How to Think About Contractual Dates
In a legal context, the term "date of formation" is often used interchangeably with "effective date." The significance of this is that, generally speaking, the date that most lawyers care about is the effective date, which is the date on which the agreement becomes effective (i.e. the agreement starts or "begins"). This date is extremely important, as it will control and determine most of the obligations and rights of the various parties going forward.
Let’s say, for example, that in an agreement, certain provisions are obligations of the parties that solely occur after the effective date. That may shield the other party from obligations prior to the effective date. However, the same provision may also have an exclusion from the definition of the "term," thereby allowing the obligations to continue beyond the contractual termination date and therefore extending such obligations indefinitely – unless otherwise terminated in accordance with the provisions of the contract .
An extension of this theme is the careful crafting of the "term of contract" and its interaction with the effective date. For instance, say that the agreement does not have to be renewed until the end of the term of twelve months. Then, upon renewal, a new agreement can be signed with a fresh effective date, also allowing for a new term.
For example, the "effective date" may be defined as a day in the future, but the contract then states that the market rate for the "price of the agreement" is subject to change on the 1st of January of each year. Does that change take effect from that day going forward, or from the one year anniversary of the effective date? This distinction can lead to interpretation issues that can impact the rights of the parties.
Likewise, termination dates can present numerous issues. A termination date in a contract normally terminates the entire contract, but is it the entire contract or just the sections referenced in the termination clause? This can be important if the flawed provisions are the only ones that are not carried forward on the renewal term.
Types of Contractual Dates
A contract can contain a number of different dates that have distinct meanings. The content and context of the contract determines the purpose of each date. The most common types of contract dates include:
Effective Date: This is the date that an agreement is active, and rights and obligations are effective. It does not necessarily have to be the date that the document was signed. For example, if a notice says an agreement is effective as of July 1, but isn’t executed until July 5, the effective date of the agreement is July 1.
Expiration Date: This is the date that an agreement will end. Some agreements are effective for a set period of time, while others expire upon the occurrence of a specific event. For example, a confidentiality obligation can be effective for years but expire upon the termination of a relationship. A lease may expire when the lease term expires however one party may have a right to extend the lease for an additional term.
Deadline: This is the date that a party must perform an obligation. For example, a subcontractor or supplier may have to give notice of a claim before a specific deadline. A default notice may have a deadline for the other party to cure a default or terminate the agreement.
Without properly defining contract dates, a reader may interpret them differently than intended. For example, an expiration date that appears in a new contract for the first time may be ambiguous if used in the context of an amended contract. Without such clarification, a reader may think the expiration date now applies to the earlier-bargained-for terms or the first agreement has expired.
An unrelated contract signed the same day might present a similar ambiguity if it refers to a prior agreement and includes an expiration date. Such a provision can mean the parties intend for the earlier-bargained for terms to be effective in the new agreement. The reader might dispute that understanding.
A contract that involves many parties could be susceptible to multiple interpretations. A failure to define the parties can cause each of them to have a different expiration date in mind.
Any ambiguities can cause delays and expensive litigation. Asking for clarification during contract negotiations is the best way to prevent misunderstandings.
Common Mistakes Regarding Contractual Dates
Mistake #1: Getting the Starting Date Wrong
When a new agreement becomes effective is an important question that you should answer as soon as possible: What is the "effective date" of the agreement? When does the agreement create rights and obligations for the parties? What are the rights and obligations between the parties arising prior to that date?
An agreement usually has specific language addressing when the contract "commences," such as:
Notwithstanding anything in the preceding two sentences, the provisions of this Agreement shall become fully effective if at all only upon [date].
You must read the provisions carefully: Is the effective date after the signing date? Is the effective date set if a certain event occurs, such as regulatory approval?
Mistake #2: Not Understanding Your Renewal Rights
Another error arises when a renewal is overlooked or improperly calendared. If a renewal right exists in a contract, you should consider exercising the right on the earliest day possible.
Sometimes a renewal right requires formal notice. Some agreements define renewal as occurring automatically unless the non-renewing party gives notice. The automatic renewal of an agreement may cause some to overlook their renewal obligations.
