preferred.

Backdating the Contract Effective Date: Pitfalls and Practices

Many jurisdictions allow an earlier contract effective date than the one that's signed, but it's not always advisable. There can be adverse consequences that the parties will want to be aware of.

Potential pitfalls include the following:

  • Liability from misrepresentations between the signing date and effective date
  • Breach when signing
  • Confidentiality issues that occur before employers know about them
  • Tax and conspiracy issues
  • Assumption of obligations that are unanticipated
  • Issues with compliance
  • Potential badge of fraud
  • Prohibited in specific circumstances and jurisdictions

It's not uncommon for parties in a contract to want the agreement to cover a certain period of time before it actually gets signed. There are multiple contexts where this can come up, and some are legitimate while others are not. However, you can't avoid the logistics of signing and negotiating contracts. Nothing is unethical or illegal about backdating contracts, but the specific situation can be illegal and unethical in itself. It's surprisingly complicated to backdate written agreements effectively so they're retroactively enforceable.

This is true when there's a complex deal that has multiple documents and the retroactive date is a few months behind. The intent for the parties to backdate the transaction must be made clear. Simply stating the retroactive date in the agreement isn't enough. If the transaction has a retroactive effect between the two parties, it's not likely this will apply if nonparties become involved.

It can be difficult if not impossible to think of all the nonparties who might be affected by a transaction, so it's unlikely there will be consequences that are unintended that won't be fixed by backdating a contract.

Pitfalls of Backdating: Liability Due to Misrepresentations Between Effective Date and Signing

An effective date that happens sooner than the signing date makes it possible for a party to the contract or another entity to make a statement that's inaccurate during the period between the effective date and the date of signing. This misrepresentation could result in criminal or civil liability. The misrepresentation might be found in another document or contract, in response to a discovery request, or in a governmental filing. One statutory provision, 18 USCS 10012, allows for criminal liability for specific false statements, including those who have a connection to certain credit applications.

Pitfalls of Backdating: Confidentiality Obligations

Confidentiality obligations can be troublesome when it comes to a backdated contract. It's important for the confidentiality provision to include the exact date when obligations started. Usually it would be the signing date, since an earlier date would mean the business is subjected to the confidentiality obligation before they even had the chance to advise their representatives it was subject to the obligation.

Pitfalls of Backdating: Conspiracy and Tax Matters

Backdating documents violates United States tax laws in the following situations:

  • For the purpose of manipulating income
  • With the intent to create tax deductions

Other jurisdiction laws are similar. Even if tax code provisions aren't violated, backdating documents can cause criminal liability, according to conspiracy statutes. In a 1988 Second Circuit court case, the court thought about backdating tax shelter documents as part of a conspiracy to violate the United State federal conspiracy statute. The backdating was considered to be part of the conspiracy to obstruct or frustrate the IRS's function of collecting and ascertaining income taxes even though the scheme didn't go into play.

It's important to consider if backdating will contribute to or create the look of a conspiracy. Backdating can cause a party assuming unanticipated indemnity or other potential obligations. There have been cases where documents have purposely been backdated with a criminal intent or for a purpose of perpetuating a fraud or committing a crime.

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