An executory contract is a
contract 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
Breach of contract is a legal cause of action and a type of civil wrong, in which a binding agreement or bargained-for exchange is not honored by one or more of the parties to the contract by non-performance or interference with the other party ...
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
In the United States, bankruptcy is largely governed by federal law, commonly referred to as the "Bankruptcy Code" ("Code"). The United States Constitution (Article 1, Section 8, Clause 4) authorizes Congress to enact "uniform Laws on the subj ...
, "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 or
debtor in possession
A debtor in possession or DIP in United States bankruptcy law is a person or corporation who has filed a bankruptcy petition, but remains in possession of property upon which a creditor has a lien or similar security interest. A debtor becomes the ...
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
Breach of contract is a legal cause of action and a type of civil wrong, in which a binding agreement or bargained-for exchange is not honored by one or more of the parties to the contract by non-performance or interference with the other party ...
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 An installment loan is a type of agreement or contract involving a loan that is repaid over time with a set number of scheduled payments; normally at least two payments are made towards the loan. The term of loan may be as little as a few months and ...
loans, period loan payments,
mortgages, 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 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
In the United States, bankruptcy is largely governed by federal law, commonly referred to as the "Bankruptcy Code" ("Code"). The United States Constitution (Article 1, Section 8, Clause 4) authorizes Congress to enact "uniform Laws on the sub ...
* 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
References
Contract law
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