If you miss the renewal period, remedies can vary based on the relevant contract terms. The contract may not provide any remedies for failure to exercise a renewal right.
Mistake #3: Ignoring Automatic Renewals
Automatic renewals may occur despite the party’s intent. If you have an agreement with a term of one year, after one year it will automatically renew for an additional year unless a party provides notice of intent not to renew. You should have internal controls over contract review and calendar dates. Auto-renewals can happen too easily, so plan ahead.
Mistake #4: Forgetting About Self-Termination Notices
Sometimes contracts allow a party to terminate after a certain period or under specified conditions. In these self-terminating contracts, the contract must be reviewed periodically to determine if the self-termination condition has occurred.
A contract may contain a contractual clause that allows it to be terminated if one of the parties files for bankruptcy or insolvency, or if one of the parties ceases to be financially strong. Such conditions can result in non-renewal or early termination if they occur. If such right exists, it should be in your calendaring system so you can be prepared to either terminate or continue to performance.
Mistake #5: Not Understanding Your Termination Rights
Rights to terminate a contract should be provided. If your contract provides termination rights, then a termination notice should be sent out as soon as you know the condition for termination has occurred.
Legal Consequences of Having Contractual Dates Wrong
Incorrect or ambiguous contract dates can lead to a variety of contract disputes. The parties may have different ideas about the time when particular performance is due, which can become an issue if a party performs their obligations after the date that the other party had anticipated. In some cases, one party may seek to exit from a contract early by claiming that certain obligations have already expired. Failing to perform by any deadline (even if it is a non-binding date) gives the other party grounds to dispute whether the agreement is in default, terminate the contract, or make a claim for breach of contract . For financing agreements, incorrect or ambiguous deadlines may even provide grounds for a lender to reduce the drawn amount and recall funds from a borrower.
Practices that mitigate the risk of ambiguity and confusion about contract dates are generally sufficient to avoid these kinds of disputes. Where the contract does include important dates, such as deadlines or the start and end of a term, it should be clear what is meant and how to interpret those dates. A committee may consider it helpful to provide an extensive set of instructions and procedures for calculating deadlines.
Best Practices for Managing Contractual Dates
The simplest best practice is simply to review the key dates with the client at the end of every legal contract review meeting or conference call and be certain that the client is comfortable with those dates. This ensures every party involved is on the same page. It also allows the opportunity to double check the dates to verify their accuracy.
In addition, it is a good practice to keep a timeline of all of the key deadlines in a single document that is distributed to the client. This is especially important when the client handles many contracts and it might be inconvenient for the client to sift through all of its contracts to remember which contract contains the important deadline.
Because most of us work on multiple matters this does not really solve the problem. Therefore, every attorney should establish an office or practice system for tracking dates. This system should be flexible enough to allow for reminder updates because it is common practice to push contract dates when delays are encountered. It has been our experience that both the contract date and the new targeted date are often ignored. Revisiting the contract can sometimes provide important opportunities to help the client circumvent the circumstance that caused the original breach and therefore avoid the need for litigation.
We have developed a calendar system that includes all key contract dates as a part of its normal business function. This system has proven to be a useful tool in helping the attorneys to structure their work around contract deadlines rather than change already established scheduling to meet contract deadlines. This improves the workflow in the office by reducing the frequency of rescheduling commitments.
The Role of Technology in Managing Contractual Dates
As the legal landscape becomes increasingly complex with globalization, mergers and acquisitions, e-commerce, and other factors, the sheer volume of contracts has exploded. This is a fact of life for in-house legal departments as well as outside counsel. It is also a source of a growing problem: failure to meet contractual deadlines. The danger is not just costly fines, penalties, and damages. When licensors deactivate copyright licensing agreements, or licensors kill software license agreements , the results can be catastrophic for businesses. Fortunately, technology helps companies manage their contracts much more effectively. Contract management software enables companies to track compliance and upcoming dates. Contract expiration management software includes contract expiration date monitoring, automatic alerts, and action item notifications. The software also has a contract renewal reminder function. Contractors are sent renewal notices for existing contracts, enabling them to proactively contact the company about extension requirements.
