Backdating – it’s illegal isn’t it?

Lawyers who were trained in commonwealth jurisdictions may have an ingrained concept that backdating a document is generally improper, if not illegal.  This is reflected in the Linklaters article Execution of Documents: Five Common Questions Answered, which offers the following advice for in-house lawyers:

“(i) contracts may only be backdated, absent fraud, in circumstances where an original form has been lost or where terms have been fully agreed but signatures have been left to a later date and (ii) deeds may never be backdated.”

Unfortunately, the article offers scant authority, and a search on Google reveals little else on the subject from the commonwealth world.

In the US, however, there seems to be have been much more consideration of the issue (at least according to my Google search results).  Despite recent controversies surrounding the backdating of executive stock options, the general attitude in the US is that backdating is not wrong (or right), per se.

In this Law.com article, the author writes:

“Backdating by itself is not generally, at least with respect to private agreements, illegal. Rather, it is the use of the backdated documents by the parties or their counsel that may violate the law.”

The US approach seems to be founded on the principle that parties to an agreement (or deed) are free to agree that the document is to take effect prior to the date of execution – this is often denoted by dating the document “as of” the earlier date.

In Grubb & Ellis Company v. Bradley Real Estate Trust, the US Court of Appeals (7th Cir. 1990) held that:

“Illinois courts have, in the past, permitted the “relation back” theory of contract effectiveness: that is, contractual terms may be effective for a period before the contract is executed, so long as such coverage is clear from the face of the contract:

In the law of contracts, it is elementary that ordinarily a contract speaks from the day of its date, regardless of when it was executed and delivered. It is of common occurrence in connection with deeds, leases and other contracts that, while they are not in effect at all and have no legal existence until delivered, yet, in respect to the date of delivery, they, in point of commencement, relate back or commence in the future. Such relation back or forward contravenes no principle of law and is determined by the intent of the parties as deduced from the instrument itself.”

As a practical matter, the proper date to put on an agreement is something that corporate counsel is likely to have to make a judgment call on quite often.  This is because documents take time to draft, negotiate and execute.  It would not be uncommon for there to be a lapse of days or even weeks between the time commercial terms are agreed and the date of  final contract execution.

Even for a simple document such as a Non-Disclosure Agreement (or Confidentiality Agreement), the parties may legitimately want the document to take effect from an earlier date.

The commonwealth-trained (and more prudent) approach would be to insert the date only when the last party has signed and to use a date no earler than the date of that last signature.  This should cover the majority of cases that come across corporate counsel’s desk.

For those instances where a document is intended to take effect retroactively, you should:

  1. Assess whether the backdating is intended to deceive or harm third parties (including government and regulatory bodies).  Only proceed if the answer is no.
  2. Ascertain if the backdating would violate a law or adversely affect the rights of third parties (including government and regulatory bodies).  Only proceed if the answer is no.
  3. Check your instincts.  If something doesn’t feel right, consult another lawyer, external counsel or your professional association.
  4. If you decide to proceed, always give full disclosure, either by adopting “as of” dating or reciting in the document body that it is intended to have retroactive effect.  Also allow for a “date” line in the execution blocks, so that any discrepancies between the dates will be apparent on the face of the document and any suggestion of concealment or deception can be defended.

Most of the suggestions above are derived from this excellent article by Kwall and Duhl, which delves into the subject in detail (albeit from a US law perspective).

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2 Responses to “Backdating – it’s illegal isn’t it?”

  1. CCKY Says:

    Most counsel would agree that parties are free to reach agreement on when they would like to their contracts to be effective from. In my experience, any “backdating” done is usually done by way of dating the contract itself the date the parties sign the document, but expressing it as being “with effect from” an earlier date. As a UK lawyer, I believe there’s no problem with such an approach, provided that parties understand that this is only going to be effective as between the parties.

    Importantly, they should realise that this will not necessarily change the factual circumstances at the earlier date. For example, if a sale contract did not in fact occur at an earlier date, then even if a contract for sale is expressed to take effect from an earlier date, that would bind the parties as between themselves, but not against 3rd parties (for example, the tax authorities, for the purposes of tax calculations).

    In my experience, law firms and especially magic circle law firms very seldom engage in such practice with regards to dating of documents. Having moved in-house however, is where I started seeing regular practice of documents being signed to take effect at an earlier date, under the mistaken belief that it will “cure” that which was supposed to have occurred at the earlier date but which actually did not.

    It goes to show the importance of lawyers undertaking CPD regularly, and this is especially true for in-house lawyers (though many will not admit it).

    C

  2. Backdating Contracts Is Tricky Business Says:

    [...] There’s nothing inherently illegal or unethical about backdating contracts, although backdating can certainly be both unethical and illegal, depending on the situation. For those with an hour to kill thinking about the issues, Jeffrey Kwall and Stuart Duhl wrote an excellent article on backdating that was published in Business Lawyer in 2008. For a shorter piece with a few practical tips see Backdating – it’s illegal isn’t it? [...]

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