We are independent & ad-supported. We may earn a commission for purchases made through our links.
Advertiser Disclosure
Our website is an independent, advertising-supported platform. We provide our content free of charge to our readers, and to keep it that way, we rely on revenue generated through advertisements and affiliate partnerships. This means that when you click on certain links on our site and make a purchase, we may earn a commission. Learn more.
How We Make Money
We sustain our operations through affiliate commissions and advertising. If you click on an affiliate link and make a purchase, we may receive a commission from the merchant at no additional cost to you. We also display advertisements on our website, which help generate revenue to support our work and keep our content free for readers. Our editorial team operates independently of our advertising and affiliate partnerships to ensure that our content remains unbiased and focused on providing you with the best information and recommendations based on thorough research and honest evaluations. To remain transparent, we’ve provided a list of our current affiliate partners here.
Law

Our Promise to you

Founded in 2002, our company has been a trusted resource for readers seeking informative and engaging content. Our dedication to quality remains unwavering—and will never change. We follow a strict editorial policy, ensuring that our content is authored by highly qualified professionals and edited by subject matter experts. This guarantees that everything we publish is objective, accurate, and trustworthy.

Over the years, we've refined our approach to cover a wide range of topics, providing readers with reliable and practical advice to enhance their knowledge and skills. That's why millions of readers turn to us each year. Join us in celebrating the joy of learning, guided by standards you can trust.

What is an Executory Contract?

Mary McMahon
By
Updated: May 17, 2024
Views: 13,795
Share

An executory contract is a legal contract characterized by obligations that have not yet been performed on the part of one or more parties to the contract. A simple example of an executory contract is a lease agreement. The landlord is required to provide a premises to lease and the person leasing the premises must continue providing payments of rent. If either party stops performing, it is a breach of contract and the other party may have grounds for a suit. In cases where both have unperformed obligations, breach by one party can allow the other party to breach without penalty.

Many contracts are executory in nature. Executory contracts take on special meaning during bankruptcy proceedings and it is in this context that people most frequently discuss these types of contracts. It is important for people declaring bankruptcy, as well as creditors, to understand how executory contracts are involved in bankruptcy proceedings. For debtors who are not certain about their obligations, a bankruptcy lawyer or accountant can provide assistance.

When a person files for bankruptcy, the creditors are required to continue performing their part of executory contracts until the bankruptcy proceedings are complete. During the bankruptcy proceedings, the debtor decides whether to assume or reject the contract. If the debtor assumes the contract, the contract and its attached obligations will persist through the bankruptcy and the debtor must satisfy or “cure” the contract. For the creditor, this is good news, as it means that the debt will be made good, and it's also good news for the debtor, who will continue to be entitled to any services the creditor is performing.

By rejecting an executory contract during bankruptcy proceedings, the debtor indicates that he or she intends to breach the contract. The breach allows the creditor to sue for damages, but these damages are a form of unsecured debt, which means that the creditor must wait in line behind other creditors. Once an executory contract is rejected, it also frees the creditor from any obligations it has under the contract, which can be an advantage if the creditor had resources tied up in the contract which it can now apply elsewhere.

As with any legal contract, an executory contract should be examined closely to look for hidden surprises that might cause problems in the future. Both parties should make sure that they understand their rights and obligations under the term of the contract. If a claim does need to be made against such a contract, thorough knowledge of the terms and conditions can be very important to pursuing the matter successfully.

Share
WiseGeek is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
Mary McMahon
By Mary McMahon

Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a WiseGeek researcher and writer. Mary has a liberal arts degree from Goddard College and spends her free time reading, cooking, and exploring the great outdoors.

Editors' Picks

Discussion Comments
Mary McMahon
Mary McMahon

Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a...

Learn more
Share
https://www.wisegeek.net/what-is-an-executory-contract.htm
Copy this link
WiseGeek, in your inbox

Our latest articles, guides, and more, delivered daily.

WiseGeek, in your inbox

Our latest articles, guides, and more, delivered daily.