Keith Mack
In contract law, consideration is a vital component of a legally binding agreement. It refers to the benefit a party receives from the deal negotiated in the contract. Executory consideration is a type of consideration that involves a promise to do something in the future, such as delivering goods or rendering services, in exchange for a like promise from the other party. This type of consideration is found in bilateral contracts, where both parties have ongoing obligations to fulfil their terms. It is important to note that executory contracts can become liabilities if future obligations turn out to be more burdensome than expected. Therefore, understanding the legal treatment of executory contracts is critical, especially for businesses operating in multiple jurisdictions.
| Characteristics | Values |
|---|---|
| Definition | A contract where both parties have ongoing obligations to perform under its terms |
| Key characteristic | Significant obligations are yet to be completed |
| Mutual responsibility | Both parties must perform their duties at a future date, such as delivering goods or rendering services |
| Legal treatment | Varies across jurisdictions, e.g., English law, ACCA, IFRS frameworks |
| Assignment | Obligations can be transferred to another party, often seen in business transactions like mergers |
| Examples | Ongoing service agreements with recurring payments, long-term leases, purchase agreements with future delivery and payment dates |
| Compared to executed consideration | Executory consideration is a promise to do something, while executed consideration is when that promise has been fulfilled |
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What You'll Learn
Executory consideration is a promise to do something
Executory consideration is a fundamental aspect of contract law, encompassing a promise to do something in the future. It is a critical component of a legally binding contract, ensuring that both parties involved agree to undertake specific actions or provide certain benefits to each other. This future-oriented nature of executory consideration sets it apart from executed consideration, which involves the immediate performance or delivery of a promised act.
Executory consideration is often found in bilateral contracts, where both parties exchange promises to fulfil particular obligations. For instance, in a construction project, a client's ongoing payments serve as executory consideration for the construction company's ongoing work. Similarly, in a lease agreement, the lessee's ongoing rent payments are the executory consideration for the lessor's continued provision of the leased property. These examples highlight how executory consideration involves commitments that unfold over time, with significant obligations yet to be completed.
The concept of executory consideration is not limited to monetary exchanges. It can also include promises to perform services, deliver goods, or refrain from certain actions. For instance, an employee might agree not to work for a competitor for a specified period after their employment ends. This agreement constitutes executory consideration, demonstrating that the value exchanged in these contracts need not be purely financial.
To be considered valid and legally enforceable, contracts typically require executory consideration from both parties. This means that each party must provide something of value to the other, whether it is a promise to act or refrain from acting in a particular manner. This reciprocity of consideration creates a balance of benefits and burdens, ensuring that neither party bears an unfair advantage or disadvantage.
It is important to note that executory consideration must be clearly distinguished from past consideration. While executory consideration involves future promises and obligations, past consideration refers to instances where a promise is given independently of an act that has already been performed. In most cases, past consideration is not considered binding, as it lacks the element of exchange that is fundamental to the concept of executory consideration.
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Executory contracts and liabilities
Executory contracts are legally binding agreements in which one or more parties have future obligations or performances to fulfill under the contract. These contracts are dynamic in nature, with significant obligations that are yet to be completed. They are formal agreements with clear, written obligations, and differ from implied contracts, which arise from actions and may lack detail. Executory contracts can be identified by their future performance, where one party promises to fulfill their end of the bargain in exchange for the other party's obligations.
An executory contract is distinct from an executed contract, which is fully performed by both parties with no outstanding obligations. Executory contracts are often associated with long-term arrangements, such as ongoing service agreements, long-term leases, and purchase agreements with deferred performance. These contracts ensure mutual benefits by outlining future actions and contingent outcomes. For example, in a construction agreement, the builder agrees to complete the project over time, while the client agrees to make ongoing or scheduled payments.
The key characteristic of an executory contract is that it involves obligations that are still pending or in progress. These contracts detail unperformed obligations and may set out a timescale for their performance. They exist in various contexts, from business dealings to personal agreements. For instance, a lease agreement is an executory contract as it entails ongoing obligations for both the tenant and the landlord. Similarly, when leasing equipment, the lessee expects it to be in good working condition and properly serviced, while the lessor wants their equipment to be well-maintained and reimbursed if damaged.
Executory contracts can become liabilities if future obligations turn out to be more burdensome than initially expected. It is important to conduct a risk assessment of these contracts to identify potential vulnerabilities and liabilities. This involves understanding the financial and operational impact, developing risk mitigation strategies, and periodically auditing the contracts to ensure adherence to obligations. Due diligence is particularly crucial before significant business decisions, such as mergers or acquisitions.
