Backdating–When is it Appropriate?
Our son is the fourth generation to play a violin made in the early 20th century by Prague luthier Janek (John) Juzek. Although based upon its age our son’s instrument likely came from Juzek’s own shop, in his later years, Juzek was an entrepreneur, as well as a luthier.
Juzek noticed that there was a high demand for string instruments in North America. Juzek engaged area luthiers to make instruments for him and exported the instruments to North America to be sold under his label. In addition to providing an income stream for European luthiers, Juzek’s foresight and initiative resulted in creation of a multi-generational company. This company is now being managed in the United States by John’s great-grandsons.
While Juzek’s entrepreneurism is worth of an article of its own, when researching Juzek’s history, I found it interesting to read that he backdated the labels in his instruments. They included his own name but a completion date about five years earlier than the actual date the instrument was completed.
It is unknown why he might have done this, but I have my suspicions. Violins “mature” with age and playing, so a violin that is a few years old might be more desirable than a brand new one, which hasn’t yet been “broken in.”
Another, less likely, reason for Juzek’s backdating is to increase its antique value. In addition to having value as musical instruments, many violins have value as antiques. Although musicians purchase an instrument based upon how it responds and sounds, an older instrument might have greater value to a collector than a brand new one, simply because it is old.
Backdating violin labels was not uncommon, and it was not illegal. However, backdating legal documents is another matter. Backdating legal documents is frequently permissible. However, under other circumstances, it can be fraudulent or illegal.
This article discusses when legal documents might be backdated and how legally to do so when it is appropriate.
Beginning with the Latin–Nunc Pro Tunc
Despite common belief, backdating documents is not necessarily illegal. In fact, it has been permitted for so long that there is a Latin phrase, nunc pro tunc, describing backdated documents.
Nunc pro tunc, which translates to “now for then,” is most commonly seen in Court orders. However, the doctrine can apply to other circumstances in which a law or document applies retroactively.
Why Backdate a Document?
Sometimes a document must be backdated to make it accurate. For instance, suppose that a vendor begins supplying its product under a proposed contract, only to later discover that the customer never signed the contract. In this instance, inserting the date on which the parties began performing under the contract is more accurate than inserting the actual date of signature.
Other times, the parties may enter into a transaction orally “on a handshake,” with the intention of entering into a written agreement later. Once many years ago, one of my clients needed to borrow $1 million money urgently. Much to my surprise, a benevolent lender wired the funds to the client with no loan paperwork in place but with the expectation of receiving a promissory note later.
The $1 million promissory note I prepared for that client to deliver to its benefactor, backdated to the actual date the funds were wired, was legal. It was created to document or memorialize a previous oral agreement to repay the funds.
How Is Backdating Accomplished?
Perhaps the most common form of backdating is “as of” dates. Frequently, the beginning of a contract will state it is entered into “as of” a certain date. Use of the phrase “as of” should be a red flag that the date is not necessarily the date on which the contract was signed. Rather, it is a date on which the parties have agreed that their contract will be effective. The “as of” date may be before or after the actual date of signature.
Some contracts make this clearer than others. Many contracts will define the “as of” date as the “Effective Date” (not to be confused with the execution date). Others will even will have an “as of” clause that makes the possibility of backdating even clear by stating:
“This contract is dated as of August 31, 2018 (the “Effective Date”), even though the parties may have executed it before or after said date.”
An “as of” date is not the only way that parties can disclose that they are backdating a document. In a contract or resolution, the recitals[1] can tell the story, including the backdating. Consider the following sample:
WHEREAS, on or about June 30, 2018, the parties entered into a non-binding Proposal describing the terms on which Buyer was to purchase certain supplies from Seller; and
WHEREAS, on or about July 15, 2018, Seller began selling supplies to Buyer under an oral agreement based upon the terms described in the Proposal; and
WHEREAS the parties now desire to enter into this Contract, to be dated as of July 15, 2018, memorializing the parties’ oral agreement and incorporating additional terms set forth in the Proposal;
This language makes it clear to anyone reading the written contract that it has been backdated. It also explains why the contract is being backdated.
