In general, it is probably a bad idea for your San Diego business to backdate any sort of consumer contract particularly in a regulated industry. “Backdating” is putting a date on a written contract that is prior to the date that the contract is actually signed. Sometimes, if there is a date line next to the signature line, the signatories are instructed to put in the “back-dated” date rather than the actual date. In part one of this series, we discussed pitfalls and problems with respect to backdating a contract among sophisticated parties. With sophisticated business parties and where the contract has been negotiated, backdating can be “okay,” but there are pitfalls to avoid. With consumer contracts, however, the best business practice is to avoid backdating. The main reason is the risk of expensive litigation. Consumer advocates are constantly searching for reasons to bring class actions. Advice and counsel of an experienced San Diego corporate attorney should be sought.

A good example of how backdating consumer contracts is a litigation risk comes from In re Raceway Ford, 2 Cal.5th 161 (Cal. Supreme Court 2016). In Raceway Ford, a Ford car dealership had backdated over 1,000 automobile purchase contracts. Under federal and state law, a car buyer who obtains financing has an opportunity to rescind the contract and the financing. In other words, the buyer can change his or her mind. In Raceway Ford, all of the backdated contracts involved buyers who had rescinded their original contracts and, then changed their mind again and signed a second purchase and financing contract. The dealership backdated the second contract to the date of the original contract.

This was a bad idea. Eventually, a class action lawsuit was brought which certified over 1,100 buyers whose contracts had been backdated. The claims focused on a few days of extra finance and interest charges, incorrect calculation of the expected annual interest charges, and excess fees charged on diesel vehicles. In the end, the California Supreme Court ruled in favor of the dealership. But the case illustrates two dangers of backdating with consumer contracts. First, the backdating created a legitimate basis for filing a class action lawsuit. Litigation is expensive. Second, the backdating implicated various statutory notice requirements in a heavily regulated industry. If the statutes require information to be provided based on a “start date,” then backdating is a bad idea.

In addition, backdating consumer contracts creates a potential legal problem of whether the contract was properly formed. If a contract is not properly formed, California courts will deem the contract unenforceable. The legal issues are two:

• The knowing consent on the part of the consumer
• Possible fraud in the making of the contract

The first issue can be put simply. The consumer says that they entered into the contract on Saturday — when they were at the store. But the contract is dated the previous Wednesday. There is now doubt about whether the contract was formed. The second issue arises in two ways: The business backdates the contract or the business asks the customer to backdate the contract. Either method can be used during litigation to argue that there was fraud in the making of the contract. If fraud is determined, that is one basis for holding the contract to be unenforceable.

Contact San Diego Corporate Law

For more information, call Michael Leonard, Esq., of San Diego Corporate Law. Mr. Leonard focuses his practice on business law, transactional, and corporate matters, and he proudly provides legal services to business owners in San Diego and the surrounding communities. Call Mr. Leonard at (858) 483-9200 or contact him via email. Like us on Facebook.

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