Is It Legal to Backdate a Contract?
Backdating a contract is the practice of marking an agreement or contract with a date that is prior to the actual date. Backdating contractual documents is a complex issue that needs to be navigated in a delicate manner in order to stay on the right side of the law.
In general, you should try and avoid using backdated documents. While backdating isn’t necessarily illegal, it takes a dedicated and outstanding business contract attorney with a solid understanding of the law to ensure nothing is out of place.
Misrepresentation vs. Memorialization in Backdated Contracts
Whether or not a backdated contract is appropriate depends on the purpose and effect of the backdating. Obviously, backdating for perpetrating fraud (misrepresentation) is illegal and unethical.
On the other hand, backdating a contract to memorialize a prior event or activity is a necessary and legitimate business practice. Past events and acts need to be documented for a variety of reasons. You need to ensure the contract is backdated for memorialization purposes.
Backdating is also impermissible when the contract describes an act that occurred at a date different from the date on the document. This may be done to secure benefits that the party is not entitled to. The United States Court of Appeals for the Seventh Circuit has recognized backdating that memorializes as a legitimate practice.
Staying Within Bounds of Memorialization and Contract Law
It’s vital to stay on the right side of the misrepresentation-memorialization line. Ethical sanctions, criminal prosecution, and lawsuits are a few consequences of indulging in improperly backdated contracts. It can be difficult to determine when an agreement is reached between parties.
An agreement is usually the end product of several oral and written negotiations taking place over weeks and months. In the end, the terms of the agreement are usually clear, but the date is not. The law is ambiguous regarding this, and it may be a precarious arrangement to backdate a document for the purpose of formalizing an agreement.
If the agreement is reached at a date earlier than the document’s date, the purpose is to memorialize it; but if the agreement was not reached until the date, backdating is a misrepresentation. Seemingly innocuous backdating can become illegal and inappropriate fabrication because of this ambiguity.
Can Contract Backdating Cross Tax Years?
It’s never a good idea to backdate a document to cross tax years unless it is absolutely necessary, clear, and with evidentiary support. Otherwise, you risk having the timing of your contract disputed by the IRS. This is especially true if the backdating provides an irregular and improper tax benefit to any party to the agreement.
Backdating is part of everyday business. It is imperative that all parties are made aware of the backdated document. And it’s necessary to use it for a proper and legitimate purpose.
Backdating used for violating the law or deceiving a third party is always an improper fabrication and hence illegal. It’s recommended that the backdating be disclosed by utilizing “as of” dating or identifying the date of execution.
It’s also prudent to have an experienced business law attorney review the issue and ensure that everything is done as per the law if you choose to backdate a contract.
Pitfalls of Backdating a Contract’s Effective Date
It’s common for the simplest contracts, such as a Confidentiality Agreement to have the document made effective before it was actually created. It doesn’t necessarily mean that the involved parties did not have legitimate intentions. There are some potential drawbacks to backdating a contract, however, such as:
- Liability issues may occur because of discrepancies between the signing date and the effective date
- Potential breach of contract upon signing
- Conspiracy issues
- Confidentiality requirements may become applicable even before the signing parties are made aware of them
- Assuming obligations that were not anticipated
- Issues pertaining to compliance
- Potential for a badge fraud
- Prohibition in certain circumstances and jurisdictions
It is important to never assume that backdating is harmless. You should have your attorney carefully assess every situation to ensure the backdating is done thoughtfully with all the necessary disclosures.
Misrepresenting facts while backdating is an offense. You should never backdate a document that adversely impacts the rights of a third party or violates the law. This is even if there was no intentional ill will.
You should also never backdate a contract to memorialize a prior act unless you are absolutely certain the act actually occurred on that specific date. You should be aware of the legal and factual repercussions of backdating your contract before you go ahead and sign it. It’s strongly recommended that you have a reputable attorney examine the contract and all its aspects before signing it.
Legal Help is Here from Knowledgeable Business Contract Attorneys in Alabama
Backdating a contract is sometimes unavoidable in business, and it should be done only after consulting with a trusted business contract lawyer. The seasoned business law attorneys at the Birmingham Law Group have the required skills and expertise to help you in all legal aspects of running your business.
Our attorneys are focused and driven to find solutions to your legal problems. To schedule your initial consultation, call us at (205) 964-9764 or fill out this online contact form.