What Are Executory Contracts?
Executory contracts are contracts between two parties in which the terms are fulfilled at a later date.3 min read
Executory contracts are contracts between two parties in which the terms are fulfilled at a later date. Until the contract is fully executed, both sides have duties to perform.
About Executory Contracts
In most cases, executory contracts are between one party and a debtor or borrower. Some agreements are more complex than others. There are various types of executory contracts, such as the following:
- Rental lease: The landlord provides a living space, and the tenant is required to pay for it for a set period of time.
- Equipment lease: The renter provides equipment, and the borrower pays rent on the borrowed equipment.
- Development contract: A contractor performs duties for a building's owner, or a building's owner pays a contractor when the contractor reaches certain building milestones.
- Car lease: A consumer makes lease payments to an auto dealership, and the dealership provides the vehicle in exchange.
- Intellectual property licenses: The licensor refrains from suing as long as the licensee uses IP only within the scope of the license.
Executory vs. Executed Contract: Examples
- Under an executed contract, terms must immediately be fulfilled after all involved parties have signed it.
- Under an executory contract, terms will be fulfilled at some future date.
Once the parties sign, however, both of these contracts are considered executed agreements., meaning that both parties are obligated to follow the contract's terms.
Tom has been looking at a television he wants to buy. After some consideration, he decides to lease it instead of buying it right then. He goes to the store and signs a lease agreement, stating he'll pay $100 a month until he's paid the purchase price in full. The contract isn't fulfilled until he makes the final payment.
Again, Tom has been looking at a television to buy. He decides to purchase it outright, so he goes to the store and pays cash for the TV. The store receives the full purchase price, and Tom takes the TV home. This is considered an executed contract because the television was paid in full and all contract terms were met.
Most debts come out of written contracts, and examples include the following:
- Someone signs a credit card application and agrees to pay off the debt according to the outlined terms.
- A person goes to a new doctor and signs a form, agreeing to pay for all provided services.
- People buy electronics, furniture, or appliances after agreeing in writing to pay for the items they purchased.
- You buy a car and sign the lender's loan document or purchase a home and sign mortgage documents.
In each one of these situations, a creditor provides goods, services, or money that the consumer agrees to pay for. The creditor has performed its obligation, so at this point, it's up to the consumer to perform his or her side of the bargain, which is paying the debt.
Breaching an Executory Contract
If either party fails to fulfill its contractual duties as specified in the agreement, it may breach the contract. For instance, if Sarah enters into an executory agreement in order to lease a car and fails to make the required payments, she's breached the contract. The dealership may then repossess the car and sue her in civil court for any uncollected payments.
Other types of executory contracts include a franchise agreement or long-term supply contract.
The following, however, don't usually count as executory contracts:
- An expired agreement
- A completed sale
- A promissory note
- A single purchase order
In some cases, exclusive and perpetual licenses are treated more like completed assignments for rights or territory instead of executory contracts. However, when examining aspects of an agreement, any ongoing obligations of either party will be considered as to whether it's an executory contract or not.
Although the terms of an executory contract won't be fulfilled for some time, it's still a legally binding agreement. Therefore, it's important to fulfill your contractual obligations. These types of contracts are especially beneficial for big-ticket purchase items, such as cars and homes. Consumers can use the items while making payments instead of having to pay a huge sum all at once.
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