The financial and economic world revolves around contracts. A binding contract does not invariably need to be put into writing to prove valid. Verbal contracts between two people can have the same enforceable effect as the most carefully worded written document. But for the most part, when people refer to contracts, they mean the written or printed kind upon which the proponents can affix legal, if barely legible, signatures.
Generally speaking, contracts fall into two distinctly different categories: executed contracts and executory contracts. Typically, the one (executory) evolves into the other (executed), either in the short term, through more or less immediate compliance with the requirements of the contract, or over time as the parties to the contract progressively comply with those obligations.
Contracts between two people or between a person and a business usually start with an agreement or verbal understanding. One party to the agreement wishes to sell a product or service and the other party wishes to purchase it. In most cases, the resulting contract, until the two parties meet all the conditions within it, remains an executory contract. When all of the requirements of an executory contract have taken place, the contract becomes an executed contract.
A contract may become an executed contract directly after the parties to it have signed it if the conditions to be met only await the formality of a completed contract. This often occurs in negotiations between two parties when the seller delivers the product or service and the buyer instantly pays for it. Such simultaneous transactions theoretically do not require a contract; but an executed contract does serve as a record both of the delivery and of the purchase of the product or service.
In certain cases, a contract may have both executed and executory features. This can happen where a builder contracts to construct a house in stages, each stage of assembly dependent either upon pre-payment by the soon-to-be homeowner or payment for each completed stage before work on the following stage can commence. Such a contract requires carefully phrased terms that bind the two parties to specific, timely obligations. Each stage of construction, when completed and paid for, forms an executed portion of the contract. Until all conditions have been met – the house finished according to specifications outlined in the contract and the final payment for the work duly rendered – the unmet portions of the contract remain executory.
Executory contracts also play an important role in today’s sometimes troubled economy where financial misfortunes all too often lead to bankruptcy proceedings, by individuals or by companies. An executory contract permits the indebted person or company to create a workable schedule for paying off overwhelming liabilities while at the same time continuing to work or to do business. In such a situation a contract may remain executory over a very long period of time.