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Executory contracts: What are they and why do they matter?
Learn what an executory contract is, when it’s needed, and how it differs from other contracts. Plus, explore how to create a digital contract template.
What is an executory contract?
An executory contract is an ongoing agreement between two parties who are responsible for completing certain obligations over a set period of time. They are written agreements that ensure each party is clear about their own and the other’s responsibilities.
Either party’s unperformed obligations can be considered a material breach — a failure of performance under the contract. This is cause for one party to claim breach of contract, which means the party that failed to perform will be forced to pay penalties to the other party to make up for the broken contract.
When to use executory contracts.
A contract is necessary any time two people rely on one another for specific products, services, or payments. Outlining the exact payment schedule and expectations provides security for both parties. Should any disputes arise, the people involved can reference the contract — the specifics will all be in writing.
Executed contracts versus executory contracts.
Both parties fulfill executed contracts immediately after signing, which makes them different from executory contracts. An example of an executed contract is the purchase of a vehicle in one lump payment. The contract is immediately complete after the sale is over.
On the other hand, both parties have to carry out their duties before they fulfill executory contracts. An example of an executory contract is an apartment lease. The lessee is expected to continue to pay and the lessor is expected to continue to care for the property until the end date in the contract.
Common types of executory contracts.
Building or real property leases.
Real property is the land someone owns and anything on that land, like a house. Anyone who wants to rent out a commercial or residential property should work with their lawyer to draw up a lease agreement. This type of agreement is an executory contract since both parties are agreeing to do their part to care for and pay for the property during the time laid out in the lease, offering protections to both the landlord and renter.
Car or equipment leases.
Be sure to manage the rental of smaller items, like cars and equipment, with executory contracts. This ensures that the renter pays on schedule and returns the item when the rental period is over. The contract should also include parameters for what types of upkeep the owner of the item is responsible for while the item is being rented.
Intellectual property licenses.
Development or construction contracts.
Executory contracts are also useful for large development or construction projects. Since these projects may take a long time to finish, it’s a good idea to lay out a scheduled plan in your contract. This way, the contractor can get paid gradually after completing certain milestones, and the owner of the property can track the progress of the project.
Franchise agreements use executory contracts since someone is paying to run a business under the brand name of a larger entity. The franchise owner agrees to follow certain guidelines in exchange for the branded property and support that the larger company provides over the course of the franchise ownership period. This prevents the possibility of business restructurings, branding alterations, or other changes that wouldn’t comply with the guidelines held by the larger entity.
Bankruptcy law and executory contracts.
When filing or working on a bankruptcy petition, it’s important to know which contracts are executory contracts. These contracts work differently from other property contracts during the liquidation phase of a bankruptcy case. While bankruptcy filing requires the return of some personal property, the debtor party may be able to keep some of their executory contracts, such as an unexpired lease.
Through bankruptcy court, the debtor party will go through a process of listing all the property included in their bankruptcy estate. For executory contracts that are prepetition (in effect before the bankruptcy petition) and not post-petition (signed after the petition), the debtor in possession of the contracts decides if they would like to surrender the contracts or keep them.
If the debtor would like to keep paying their contracts (like an apartment lease and car lease), they must prove adequate assurance of future substantial performance, or prove that they can continue to pay on time, to the non-debtor party.
Consult a law firm.
Bankruptcy code is complex, and so is setting up an executory contract for your business. Whether you’re helping someone reject executory contracts due to debt or create contracts to do business with a new person, legal advice is essential. Attorneys that specialize in contracts or bankruptcy can help you understand the federal or state laws that apply to you.
How to make an executory contract with Adobe Acrobat.
What to include in your executory contract.
Because there are so many different kinds of executory contracts, the content of such contracts can vary greatly.
At a minimum, your contract should include:
● The contact information of both parties
● A description of the products or services to be provided by each party
● A detailed explanation of the payment schedule
● The duration of the agreement
● The terms of the agreement
● The signatures of both parties
Create executory contract templates.
Once you figure out the executory contract structure that works for you or your business, use Acrobat Sign to create a digital contract template. Open and customize your template each time you need to create a new contract for a streamlined and easy process.
Save time and money by going digital.
Compared to traditional paperwork, it’s much faster to create, sign, send, and receive a completed digital contract. Arval UK, a bank that specializes in vehicle leasing, implemented Adobe e-signature solutions to get customers into new vehicles faster, and cut down their contract turnaround time from 12 days to about 7.5 hours. Try Adobe Acrobat for your contracting needs today and watch your administrative expenses shrink.