An executory contract is a
contract
A contract is a legally enforceable agreement between two or more parties that creates, defines, and governs mutual rights and obligations between them. A contract typically involves the transfer of goods, services, money, or a promise to tr ...
that has not yet been fully performed or fully executed. It is a contract in which both sides still have important performance remaining. However, an obligation to pay money, even if such obligation is material, does not usually make a contract executory. An obligation is material if a
breach of contract would result from the failure to satisfy the obligation.
A contract that has been fully performed by one party but not by the other party is not an executory contract. See, generally, Countryman, Vern, "Executory Contracts in Bankruptcy: Part I" (1973). Minnesota Law Review. 2459. https://scholarship.law.umn.edu/mlr/2459 and "Executory Contracts in Bankruptcy: Part II" (1974). Minnesota Law Review. 2460.https://scholarship.law.umn.edu/mlr/2460.
In US bankruptcy law
In
US bankruptcy law, "executory contract" assumes a special meaning, a contract in which continuing obligations exist ''on both sides'' of the contract at the time of the bankruptcy petition. It still requires both debtor and counterparty to make further performance. A
trustee
Trustee (or the holding of a trusteeship) is a legal term which, in its broadest sense, is a synonym for anyone in a position of trust and so can refer to any individual who holds property, authority, or a position of trust or responsibility to ...
or
debtor in possession may assume any prepetition executory contract or unexpired lease of the debtor, preserving obligations of both the debtor and the counterparts by the bankruptcy process. If he rejects it, there is a
breach of contract as of the date of the petition.
Affirmation and rejection are subject to court approval.
.
Installment contracts
Many installment (or instalment) contracts are commonly executory such as
installment credit loans, period loan payments,
mortgages
A mortgage loan or simply mortgage (), in civil law jurisdicions known also as a hypothec loan, is a loan used either by purchasers of real property to raise funds to buy real estate, or by existing property owners to raise funds for any ...
, paychecks, and contracts for the delivery of goods or the performance of services over a period of time in discrete elements.
Missed deliveries under an instalment have on occasion given rise to the legal question of whether they are indicative of a breach of contract, allowing the other party to terminate the contract, or whether the contract should continue. In the case of Maple Flock Co Ltd v Universal Furniture Products (Wembley) Ltd., decided in 1934,
Hewart LCJ used reasoning drawn from an earlier case, Freeth v Burr, and approved in Mersey Steel and Iron Company v. Naylor, Benzon and Co.: “That the true question is whether the acts and conduct of the party evince an
intention
Intentions are mental states in which the agent commits themselves to a course of action. Having the plan to visit the zoo tomorrow is an example of an intention. The action plan is the ''content'' of the intention while the commitment is the ''a ...
no longer to be bound by the contract". In applying this reasoning to a situation of a missed delivery, the court concluded that the main issues were (i) the ratio quantitively between the breach and the contract as a whole, and (ii) the degree of
probability
Probability is the branch of mathematics concerning numerical descriptions of how likely an event is to occur, or how likely it is that a proposition is true. The probability of an event is a number between 0 and 1, where, roughly speaking, ...
or improbability, that the omission might be repeated. In this case, the 16th delivery of flock out of 67 deliveries planned for the contract was defective: the ratio was low and the existence of a good quality control system confirmed that the defective provision was unlikely to be repeated.
Termination for breach
page 8, accessed 18 January 2021
See also
* Bankruptcy in the United States
* Chapter 11, Title 11, United States Code
Chapter 11 of the United States Bankruptcy Code (Title 11 of the United States Code) permits reorganization under the bankruptcy laws of the United States. Such reorganization, known as Chapter 11 bankruptcy, is available to every business, wheth ...
* Charging order
* Executory interest
* Future interest
* Rule against perpetuities
The rule against perpetuities is a legal rule in the American common law that prevents people from using legal instruments (usually a deed or a will) to exert control over the ownership of private property for a time long beyond the lives of p ...
References
Contract law
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