Key Takeaways

  • An executory promise is a legally binding agreement where obligations remain unperformed by one or both parties.
  • Common examples include leases, car loans, equipment rentals, and development contracts.
  • Executory consideration occurs when both parties exchange promises for future performance.
  • Executed contracts are completed immediately, while executory contracts extend into the future.
  • Executory promises are significant in bankruptcy law, where they can be assumed, rejected, or assigned.
  • Clear drafting, legal review, and awareness of remedies for breach are essential before signing.

An executory promise, also known as an executory contract, takes place when two parties agree to a certain set of terms and conditions that are to be fulfilled at some point in the future. Within the contract are stipulations outlining the duties that must be performed by the parties in order for the promise to be considered fully executed. Many times, an executory promise is made between a debtor and the party from the whom the entity is borrowing money from.

Understanding Various Types of Executory Promises

An executory promise can come in many forms. Below is a list of examples of executory promises, but it is important to note that they come in many other types. In fact, many businesses use executory promises within their operations:

  • Rental leases
  • Car loans
  • Equipment leases
  • Car leases
  • Development contracts

An executory promise in the form of rental lease takes place when a tenant agrees to pay a landlord a set amount of money each month according to certain dates. In return for the rental money, the landlord provides the renter a space to live.

When an executory promise is in the form of a car loan, this means a lender lends money to a person to purchase a car. In agreement to provide the money, the borrower agrees to pay back the borrowed funds according to certain dates.

An equipment lease is an example of an executory promise when a borrower pays money for equipment. The equipment is not under the ownership of the renter. Instead, it stays under the ownership of the equipment provider in exchange for money. When the lease is over, the equipment is returned. In some cases, the equipment lender will allow the renter to purchase the equipment outright with the rental payments going toward the purchase price.

A car lease is much like a car loan except that the debtor never actually owns the car. Instead, the person leasing the vehicle maintains ownership of the car. Like an equipment lease, the entity leasing the car may allow the renter to purchase the car once the lease is over.

A development contract is put into place when it is agreed by both parties that certain monies will be paid out when certain construction milestones are completed. When the structural part of the building, for example, has been completed, a set amount of money will be paid to the developer and then no more money will be paid until the next milestone has been completed.

Characteristics of an Executory Promise

Executory promises share certain defining traits:

  • Ongoing obligations: At least one party still has duties to perform in the future, such as delivering goods or making payments.
  • Mutual dependency: Performance by one side is often contingent on the other side’s fulfillment of their promise.
  • Time element: These promises span a set duration, making them distinct from contracts completed instantly.
  • Legal enforceability: Even if performance is not yet due, an executory promise carries full legal weight once validly formed.

These features make executory promises especially important in business transactions where performance is phased over time, such as installment contracts, long-term leases, and construction agreements.

What Is an Executory Consideration?

An executory consideration takes place when an entity makes a promise to another entity and that entity does the same. Take for example a person promises to lend money to a person to purchase a car at a later date as long as the receiving party promises to pay back the borrowed funds. Although the funds have not exchanged hands yet, the promises between both parties can still be made legally official with an executory consideration.

Legal Significance of Executory Promises

Executory promises play a major role in contract law because they create enforceable obligations before performance occurs. Courts recognize these promises as binding so long as the agreement includes valid consideration.

For example, a supplier may promise to deliver equipment in six months, while the buyer promises to pay upon delivery. Even though nothing has yet occurred, the agreement is legally enforceable. If either party fails to act, the other may seek damages, rescission, or specific performance.

In bankruptcy proceedings, executory contracts receive special treatment. The trustee or debtor-in-possession can:

  • Assume the contract, continuing performance.
  • Reject the contract, treating the rejection as a breach.
  • Assign the contract, transferring it to another party with court approval.

This makes executory promises central to corporate restructuring and debt management.

Understanding the Difference Between an Executed Contract and an Executory Contract?

When a person takes part in an executed contract, this means that the terms of the contract must be fulfilled immediately after all parties have signed in agreement to the terms. This is unlike an executory promise because the terms are to be fulfilled at some time in the future. Still yet, once all parties sign an executed contract or executory contract, both are considered to be executed agreements. No matter the type of contract signed, once signed, all parties are legally obligated to fill their promises made to each other.

Real-World Examples in Business and Law

Executory promises appear in many industries and legal contexts:

  • Real estate leases: A tenant promises monthly rent, while the landlord promises continued access to the property.
  • Technology development contracts: Companies agree to deliver software updates or milestones, with payments tied to completion.
  • Franchise agreements: Ongoing duties such as royalty payments, training, and brand support are spread out over years.
  • Bankruptcy cases: A company in Chapter 11 may renegotiate executory promises to reduce liabilities while restructuring operations.

These examples illustrate that executory promises are not limited to consumer transactions—they also shape complex corporate, real estate, and intellectual property deals.

Tips for Signing an Executory Promise

Before a person signs an executory promise, it is very important that all parts of the contract be thoroughly read through. Because many contracts tend to include legal jargon that can be extremely confusing and difficult to understand, it is typically in the best interest of all parties involved to have the agreement explained by a qualified attorney.

In the event that either party does not fulfill their promises to one another that are agreed upon in an executory promise, this means the contract has been breached and there is generally some type of consequence that will occur.

Take for example a person borrows money from a lender for a car but fails to make an agreed-upon payment. As a result, the lender has the right to take back possession of the car. The exact consequences of breaching an executory promise will be outlined in the contract itself.

Remedies and Consequences of Breach

If one party fails to honor their executory promise, the contract is considered breached. Potential remedies include:

  • Damages: Monetary compensation for losses caused by the breach.
  • Specific performance: A court order requiring the defaulting party to carry out their promise.
  • Contract termination: Ending the agreement and possibly seeking restitution.
  • Rejection in bankruptcy: Treating the unperformed contract as a pre-bankruptcy debt claim.

Because outcomes vary depending on jurisdiction and contract terms, careful drafting and legal review are essential before entering into an executory promise.

Frequently Asked Questions

  1. What makes a promise executory?
    A promise is executory if one or both parties still have significant duties to perform in the future.
  2. Is an executory promise enforceable in court?
    Yes, once supported by valid consideration, an executory promise is fully enforceable even before performance occurs.
  3. How does bankruptcy affect executory promises?
    Bankruptcy law allows a debtor to assume, reject, or assign executory contracts, which can impact creditors and ongoing business relationships.
  4. What is the difference between executory and executed contracts?
    An executed contract is completed at the time of signing, while an executory contract requires future performance.
  5. What remedies are available if an executory promise is breached?
    Remedies may include damages, specific performance, termination, or adjustments in bankruptcy proceedings.

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