With contracts playing a crucial role in many business and personal affairs, it’s essential to understand how they can vary and why.
This article will explain the differences between two key contract types: executory and executed contracts.
Both set out legally binding obligations between two or more parties and, as such, are legally enforceable.
What is an executory contract?
An executory contract is one in which all or some of the obligations remain to be performed (or ‘executed’).
In other words, it involves a set of contractual obligations that must be carried out over time. Performance of the contract remains in progress until these obligations are fulfilled.
An executory contract should set out the obligations of each party and a schedule for fulfilling them.
Executory contract example
Executory contracts underpin many aspects of our lives.
For example, construction work on a home extension is typically covered by an executory contract between the property owner and the builder.
This contract outlines the obligations of the owner (e.g., a schedule of payments) and the builder (e.g., a delivery schedule and specification).
The contract remains executory until the obligations have been ‘fully executed’.
The provision of services often involves an executory contract too.
For example, business consulting, construction projects, and garden or home maintenance are all scenarios where an ongoing set of obligations are entered into.
Ergo, all are typically subject to an executory contract.
Executory contracts in real estate
Real estate is one context where many of us will have experienced executory contracts.
If you’ve ever rented, you’ve almost certainly entered into one.
In a rental scenario, the real estate contract will specify the space the landlord is providing and the rate the tenant must pay for it.
It should also outline the timings for these obligations.
Only once the rental period has ended and all obligations have been fulfilled can the contract be described as ‘fully executed’.
At this point, you may be wondering, what is an ‘executed’ contract?
What is an executed contract?
A fully executed contract is usually considered one that’s been signed and has had all the obligations laid out in it fulfilled.
In many cases, the obligations in an executed contract are performed immediately.
It can get a bit confusing at times, though.
That’s because, sometimes, people refer to ‘executed’ contracts as any contract that’s been finalized and signed by the parties involved; in other words, where the document has come into effect even though the obligations contained within it have not yet been fulfilled.
So, be aware of this possible mix-up in discussions about an ‘executed’ contract.
In this article, however, we’ll take ‘executed’ to mean signed and fully completed with all obligations satisfied.
Executed contract example
There are many examples of executed contracts where the contract completes immediately after signing.
Think of a marriage contract, for example, which completes as soon as a couple signs their marriage license.
The sale of goods is another classic scenario of an executed contract.
Consider a consumer purchasing a product from a shop: they make a single, one-off payment in return for the product.
This is an ‘executed’ contract because both parties have fulfilled their contractual obligations during the transaction (i.e., to provide and pay for the product).
Real estate purchases usually also fall into the fully executed contract category.
Both parties sign the contract, and this triggers the buyer to pay the purchase price and the seller to transfer the title deeds.
The contract is fully executed by way of this transaction.
If, however, the purchase of goods involves more than one payment across a period of time (e.g., some sort of payment plan), the purchase is likely to involve an executory contract instead.
Executed vs. executory contract — what are the differences?
The fundamental differences between executed and executory contracts detailed above can have important legal implications.
The following table raises some of these.
|Executed contract||Executory contract|
|Definition||The contract has been fully performed by all parties involved and all obligations have been fulfilled.||One or more parties have yet to perform their obligations or the contract is still in progress.|
|Performance||All duties and obligations have been performed as outlined in the contract.||There are outstanding duties or obligations to be fulfilled as per the contract.|
|Legal status||Legally binding and enforceable.||Legally binding but tends to be more complex (e.g., subject to further contingencies and performance).|
|Rights and remedies||All rights and remedies have been fulfilled.||There may still be outstanding rights and remedies for the parties if obligations are not met.|
|Risk||Lower risk as the contract has been completed.||The risk is greater as the contract has not yet been fully performed.|
|Legal implications||As the contract has been completed, legal action for breach or noncompliance is far less likely.||Legal action for non-performance or breach is possible. Executory contracts may also be treated differently in bankruptcy cases.|
Of course, this only gives a very simplistic overview. Remember, for example, that contract law varies between jurisdictions.
Moreover, different interpretations and implications may apply to contracts in particular circumstances and sectors.
Best practices for smoother contract execution
Contracts play an important role in many companies.
It’s crucial to build systems and procedures to ensure they’re a source of strength and security rather than a risk factor for your business.
Here are some tips for a smoother approach to contract execution.
Set up templates for your contracts
Create standardized contract templates for consistent and efficient contract creation.
Contract management software can help in creating and managing these.
Streamline the review and negotiation stage
Utilize digital tools for real-time collaboration, version control, and document tracking during contract review and negotiation.
Again, contract management software can support you in this.
Adopt electronic signatures
Use secure electronic signatures to obtain signatures efficiently and eliminate the need for physical signing.
Document handling tools like PandaDoc often include electronic signature capabilities.
Document handling tools can help you automate laborious (and often delay-causing) tasks such as contract generation, approval workflows, and sending notifications and reminders.
Develop an effective storage approach
Establish a centralized and secure storage system for contracts, enabling easy accessibility and retrieval.
Document management software can facilitate organized and searchable contract storage.
Be clear about roles and responsibilities
Clearly define obligations, deliverables, and timelines to minimize confusion and disputes during contract execution.
Effective communication and well-drafted contract language support clarity in roles and responsibilities.
Contract and document software allows you to assign different people to different roles to help the process move smoothly.
Take a look at this guide on how to create a contract from PandaDoc for more great tips.
Execute contracts with ease
A well-organized approach to contract management and execution enables your company to use these confidently and effectively.
In this way, your business contracts can become a source of strength.
See how PandaDoc contract management software can support you in creating, negotiating, and managing your contracts.