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Assignment of executory contracts
Executory contracts are those in which both parties still have significant remaining performance obligations. Examples include supply contracts, purchase agreements, employment contracts, and service contracts.
In the context of a business debtor's Chapter 11 bankruptcy, the debtor has three basic options to dispose of an executory contract: they may assume the contract, reject the contract, or assume and assign it to a third party.
If the debtor assumes the contract, they effectively continue the contractual relationship as if, with limited exceptions, the bankruptcy case had not occurred. To assume a contract, the debtor must cure defaults by paying any outstanding amounts and performing any remaining non-monetary obligations. Alternatively, they must provide "adequate assurance" that the defaults will be promptly cured and compensate or provide assurance of prompt compensation for pecuniary loss from the default.
If the debtor rejects a contract, it is deemed a breach of the contract occurring right before the debtor filed for bankruptcy. Rejection does not technically terminate a contract but effectively ends the contractual relationship, leaving the non-debtor counterparty with a claim for damages.
If the debtor assumes and assigns a contract, they may do so even if the non-debtor counterparty objects. However, the proposed assignee must provide adequate assurance of future performance of the debtor's obligations.
The assignment of assets can be a lucrative source of income for the debtor. However, the debtor must carefully consider the potential negative effects of terminating a contract, as it may breach the contract and lead to a claim by the other party.
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Executory contracts and bankruptcy law
Executory contracts and the law surrounding bankruptcy is a complex area of law, described as a "thicket... where...lurks a hopelessly convoluted and contradictory jurisprudence".
In the United States, the Bankruptcy Code, 11 U.S.C. § 365, provides that debtors can assume or reject any executory contract or unexpired lease, subject to court approval and certain limitations. This means that a debtor can choose to continue with a contract, or reject it, and thereby terminate their obligations under it.
The Code does not define "executory contract", but most courts have adopted the following definition: "a contract under which the obligation of both the bankrupt and the other party to the contract are so far unperformed that the failure of either to complete performance would constitute a material breach excusing the performance of the other".
When deciding whether to assume or reject an executory contract, courts will consider a number of factors, including: whether the contract financially burdens the estate, whether rejection will result in a large claim against the estate, whether the debtor has shown an economic benefit resulting from rejection, and whether rejection will cause more harm to the other party than to the debtor.
The assumption of a contract does not change the obligations of the parties, except as provided explicitly in the Code. For example, the debtor may be permitted to cure defaults, ignore ipso facto clauses, and resume their contractual obligations if the statutory tests are met.
The unenforceability of ipso facto or bankruptcy clauses means that courts must be sensitive to the rights of the non-debtor party to executory contracts. If a trustee assumes a contract, the court must ensure that their performance under the contract gives the other contracting party the full benefit of their bargain.
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Executory vs executed consideration
In contract law, consideration refers to something that has value in the eyes of the law. It is the price asked by the promisor in exchange for their promise. In other words, it is the benefit a party receives from the deal negotiated in the contract.
Consideration may be classified as either executory or executed. Executory consideration involves an exchange of promises between two parties. It is a promise to do something in return for a like promise. For instance, a promise to carry out some work in return for a promise of payment. Executory contracts are enforceable as long as they meet the basic requirements of contract law: offer, acceptance, consideration, and legal intent.
On the other hand, executed consideration occurs when one of the parties has performed their side of the contract, and the other party is left to carry out their obligations under the contract. In this case, the promise and the act are integral parts of the same transaction. For example, a buyer of goods who paid £10 in the past. It is not good consideration for the supply of new goods, so as to form a new contract.
Most contracts take the form of executory consideration, comprising initial promises such as the promise to buy and sell, even if the payment and exchange of property occur almost immediately. Executory contracts involve commitments that are not yet fully completed, with significant obligations yet to be completed in the future.
It is important to note that in some jurisdictions, consideration is not an essential element of a contract. However, under common law, for an agreement to be binding, the promisee must provide consideration (payment of some kind) for the promise they have received.
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Frequently asked questions
Executory consideration is a promise to do something in the future, such as delivering goods or rendering services, in return for a similar promise. It is an exchange of promises, for example, a promise to carry out work in exchange for a promise of payment. Executory consideration is found in bilateral contracts.
A construction company's work is the executory consideration for the client's ongoing payments. In this case, the construction company promises to perform work, and the client promises to make ongoing payments.
Executory consideration is a promise to do something, whereas executed consideration is when that promise has been fulfilled or performed. Executed consideration is found in unilateral contracts, where one party makes a promise in exchange for an act by the other party.
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