Executory Contracts Explained: Definition, Examples, and Why They Matter in Business & Bankruptcy

Ever signed a contract where both you and the other party still have important things left to do long after the ink has dried? Think about a long-term software subscription, an office lease, or a complex construction project. These aren’t one-and-done deals; they involve ongoing commitments. This type of agreement is known as an executory contract, and understanding its nature is critical for managing business relationships, mitigating risks, and navigating complex situations like bankruptcy.

But what exactly makes a contract “executory”? How does it differ from a standard, completed contract? And why does this distinction carry so much weight, especially under financial distress? This guide unpacks the concept of executory contracts, providing clear definitions, real-world examples, and insights into their significant legal implications.

What is an Executory Contract?

At its core, an executory contract is an agreement where both parties still have significant obligations left to perform. If either party were to stop fulfilling their end of the bargain, it would constitute a material breach – a serious breach of the contract. Think of it as a contract that is still “in progress.”

The legal definition often hinges on this concept of remaining material obligations. As defined by resources like Cornell Law School’s Legal Information Institute, the key characteristic is that the obligations of both the debtor and the other party are so far unperformed that the failure of either to complete performance would constitute a material breach excusing the performance of the other.

Key characteristics typically include:

• Ongoing Performance: Unlike a contract for a simple, immediate purchase, executory contracts involve future actions over a period.
• Mutual Obligations: Both sides have crucial tasks yet to complete. It’s not executory if only one party has significant duties remaining.
• Potential for Future Events: The ongoing nature means future events (like changes in market conditions or even bankruptcy) can significantly impact on contract management.

The Purpose and Importance of Executory Contracts

Executory contracts aren’t just a legal construct—they’re a practical foundation for sustained commercial relationships. Their importance lies in how they support ongoing operations and strategic continuity across the business.

• Enable Long-Term Value Exchange: Many business models—subscriptions, leasing, franchising—depend on contracts that spread obligations and value delivery over time.
• Promote Operational Continuity: By formalizing multi-step engagements, executory contracts ensure predictability in services, supply chains, and performance commitments.
• Allow Flexibility and Scalability: These contracts accommodate evolving business needs, whether through adjustable volumes, milestone-based changes, or auto-renewal
• Distribute Risk Over Time: Instead of concentrating obligations at the point of signing or delivery, executory contracts allow businesses to manage cash flow, resource allocation, and legal exposure across the term.
• Support Governance and Compliance: With obligations continuing beyond contract signature, these agreements help enforce accountability and alignment throughout the contract lifecycle—particularly valuable in regulated industries.
• Critical in Insolvency Scenarios: In bankruptcy, executory contracts represent either a potential asset (if retained) or a liability (if rejected). Their structure and enforceability can significantly impact financial outcomes.

Ultimately, executory contracts matter because they govern real-world, time-bound obligations—not just static terms on paper. Understanding their role allows businesses to manage them intentionally and strategically.

Executed vs. Executory Contracts: Spotting the Crucial Difference

It’s easy to confuse “executory” with “executed,” especially since “executed” can sometimes mean simply “signed.” However, in contract law, the distinction is vital and relates to the performance status of the obligations.

An executed contract is one where all parties have fully performed their required duties. The promises made have been fulfilled, and the contract is essentially complete or finished.

Understanding the difference is key to managing expectations and legal standing. Here’s a breakdown of the core differences:

Feature	Executory Contract	Executed Contract
Contract Obligations	Significant duties remain for both parties.	All primary duties have been completed by all parties.
Contract Performance	Ongoing or future performance is required.	Performance is finished.
Timing	Performance unfolds over time.	Performance occurred at a specific point or is finalized.
Contractual Risk	Higher ongoing risk of non-performance or breach.	Lower risk related to primary performance.
Legal Status	Active, ongoing agreement.	Completed agreement (though warranties might survive).
Common Example	A commercial lease (ongoing rent vs. space use).	Buying a coffee (immediate payment vs. product).

Consider this simple examples:

Executed: You pay $50,000 for a car and immediately receive the title and keys. Both parties have fulfilled their main obligations (payment and delivery). The contract is executed.

