A fully executed document is a legal contract that has become effective as a result of the signatures of authorized representatives of the parties to the agreement. The contract could be between two or more individuals, an individual and an entity, or two entities.

Importance of a Contract

The important components of a contract that gives it standing in a court of law are the signatures attached to it and, in some cases, the witness of those signatures by another party. A contract begins with one person or entity offering goods or services to another and the acceptance of that offer.

There can be conditions attached to the offer. The contract can have terms and clauses that clarify the obligations of the person accepting the offer. However, it does not become legally binding until both parties sign off on the agreement.

Although a contract can be used in any setting, there are several forms of contracts that come to mind when people hear the word “contract.” One example would be a sales contract where the obligations of the parties to each other are completed once it is executed. Other types of contracts include loan documents and service agreements. These often specify a period of time over which the contract will be binding.

One issue that often confuses people is the difference between an “executed contract” and an “executory contract.” Say you walk into a car dealership, sign a contract for a car, pay cash, and leave with the car. This is an “executed contract.” Both the obligations of the seller and the buyer have been completed.

However, if you go to that same dealer, but rather than purchase a car outright you decide to enter a lease agreement for three years, you have entered into an “executory contract.” This is so because your obligation to the dealer will not be complete until the lease has been paid and the car is returned to the dealer.

Both an “executed contract” and an “executory contract” are valid contracts. Even if work is to begin or money is to change hands at a later, on the day the two parties put their signatures to the document, they have formed a binding obligation to each other.

Another example of an “executory contract” that people are familiar with would be an agreement to purchase a home. You might sign an agreement to buy a house today, but won’t actually take possession of the property for 60 days to allow the current resident to pack up and move. You still own the home, but the effective date of the contract is two months away.

Elements of a Contract

While a contract needs to be signed by both parties to be considered “executed,” it requires more to be valid. Other important components of a contract are:

  • Mutual consent. Also called a “meeting of the minds,” this element to a contract stipulates that both parties agree as to the intent of the contract. It means both parties have read and understand the contract, although in practice many people sign contracts without reading what is called the “fine print.” Whether they have or not, their signature indicates that in fact they have.
  • Consideration. Consideration means the exchange of things of value between the parties. It can be cash for a car or the promise to clean a house in exchange for the use of a car. What matters is that both parties get something in the deal that is of worth to each other.
  • Intention to create a legal document. Both parties enter the agreement understanding that it will be enforceable in a court of law.
  • Certainty. There must be no ambiguity as to the intention of the two parties.
  • Free consent. Both parties are entering the agreement of their own free will.

Since a contract often involves the exchange of things that are of great value, as in the case of an agreement to buy a house for a large sum of money, consult an attorney experienced in contract law to draft or at the least review the contract before you put your signature on it.

Once you execute it, you’ve bought it. Your only recourse to get out of the agreement may be to go to court.

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