Executory Contracts

Introduction

In order to define executory contracts, these are the contracts between two different parties in which the terms are executed or complied with afterwards. In this contractual agreement, the performance is either completely or partly unperformed by both the parties involved. Executory contracts usually involve a debtor or a borrower along with another party. If either party ceases performing the contract, it will lead to a violation of the contract. Additionally, both parties have to perform their duties till the contract is completely executed. As opposed to this, an agreement with the fulfilment of the performance is called the executed contract.

Areas where Executory Contracts are used most

After learning about what is an executory contract, let us now learn more with several examples of executory contracts:

1. Rental agreement: The tenant must pay the lease while the landlord provides a space to accommodate.
2. The car lease: A customer pays instalments to the dealer who has provided a car in return.
3. Licences of intellectual property: The licensee is not sued by the licensor as long as he uses the IP involved in the licence’s scope.
4. Developmental contract: The owner of a building rewards the contractor when they reach a certain milestone, or for a building’s owner, duties are performed by a contractor.
5. Lease of equipment: When a person borrows equipment from someone, they pay a rental amount to utilise it.

Difference between executory and executed contracts

When we consider an executed contract, the terms in the contract are expected to be followed and fulfilled as soon as the parties have signed the contract. At the same time, executory contracts have no such deadline as to the terms being fulfilled. These terms have the option to be completed at any time in future. A similarity in both these contracts is that when both the parties sign the contract, it comes under an executed agreement wherein it is mandatory for both the parties to follow the terms mentioned in the contract. Both the parties involved are legally expected to go through the terms mentioned in the contract signed by them. To understand what is an executory contract and executed contract, study the examples given below.

Example of Executed Contract

Let us take an example of an individual who had gone to buy a car. Instead of leasing it, the individual decides to buy the car right away with a single payment. They go to the showroom, buy the car at full price, and bring it back to their home. This is an example of executed contracts since all the terms were fulfilled by both parties because the car was purchased at the full price in one go.

Example of Executory Contract

Now, let us consider that this same individual goes to a showroom to buy a car. Instead of buying the car right away, the person decides to lease it for some reason. When the person leases the car, he signs an agreement to pay a certain amount from the total price of the car every month. This is an example of an executory contract since the contract is not fulfilled until the complete payment has been made by the buyer. 

Executing a Contract: The Basics

Whenever a person is planning to sign a contract, they must go through all the details mentioned in the contract. There might be a chance that the detailed terms could make it difficult for you to understand the underlying meaning of the terms mentioned. So, it is better to completely understand the terms of a contract before coming to an agreement, even if you have to take an attorney’s help.

Executory Contract: Breaching

After signing a contract, either of the parties could be unable to fulfil their end of the deal. There could be a situation in which one of the parties breaches the contract by being unsuccessful at fulfilling their duties as part of the terms in the contract. In this case, the breaching party will have to face some sort of punishment or repercussions to settle their end of the deal.

Executory Contract: Bankruptcy

If any of the parties involved in a contract file bankruptcy, it does not directly lead to a relief from their duties mentioned in the contract. There are two ways to go ahead in this situation when one of the parties files for bankruptcy. The first one includes a reaffirmation stating the continuation of the terms of the contract as mentioned. The second option is to completely discard the contract and its terms with bankruptcy. For example, if an individual who has leased a car intends to keep it, they will have to continue paying the instalments of the car, but if they wish to discard the contract, they will have to return their car and move their contract to bankruptcy.

Bankruptcy Attorney: Consultation

With the laws, terms, and rules being complicated, it is better to consult a bankruptcy attorney before signing a contract. It can help both the parties to not fall into an intricate trap and make sure that their rights are being protected. By consulting a legal attorney, an individual can educate himself with the terms and legalities of the contract by making sure they are well aware and cognizant of the rules.

What to not mistake for executory contracts:

An individual might have confusion finding out what counts as an executory contract and what does not. In order to help you understand better, a few examples have been mentioned below:

1. Solitary purchases
2. Invalid/Expired agreements
3. A note payable

A fulfilled sale

Conclusion

This article explains in detail the executory contract meaning. We get to learn about the different types of executory contracts, the difference between executed contracts and executory contracts, along some more insights into this topic. We have various examples of these contracts above. This article helps differentiate an executory contract and explains in detail the different aspects related to the basics of an executory contract, breaching of an executory contract, and what options are available to an individual after bankruptcy.