Executory: You sign a 3-year lease for the same car. You have an ongoing obligation to make monthly payments, and the leasing company has an ongoing obligation to provide you with the use of the vehicle. This is an executory contract because significant duties remain on both sides.

Different Types of Executory Contracts

Executory contracts can take several structural forms depending on how the obligations are defined, distributed, and executed over time. Rather than focusing on specific industries or examples, the following categorization highlights contract design types based on their operational mechanics:

• Fixed-Term Contracts: Agreements that span a defined period, with obligations recurring or staged throughout (e.g., 12-month service contracts with monthly deliverables). These typically include end dates and renewal provisions.
• Milestone-Based Contracts: Performance and payments are tied to specific stages or deliverables. Construction and software development contracts often follow this model.
• Rolling or Auto-Renewable Contracts: Contracts that continue indefinitely or renew automatically unless one party opts out. These require ongoing obligation monitoring and proactive renewal or termination management.
• Conditional Contracts: Execution of obligations depends on future events or triggers, such as achieving a particular performance metric or obtaining regulatory approval.
• Output or Requirements Contracts: One party agrees to buy all output from or supply all needs to the other. Obligations persist but fluctuate based on volume, making tracking more complex.
• Framework or Master Agreements: These set the terms for future, yet-to-be-specified transactions. Individual statements of work or order forms activate portions of the agreement over time, creating ongoing obligations.

These types focus on how executory obligations unfold, not what the subject matter is. Recognizing this helps businesses classify contracts beyond surface-level examples and manage them according to their structure and risk profile.

Where Do You Encounter Executory Contracts? Common Examples

Executory contracts are prevalent across various business and personal contexts. Recognizing them helps in understanding the ongoing commitments involved. Here are some common examples, highlighting the reciprocal obligations:

• Real Estate Leases (Residential/Commercial): The tenant has an ongoing obligation to pay rent and maintain the property according to terms, while the landlord has an ongoing obligation to provide possession and maintain essential services (like structural integrity, utilities access).
• Service Agreements: This includes contracts for consulting, maintenance, or Software-as-a-Service (SaaS) subscriptions. The client is obligated to make periodic payments, and the service provider is obligated to deliver the agreed-upon services or software access continuously.
• Construction Contracts: Often involve phased performance. The owner makes milestone payments as work progresses, while the contractor has the ongoing duty to complete construction according to specifications and timelines.
• Intellectual Property (IP) Licenses: The licensee (user of the IP) typically has an ongoing obligation to pay royalties or licensing fees and adhere to usage restrictions, while the licensor (owner of the IP) has an ongoing obligation to permit the use of the IP and potentially defend its validity.
• Franchise Agreements: The franchisee owes ongoing fees, must adhere to brand standards, and operate according to the franchisor’s system. The franchisor provides ongoing brand usage rights, support, and system updates.
• Employment Contracts (Ongoing): While some jurisdictions treat these differently, many consider employment agreements executory as the employee provides ongoing labor and the employer provides ongoing compensation and benefits.

Are Executory Contracts Legally Binding? Understanding Enforceability

Generally, yes, executory contracts are legally binding and enforceable just like any other valid contract, provided they meet the standard elements of contract (offer, acceptance, consideration, legality, capacity). The key difference lies in the ongoing nature of the potential for breach.

A breach of an executory contract occurs when one party fails to perform a material obligation that is still due. For example, if a tenant stops paying rent midway through a lease, or a SaaS provider shuts down service without cause before the subscription ends.

Remedies for breach can include:

• Damages: Monetary compensation for the losses incurred due to the breach.
• Specific Performance: A court order requiring the breaching party to perform their contractual obligations (less common, usually for unique situations).
• Termination: The non-breaching party may have the right to end the contract.

It’s crucial to remember that contract law can vary significantly by jurisdiction, so the specific rules and outcomes can differ.

What Happens to Executory Contracts During Bankruptcy?

This is where the distinction becomes critically important. Bankruptcy law, particularly under the U.S. Bankruptcy Code, grants special treatment to executory contracts. When a person or company files for bankruptcy, they (or a court-appointed trustee) gain a significant power regarding their ongoing executory contracts and unexpired leases, outlined primarily in Section 365 of the Bankruptcy Code.

