Here’s the general rule on start dates: The term of a contract begins on the contract’s effective date. Unless you state otherwise in the contract, the effective date is ordinarily the execution date—the date the contract is signed. When you’ve got different parties signing on different dates the contract becomes effective on the date signed by the last party to sign.
Here are a few tips to make sure you get the start date you want:
- You can make the effective date conditional. An effective date specified in the contract is usually a fixed date, but it may also be a variable date based on the satisfaction of a condition precedent. For example, the effective date may be the date on which one party files a relevant document with the Secretary of State, the date a specific agency issues a license, or the date one party receives a necessary approval. But keep in mind that it’s risky to make the start date subject to the “approval” of one of the parties. In Lopez v Charles Schwab & Co. (2004) 118 CA4th 1224, 1229, a brokerage agreement provided that it was effective only after approval of the account application; the application was denied and the court held that an arbitration provision in the agreement was unenforceable because no contract had been formed.
- Make sure your effective date covers all claims you want to cover. Sloppy drafting as to the effective date of contract provisions can lead to undesirable results. For example, an arbitration clause in an employment application was held inapplicable to pre-employment gender discrimination claims. The court interpreted the arbitration clause to extend only to disputes arising out of employment, indicating that the clause could have been enforceable if it had been worded more broadly to also cover disputes arising out of the application itself. Balandran v Labor Ready, Inc. (2004) 124 CA4th 1522.
- If different effective dates apply, make that clear. Whenever different aspects of the agreement are to have different effective dates, you should identify those dates to avoid ambiguity. For example, if an option agreement includes a 5-year covenant not to compete, the effective date for commencement of the 5-year period is the same as the effective date for the option agreement, not the later date the option was exercised, unless the agreement specifically provides for the latter construction. See CC §§1626, 1657.
When it comes to the termination date for a contract, the most important thing to remember is to actually include one. The ending date of the contract can be fixed, contingent, or fixed with provision for earlier termination on the occurrence of specified conditions. The length of the term, or whether a term should be stated at all, depends on the nature of the contract and the goals of the parties.
But it’s generally better to provide when the contract will terminate to avoid uncertainty. If a contract doesn’t specify a term, a court will generally imply one based on the nature of the contract and the surrounding circumstances or on what’s reasonable—and you definitely don’t want to deal with differing interpretations of what’s “reasonable.”
For much more on the duration of contracts, including the terms of specific types of agreements, turn to CEB’s Drafting Business Contracts: Principles, Techniques and Forms, chap 6.
Other CEBblog™ posts on contract drafting skills:
- Contract Drafting 101
- 5 Writing Tips for Every Contract You Draft
- 4 Steps to Drafting a Contract to Your Client’s Advantage
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