Executory Contract

An executory contract is a contract made by two parties in which the terms are set to be fulfilled at a later date. The contract stipulates that both sides still have duties to perform before it becomes fully executed. The contract is often in place between a debtor or borrower and another party.  To explore this concept, consider the following executory contract definition.

Noun

  1. A contract that stipulates the parties have duties to perform on a certain date as specified in the terms of the contract.

Origin

1400-1450   Late Middle English executorie

Executory Contracts

There are many types of executory contracts, some more complex than others:

  • Rental lease: Tenant is required to pay the landlord rent; landlord required to provide living space.
  • Equipment lease: Borrower must pay rent on the equipment borrowed; renter must provide equipment.
  • Development contract: Contractor receives payment from the owner when building milestones are complete; contractor performs duties for the building owner.
  • Car lease: Consumer makes lease payments to the dealership; the dealership provides the car in return.

Executory vs. Executed Contract

An executed contract is a contract that is fully legal immediately after all parties involved have signed, and the terms must be fulfilled immediately. With an executory contract, the terms are set to be fulfilled at a future date. Both contracts however, are considered executed agreements once the parties sign. This means that both parties are legally obliged to follow the terms as and when defined within the agreement.

Example of Executory Contract

John has been looking at a TV he wants to purchase. After some debate, he finally decides to go lease it instead. John enters the electronics store, signs a lease agreement that states the he will pay $100 per month until the purchase price has been paid in full. Until John makes the final payment, the contract has not been fulfilled.

Example of Executed Contract

John has been looking at a TV he wants to purchase. After deciding to go forward with the purchase, John walks into the electronics store and pays for the TV in cash. John walks out of the store with the TV and the store has the full payment. This contract is considered executed since the TV was paid for in full and all terms of the contract were met.

Basics of Executing a Contract

Before signing, or “executing” a contract, it is very important for all parties involved to read and understand all of the terms contained within. Some contracts contain legal jargon or information that may be difficult to understand. In this case, having an experienced attorney review the contract before signing helps protect the parties from entering into an agreement they are unable or unwilling to fulfill.

Breaching an Executory Contract

Either party to a contract can breach that contract by failing to fulfill their duties as outlined in the agreement. For example, if Jim enters into an executory contract to lease a car, then fails to make the required monthly payments, he has breached the contract. As a result, the dealership may repossess the car, and sue Jim in civil court for uncollected payments.

Executory Contracts in Bankruptcy

When an individual who is party to an executory contract files bankruptcy, he is not automatically relieved from his performance under the terms of the contract. His options include (1) confirming in writing that he intends to continue to fulfill the terms of the contract, or (2) rejecting the contract within the bankruptcy. As an example, if Jim wants to keep his leased car, he can reaffirm the lease, keep the car, and continue making the lease payments as agreed. If he wants to be relieved of the burden of lease payments, Jim can return the car to the dealership and put the contract into the bankruptcy.

Consulting a Bankruptcy Attorney

The rules governing executory and other contracts in bankruptcy are very complex. An experienced attorney can help explain the laws and ensure that the rights of the debtor are protected.

Related Legal Terms and Issues

  • Bankruptcy – a legal process that takes place when a person or business is unable to pay their outstanding debts.
  • Debtor – a person or entity that owes money or property to another person or entity
  • Civil Suit – a case in which a person who feels he been wronged brings legal action against another person or entity to collect damages from the person who wronged them.
  • Legal Jargon – unnecessarily complicated or technical language used in contracts or detailed documents.

One comment

  • Really helpful article, probably one of the best explanations of the executory and executed contract debate I’ve ever seen!

Leave a Reply

Your email address will not be published. Required fields are marked *