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.
Origin
1400-1450 Late Middle English executorie
There are many types of executory contracts, some more complex than others:
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.
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.
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.
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.
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.
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.
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.