What is an executory contract? Meaning and examples
If you want to know what an executory contract is, you’re in the right place.
Here, we’ll tell you all about executory contracts, how they work, how breach of contract is dealt with, how executory contracts connect to the bankruptcy code, and more.
What exactly is an executory contract?
An executory contract is a contract made when two parties enter into an agreement that involves certain obligations to be executed over time.
At its most basic, the definition of an executory contract is that, unlike an executed contract, it involves obligations that are still pending.
An executory agreement details unperformed obligations and may set out the timescale for them to be performed.
How are executory contracts different from other contracts?
With an executed contract, the contract completes immediately after signing. For example, in a real estate transaction, property officially passes from one party to another after everyone signs on the dotted line.
Executory contracts aren’t like that. To stick with the real estate example for a moment, a lease agreement is an executory contract because the obligations are ongoing.
The terms of the contract detail the obligations of the tenant during their tenure and the obligations of the landlord on an ongoing basis.
Executory contracts are also given special treatment under the bankruptcy code. During a bankruptcy filing, a bankruptcy court will work hard to establish which of a petitioner’s contracts are executory contracts.
This is important because, while bankruptcy law may require the petitioner to return property, they may be able to keep some of their executory contracts.
For example, someone may have to return unpaid items but will not be required to surrender an unexpired lease.
So, a bankruptcy petitioner will present a list of all property included in their bankruptcy estate to the court.
Executory contracts that are pre-petition (i.e., which were signed before the bankruptcy petition was made) may not be surrendered. Instead, the petitioner themselves decides whether to surrender or keep them.
If the debtor-in-possession wants to keep their executory contracts, they must prove that they’re able to pay the non-debtor party as required.
So, someone filing for bankruptcy doesn’t have to give up their apartment lease, but they must prove to the court that they can keep up their end of the executory lease contract in order to keep it.
Executory contract examples
1. Equipment lease
When leasing equipment, there will be expectations on both sides. The lessee will expect the equipment to be in good working order, have up-to-date service, and be capable of performing the job required.
The lessor, on the other hand, will want their equipment to be cared for, to be reimbursed, and may have certain stipulations about what jobs the equipment can and cannot be used for.
An executory contract will detail all of these ongoing obligations, perhaps with set milestones like service and return dates. It will also detail the penalties if conditions are breached.
2. Car lease
Leasing a car is a great option for people who don’t feel they can justify the full purchase price of a brand-new vehicle. However, you do want to be sure that your new ride is roadworthy.
Someone leasing a new car has expectations, including that the car is roadworthy, serviced, and insured. Similarly, the lessor will want to be sure that their property won’t get damaged (and, if it does, that they’ll be fairly reimbursed).
An executory contract — in the form of a car lease agreement — will set out expectations and obligations for both parties, as well as terms in case any obligations are breached.
3. Rental lease
Real estate leases are a classic example of executory contracts.
The renter expects a home, and maintenance of the home. The landlord expects regular rent plus certain other stipulations (for example, no pets). They’ll also want to protect themselves in case the tenant defaults.
The contract both parties enter into is an executory contract because it’s ongoing and contains ongoing obligations on both sides.
4. Development contract
Building and development work can go on for a long time. As such, it’s well worth setting down ongoing expectations and requirements in an executory contract.
A development contract may set down things like work to be completed, working conditions, anticipated timescale, anticipated costs, payment terms, procurement terms, and more.
5. Intellectual property license
Intellectual property is a complicated area of business law. Many law firms have made their fortune dealing in the gray areas of IP law.
However, at its most basic, an intellectual property license involves the permissions the licensor is willing to give and the requirements of the licensee.
For example, the IP holder may give permission for the licensee to use their graphics on social media and in non-broadcast branding, but stipulate that they may not be used on televised broadcasts.
They may also detail the contexts in which they don’t want their IP used (for example, they may not want their IP associated with controversial political movements).
The licensee will, in return, state their usage needs and what they’re willing to pay. The result of these negotiations (which can get very detailed and complicated!) will be set down in an executory contract.
Examples of non-executory contracts
Non-executory contracts are contracts which complete upon signing.
A marriage contract, for example, completes when both members of the couple sign the marriage license. They cease to be single individuals and become legal entities.
The important thing about non-executory contracts is that they complete after signing. They’re a done deal. There are no ongoing obligations to worry about.
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