Commercial and technology contracts mythbuster - backdating a contract

Commercial and technology contracts mythbuster - backdating a contract

An update on previous finance stories from 2018

The myth

A contract can be backdated to cover events occurring prior to the date of signature of the contract.

It is a common myth that parties can backdate a commercial or technology contract to ensure that it covers events occurring prior to the date of signature. However, backdating a contract in this manner may constitute a criminal offence and is often entirely avoidable, as the same effect can be achieved with careful legal drafting.

The law

The contract date is the date that both parties agree to be bound by the contract terms. As a rule of thumb, it should usually be the date the last party signed the contract.

Backdating a contract is potentially an offence under section 17 (false accounting) or section 19 (false statements by company directors) of the Theft Act 1968. It may also amount to forgery under section 1 of the Forgery and Counterfeiting Act 1981 as the document will become a "false instrument" if it has been "altered on a date on which […] it was not in fact made".

Legally, a contract should generally only be backdated if:

  • The original contract is lost or destroyed before it could be stamped or filed and an identical copy of the contract needs to be re-executed or
  • The parties reach a binding oral agreement on one date but are unable to put it in writing so draft an identical written contract on a later date (but this is more risky and will only work for simple, standard contracts, not those signed as a deed)

Scenario

A business (the customer) wants to procure certain IT services, which its IT service provider is due to commence on 1 March. Negotiations over the terms of the services contract between the parties take longer than anticipated so, in the meantime, the service provider starts work. The parties reach agreement on the terms of the services contract on 1 April, which they propose to sign on that date.

Each of the parties may feel that the services contract should apply from 1 March, when the service provider started work, as opposed to 1 April, but often for different reasons, for example:

  • The service provider will likely want to rely on any limitations of its liability under the services contract from 1 March, as well as being able to enforce payment for the services provided from that date and
  • The customer will likely want to ensure that the service provider’s obligations in the services contract apply to the services provided from 1 March, for example the service levels and any warranties relating to the services

In such a situation, parties are often tempted to date the services contract with 1 March in an attempt to make sure that the services contract creates and confirms rights relating to services that took place from that date. However, parties often do not realise that this effect can be achieved by including an "effective date" or a "commencement" clause in the services contract which would state that, whilst the services contract is dated on 1 April, its provisions are deemed to apply from 1 March. This deemed earlier start date should also be recognised in the clause dealing with the term of the agreement to ensure consistency and clearly evidence the intention of the parties.

When drafting such provisions, it is important for the parties to distinguish between the "contract date" and the "effective date". The "contract date" is the date on which the parties agree to be bound by the terms of the services contract and the "effective date" is the date from which the parties agree that the terms agreed in the services contract will apply.

In this scenario, the effective date will be 1 March and the contract date will be 1 April.

Practical tips

Contracting parties should take care when drafting, dating and signing their contracts, for example by:

  • Making sure that the contract date is the date that the contract was last signed
  • Checking that any dates in the signature boxes are the dates on which the signatories actually signed the contract and that they reflect the contract date
  • Where the obligations in the contract need to apply prior to the contract date, ensuring that the wording of the contract accurately reflects this

 

Contact our experts for further advice

View profile for Gregory BartonGregory Barton, View profile for Emily HockenEmily Hocken

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