Pay back contract definition is also known as a back month or far month contract. This type of contract can be used with repayment clauses, termination payments, training costs, and futures contracts.

How Back Month Contracts Work

A back month contract is used with futures and has an expiration date that is the furthest beyond the next date of expiration that is approaching. This next date of expiration is also known as a front-month contract.

For example, let's look at what happens if a buyer wants to purchase sugar futures. In this example, we'll say it is July, and the buyer believes the prices will increase in October. Rather than purchasing the front-month contract, July, the buyer will instead purchase the contract that will expire as far into the future as possible. In this scenario, it would be December 31. The December contract is a back month contract. The futures contract will increase in liquidity as it gets closer to the expiration date since there is an increase in trading contracts that are close to expiration.

The downside to back month contracts is that they are riskier than front month contracts. The risk then increases the contract premiums. So although a back month contract can offer an indication to the market in the future, it is a greater risk.

Repayment Clauses

An employer may attempt to recover costs incurred by an employee. This may happen for several reasons including:

  • The employee quits after attending an expensive training course paid for by the employer.
  • The employer wants to recoup costs associated with an employee who took maternity leave but did not return to work.
  • The employer wants a termination payment if the employee lodges tribunal claims when they agreed not to.

For an employer to succeed in this type of financial recovery, two things must be remembered. They are:

  1. An express agreement must be in place between employer and employee.
  2. The agreement must include all elements for it to be seen as a valid contract.

If these are not followed under the law, the likelihood of receiving repayment is very low.

Legal Risk

If a contract includes a clause that requires one party to pay the other party a specific sum for a breach of contract, it is regarded as a penalty. If this occurs, the penalty will not be enforced. For a clause to be enforceable, it must show a full attempt to estimate the total loss caused by the breach. If this isn't shown, the penalty may be used.

Factors that affect the outcome include:

  • If the sum listed in the claim is significantly greater than the largest possible loss caused by the breach.
  • If the sum listed in the claim is the same for any level of breach, regardless of seriousness.
  • If the clause is structured to prevent one party from breaching the contract, instead of compensating another for the loss caused by the breach.

How to Avoid Drafting Unenforceable Repayment Clauses

To avoid drafting repayment clauses that can't be enforced, follow these guidelines and when possible consult a lawyer. The guidelines include:

  • The reason for repayment cannot be a breach of contract.
  • The repayment should not be called a penalty.
  • The purpose of the clause should not be written to prevent an employee breach of contract, or it may be seen as a penalty.
  • The repayment sum should be within reason and not significantly more than the loss the company suffers.

The process of estimating a loss may prove difficult, but that shouldn't prevent a repayment clause from being included. Calculating an estimated loss and what brought you to the sum may help in the future. If the sum you calculate is applied to all levels of contract breach, it will be seen as a penalty.

Repayment clauses should show a true loss to the company, not an amount that is seen as a punishment to the employee. If this is not carefully thought out, the employer may end up recouping nothing from the employee.

In the case of training costs, a contract can state that all costs related to training will be paid by the company as long as the employee worked at the company for two years or the employee would have to repay the training costs. The repayment was designed to reflect the loss of a valued employee. If the repayment amount decreases over time, it is considered a genuine pre-estimation of company loss.

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