Although it is not technical backdating, ratification is frequently used in the corporate context to provide nunc pro tunc approval of an action. When a corporate board ratifies a contract or other action previously approved by the officers or even by someone otherwise not authorized to take action, the effect is similar to backdating. The corporation is agreeing to be bound by an action prior to the date of it actually being approved.
When is it Illegal to Backdate a Document?
Yet, backdating documents can be illegal or even criminal. If backdating document misleads a third party or gives a false impression about when an action was taken, it may be fraudulent. The parties’ intentions are also important when evaluating whether backdating is legal.
If, in the vendor example above, suppose that the salesperson presented a contract on December 15 with products being supplied starting on February 1. Suppose that the customer signs the contract on January 15, but the salesperson asks the customer to backdate it to December 30 so that the salesperson would have higher sales for the calendar year and receive a larger bonus. That backdating would be intended to mislead and would not be appropriate.
In another example, imagine a landlord who does not want to lease an apartment to a minority applicant. The landlord finds a non-minority tenant and backdates that tenant’s signature in order to claim the non-minority tenant leased the apartment before the minority applicant’s inquiry. That backdating may be illegal because it was intended to mislead the minority applicant and to facilitate the landlord’s unlawful discrimination.
A document which is backdated in order to obtain a more favorable legal result also is likely to be illegal. For instance, if a document is signed in January but is backdated to December in order to obtain a particular tax benefit, it likely is illegal and may be criminal.
A document which is backdated in order to avoid a legal penalty also is likely to be illegal. Suppose that an health-care facility is required to verify that all employees have received TB tests and flu shots. The facility places an employee in service without verifying those medical items and later learns the employee did not have a flu shot. The employer should correct this oversight. But, it would be illegal for the employer to administer the flu shot and backdate the date of the vaccine to the employee’s first day of work.
Using the $1 million loan example from above, under different facts, the backdated note might have been fraudulent. Suppose the client had intentionally planned not to sign the promissory note because it had told its joint venture partner that the funds were an equity contribution that did not have to be repaid. In that instance, although it would be proper to document the loan via a promissory note, the underlying transaction could have been part of a plan to mislead a third party.
How to Assure Your Backdating is Legal
There are no “bright line” tests for legal backdating. But, following are some questions parties can consider when evaluating whether their backdating is legal:
1. Why are the parties’ backdating the document?
2. Could a third party by harmed by the backdating?
3. Is either party receiving a special benefit or avoiding a detriment due to the backdating?
4. Was the document backdated to comply with (or avoiding having to comply with) any law or regulation?
5. Is the backdating disclosed in the document?
If the answer is not clear after answering those questions, there is what I call “gastrointestinal law”–does it feel right? If the parties do not feel they are doing the right thing or there is doubt about whether it is right, then they should add disclosure of the backdating or reconsider that strategy altogether.
As with violin labels, backdating legal documents can be lawful and even advisable. It is up the parties to a document to assure that their intentions are honest and that the backdating does not harm third parties or run afoul of legal requirements. Where there is doubt, strong disclosure of the backdating the document itself can be helpful in address any lingering concerns.
© 2018 by Elizabeth A. Whitman
DISCLAIMER: The content of this blog is for informational purposes only and does not provide legal advice to any person. No one should take any action regarding the information contained in this blog without first seeking the advice of an attorney. Neither reading this blog nor communication with Whitman Legal Solutions, LLC or Elizabeth A. Whitman creates an attorney-client relationship. No attorney-client relationship will exist with Whitman Legal Solutions, LLC or any attorney affiliated with it unless and until a written contract is signed by all parties and any conditions in such contract are fully satisfied.
[1] For more detailed information about the importance of contract recitals, read my article entitled Recitals.