What Are Contract Effective Dates, and Why Do You Need Them?
Table of contents
- What is a contract effective date?
- Future-dated
- How is an effective date different from an execution date?
- Why is it important to have effective dates in a contract?
- How can you track your contracts efficiently?
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Effective dates are the gears of the contract machine. They keep things moving by starting, extending, or specifying a period of time within a contract. Let’s take a look at why effective dates are so integral to the contractual process and how you can manage all time-sensitive aspects of your contracts.
What is a contract effective date?
An effective date is the start date of the contract and the point at which it becomes legally binding. It can be the point at which both parties have signed the contract, but it can also be before or after. Let’s look at some examples of what different effective dates can look like.
Future-dated
A future-dated contract is an example of an express contract that holds each party accountable after they’ve signed but before the work has begun. This is common with NDAs or other standard employment contracts that can be signed without needing to make changes.
Backdated
Conversely, backdating assumes that both parties have agreed to begin or continue work before everyone has signed. This is an example of an implied contract. You can legally backdate a contract, but you need to make sure that there’s a legitimate reason for doing so. As there is a level of trust involved, you should ensure clarity and understanding by all parties.
As you can imagine, backdating can be hazardous and can be deemed unacceptable in many circumstances. Certain government contracts, for example, won’t allow backdating. In the event that a contract was backdated, any costs incurred before the contract was signed are unallowable.
Effective upon signing
With these types of agreements, you cannot execute a contract until all parties have signed. They can be risky because the effective date can shift depending on when all signatures are completed. This creates a domino effect by which any other dates dependent on the effective date will be shifted as well.
How is an effective date different from an execution date?
An effective date can be the same as the execution date, but it doesn’t have to be. Let’s compare and contrast.
Effective date
The effective date is the date at which all parties become legally bound to the terms of the agreement. It is not enforceable until that point, even if you sign before then. Effective dates are the start of the contract, but there can also be specific clauses within a contract with their own unique effective dates.
Execution date
The execution date is the date that all parties sign the contract, regardless of the effective date. If all parties don’t sign on the same day, the execution date is the day that the last party signs.
Why is it important to have effective dates in a contract?
Contract effective dates are the beginning of everything–at least legally speaking. They’re the line between no legal obligation and an enforceable legal obligation. They’re arguably one the most crucial aspects of the agreement intelligence lifecycle. Here are some reasons why:
They start the clock
Effective dates start the clock on every contract, or specific clauses within a contract. Without effective dates, you wouldn’t know when an agreement begins or when it ends.
They illustrate clear expectations
Effective dates are mutually agreed upon and are as essential as any other term or clause. You can’t breach an effective date any more than you can breach a non-disclosure agreement.
They protect both parties
Since they’re mutually agreed upon, they protect both parties equally in the event of a dispute. Effective dates are enforceable in court, and thus everyone is held accountable to those dates.
They provide valuable data
Through the use of contract tracking, you can quickly pull important information from your contracts. Effective dates in particular are useful tools in determining the efficacy of your contracts for all the reasons listed above. You can also see if any extensions needed to be signed throughout the lifecycle, meaning the timeframe of your contracts may not be long enough.
How can you track your contracts efficiently?
If you have contract management software, you’ll be able to unlock data and manage these dates more efficiently. Let’s take a look at some reasons why contract management software is a worthwhile investment in agreement intelligence.
Better allocate your time
You can’t be everywhere at once, and you only get so many hours in a day. By allowing software to do some of the work for you, you’ll spend less time searching for dates and more time increasing productivity.
Lower your error rates
Contract management can be tedious at times. Key details like effective dates can easily get missed in the shuffle of legal documents. By turning this aspect over to contract management software, you mitigate much of the risk that comes with being human — we make mistakes.
Grow revenue
When you’re less tied down by paperwork, you’ll have more time to build valuable relationships and close important deals. This can help you accelerate your growth and increase profits.
