Bilateral Executory Contract: Everything You Need to Know
A bilateral executory contract is a legally binding agreement that requires the contracting parties to carry out the performance at a future date.4 min read
A bilateral executory contract is a legally binding agreement that requires the contracting parties to carry out the performance at a future date, usually for a certain period of time. For example, joint venture and partnership agreements.
What Are Bilateral Executory Contracts?
In addition to offer, acceptance, and consideration, a contract also imposes a duty of performance on the parties. If a party is to carry out its performance under a contract at a future date, such a contract is called an executory contract. If a contract requires both the parties to perform in future, it's called a bilateral executory contract.
For example, leasing agreements, franchise agreements, loan agreements, and LLC operating agreements are all bilateral executory contracts because, in all of these cases, the parties agree to complete a task at a future date despite their inability to anticipate any contingencies.
While drafting bilateral executory agreements, lawyers usually focus on the circumstances that might go wrong. You would expect your lawyer to protect you from unforeseen circumstances. However, that's not enough when it comes to bilateral executory contracts. These are special contracts since the relationship between the contracting parties lasts longer. Negotiating a bilateral executory agreement requires a different approach than merely sticking to an adversarial behavior.
How to Draft a Bilateral Executory Contract
Proper drafting of a bilateral executory contract often has an impact on the length and success of the venture associated with the agreement.
Before you begin preparing the agreement, you should understand the fundamental components of the business deal involved. Contracting parties often tend to miss some basic issues. You may want to make a note of all such missing points and have them answered before drafting the document.
Make sure you cover the basic elements, like identifying the party you are doing business with, the product or service you are selling or buying, the price at which the deal is finalized, the length of the agreement, and the place of performance.
For instance, while drafting a lease agreement, you should cover the following aspects:
- Name of the tenant
- Location of the space being leased
- Term of lease
- The purpose for which the space can be used by the tenant
- Who would bear the cost of the build out?
- The amount of rent and its mode of payment
Try to be as specific as possible. It's often tempting to defer a likely confrontation with your contracting business partner on a new issue raised by your lawyer, especially due to the risk of losing a potential business relationship. However, it's important to get over the skittish side and address the key issues.
For example, let's say you are hiring a salesman to sell your products in a certain territory. The salesman will receive a commission on all the sales taking place in that territory, including those generated by your advertising efforts. Now, if a deal is closed by a salesman of an adjoining territory, who should get the commission? Should it be split between both of them? Although you may be reluctant in raising this point with your salesman while drafting the agreement, you may soon find yourself facing this situation.
Similarly, payment distributions may be the primary issue while writing a joint venture agreement. One of the venturers may assume that the payments will be made on the basis of pretax profits, while another may think that the distributions will cover 100 percent of cash flow, and yet another may expect his loan to be repaid on priority call. All this difference in understanding may lead to disagreement and anguish among the parties. Hence, it's important to clearly state the circumstances under which the venturer would receive distributions.
It's not just enough to put down a formula on paper. In order to prevent any future litigation, you should ensure mutual understanding between the contracting parties. Basically, you must be able to put down the entire business plan in black and white. For example, while drafting a management contract, it's not enough to simply state that the manager's fee would include the incentives. You need to state the formula for computing the incentives, and this will require you to translate the business objectives that the manager is expected to achieve into measurable goals.
Likewise, while writing a management contract for an apartment building, you should cover issues like:
- What aspects of the job affect the financial performance of the apartment in the long run?
- What's most important to the apartment owner? Occupancy, annual profits, or minimal operating expenses?
- The guidelines for achieving the stated objectives.
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