Executory Contract

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Executory Contract

Brief Introduction About Executory Contract

Any agreement among two or more parties to act or refrain from acting now or afterward. The agreement is legally enforceable as well. In other words, by the executory contract, we mean a form of the legal contract that still has several aspects unfinished. The unfinished work is not limited to one party, as it means that both the involved parties have unfinished acts left. The unfinished work does not usually cover the paying of money, even if the payment is material.

The payment of money can be considered material if the non-payment could result in a breach of contract. In case one of the involved parties have performed their obligations entirely, and the other has not, then it still cannot be considered an executory contract.

An appropriate example of the contract would be a contract of sale of goods or leases. In such cases, if the seller has not yet delivered the goods and the buyers have not made the payment, then it would be considered an executory contract. These contracts are treated differently in case of insolvency, as the debtor gets the choice of either continuing the agreement or rejecting it.

Who takes the Executory Contract – People Involved

When it comes to the executory contract, there must be at least two parties partaking in the activities of the contract. One such party must be the offeror, and the other involved party is called the offeree. The number of involved members can increase; however, they must all provide their genuine consent to the contract.

Purpose of the Executory Contract – Why do you need it?

A legal contract has several forms, so dividing them into specific categories becomes essential. This not only clears up the confusion but also helps speed up the performance. The purpose of this contract is the same, as it explicitly states the obligations the involved parties still have. Even if one of them finishes all their obligations, the contract would still be labeled as executory since there is still a part of it yet to be executed. The contract is a key part of a legal contract, and that is why anyone seeking to form up one should be aware of its implications and needs.

Contents of the Executory Contract

Executory contracts have several key elements, and here are the most important ones:

  • A mutual agreement: Both the involved parties must have a mutual agreement to be part of the contract. The involved parties should gain from entering the contract, and they must do it in good faith.
  • Consideration: The involved parties must get something valuable in return for their services. Since consideration is an integral component of a legal contract, it must be fulfilled to get enforceability from the law.
  • Competency: The said parties must be competent in forming up a legal contract. They must not be insolvent, a minor, an enemy to the country, prisoner, or under the influence of alcohol or drugs. They must be fully competent in entering a contract, and not in any way or form be deemed incompetent by the law.
  • Offer: There must be an offer made by one party, and it can be made either verbally or in writing. It should mention the specific mode to reply to the offeror. The offer could be implicit or explicit. For example – A bus stopping at the bus stand and opening its gate is an implicit offer. Here no words are said, but it is implied that the interested passenger can board the bus. When it comes to an explicit offer, then the offer must be expressed more openly. A newspaper advertisement for the sale of a car is an explicit offer.
  • Acceptance: The said offer must be accepted. In case the offer mentioned a specific medium, then the acceptance should be made in that way. If there was no particular mean mentioned, then it can be vocal or written. If the offer was a newspaper advertisement asking for a written response, then the acceptance must be made that specific way. In case the acceptance is not expressed in writing, then it cannot be considered a valid acceptance. This directly means no contract as a vital component of a valid contract would be missing.
  • Enforceability: The contract must be enforceable by law. The dealings and the subject matter of the dealings must be legal. Any illegal transaction, activity, or remuneration can result in the revocation of the contract. It can even be punished by law if the accounted dealings are punishable under the penal code.
  • Genuine Consent: The parties must have valid consent to the contract. There should not be any outside force like coercion, misrepresentation, fraud, undue influence, and mistake affecting the consent.
  • Form: The contract must have the required components (seal, signature, written copy).

How to Draft the Executory Contract

The process of this contract starts with fulfilling the essentials of a valid contract. In case it is not enforceable by the law, then it would be considered null or void. Here is how the process goes:

  1. An interested party makes an offer.
  2. The offer is then accepted by the one to whom it was intended.
  3. It must be ensured that the parties have a mutual agreement in the proceedings.
  4. Consideration must be discussed, and both the parties should be given apt opportunities.
  5. A written form must be filled with every needed component (signature/seal, written, important terms and conditions, consideration amount, project duration, duties, authorities, restrictions, etc.)
  6. The parties must give their genuine consent before commencing their dealings.

Negotiation Strategy

Before forming up the contract, both parties should consider their requirements and evaluate their capabilities. It should be ensured that no single party should get the short end of the stick. Every involved party should receive appropriate opportunities to negotiate before finalizing the components of this contract.

Benefits and Drawbacks of Executory Contract

Executory contracts are an essential component of valid contracts, so if you wish to get an enforceable agreement, then it is advised to form one. There are numerous benefits of having this contract, and here are some of the most important ones:

  1. The written contract can be used as evidence in case of a dispute.
  2. A written agreement can help out in solving possible litigation and disputes.
  3. A contract facilitates clarity in agreements, rights, and duties of parties and business relationships as well.
  4. It helps in the prevention of agreement and communication misinterpretation.
  5. It helps in establishing better commercial relationships and improved management.
  6. It helps in smoothly finalizing the dealings.
  7. Preserving asset values, real property, and intellectual property.

What Happens in Case of Violation?

If any of the involved parties fail to perform their assigned obligations, then it can result in a breach of contract. If the requirements are not met, then the affected party can sue for damages and compensation as well. This contract is said to be violated when any involved party has explicitly or implicitly become incompetent in carrying out their duties. In such cases, the contract is breached, and the affected party gets special rights. Even if one party gets insolvent, the affected party gets the right to either reject or continue the dealings.

For example – Amar bought some goods from Rajesh, and they both agreed to the terms of the contract. Rajesh would deliver the goods and get paid in return. If Rajesh fails to deliver the goods or Amar fails to pay him, then the contract would be breached. Now, if Rajesh bore the loss, then he can sue Amar for damages. However, in case it was Amar who bore the losses, then he can sue Rajesh for compensation.

The law treats the case of insolvency differently when it comes to these contracts(1). For example – We are using the previous example and modifying it a bit. In case Rajesh went insolvent before he could fulfill his obligations, then Amar would have the right to either reject the agreement completely or continuity. The case remains the same in the case of Amar’s insolvency.

This contract refers to the state of the contract when both parties have some duties to fulfill. Even in cases where one party has completely fulfilled its obligations, the contract would still be considered executory. The parties should ensure to fulfill every requirement to form a legal executory contract to get the right of law enforceability. Any contract that fails to do so can potentially be declared null or void by the court.