Why the special treatment? It allows the debtor (the entity filing for bankruptcy) a chance to reorganize effectively or liquidate assets efficiently by deciding which contracts are beneficial to keep and which are burdensome to shed.

The debtor typically has two primary options, subject to court approval:

• Assume the Contract: The debtor chooses to keep the contract and continue with its obligations. To do this, they generally must:
• Cure Defaults: Fix any existing breaches, often by paying any amounts past due.
• Provide Adequate Assurance: Convince the court and the other party that they will be able to perform their future obligations under the contract as detailed by legal analyses.
• Reject the Contract: The debtor chooses to terminate the contract. Rejection is treated legally as a breach of the contract occurring immediately before the bankruptcy filing date. This has significant consequences:

The non-debtor party’s claim for damages resulting from the termination becomes a pre-petition unsecured claim. This often means they will receive only a fraction of what they are owed, paid alongside other general creditors.

Both parties are relieved of future performance obligations.

For the non-debtor party, the bankruptcy filing creates uncertainty. They may need to file motions with the court to compel the debtor to decide whether to assume or reject, or to seek assurance of future performance if the contract is assumed.

A common legal standard used, particularly in bankruptcy, to determine if a contract is executory is the “Countryman test”. This test defines an executory contract as one where “the obligations 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” a standard explored by Temple Law.

How Can You Effectively Manage Executory Contracts?

Given their ongoing nature and potential complexity, especially in scenarios like bankruptcy, effectively managing executory contracts is vital for business health. Poor management can lead to missed obligations, disputes, unexpected costs, and increased risk.

Here are some key strategies:

• Ensure Clear Drafting: Start with a well-drafted contract that clearly defines all parties’ ongoing obligations, performance standards, timelines, and remedies for breach. Ambiguity is a common source of disputes.
• Monitor Performance: Actively track both your own and the counterparty’s performance against the contract terms. Are milestones being met? Are payments timely? Are service levels adequate?
• Implement Robust Tracking Systems: Manually tracking dates, obligations, and risks across potentially hundreds or thousands of executory contracts is prone to error. Managing numerous complex executory contracts, tracking obligations, and assessing risks can overwhelm manual processes.
• Include Risk Mitigation Clauses: Consider clauses addressing potential issues like non-performance, changes in circumstances (force majeure), dispute resolution, and termination clauses.
• Centralize Contract Storage: Ensure contracts are easily accessible for review and monitoring. A disorganized system makes effective management nearly impossible.

How CLM Solutions Like Sirion Simplify Executory Contract Management

Managing executory contracts requires more than just a digital filing cabinet. Given the ongoing nature of obligations and potential legal and financial risks, businesses need systems that go beyond storage—offering visibility, automation, and proactive governance. That’s where modern CLM platforms, especially AI-native ones like Sirion, come in.

Here’s how Sirion helps organizations streamline the end-to-end management of executory contracts:

• Automated Obligation Tracking: Sirion extracts obligations from contracts and monitors them continuously—helping ensure no milestones, renewals, or deliverables fall through the cracks.
• Performance Monitoring and Alerts: Users can track contract performance against KPIs and receive alerts on delays, missed SLAs, or compliance issues—essential for service contracts and project-based engagements.
• Centralized Visibility and Collaboration: With all contracts and associated data in one place, legal, procurement, and business teams can work collaboratively to ensure terms are honored and updated as needed.
• Proactive Risk Management: The CLM platform flags risks related to non-performance, expiration, or unfavorable clauses—enabling early interventions before issues escalate.
• Integrated Audit Trails and Reporting: Sirion provides a detailed history of contract activities, modifications, and fulfillment—supporting audits, legal reviews, and internal governance.
• Bankruptcy Scenario Preparedness: In case of counterparty insolvency, Sirion helps quickly identify all active executory contracts and assess exposure, obligations, and termination rights—equipping businesses for faster legal response.

By embedding intelligence and automation into every step, Sirion transforms executory contract management from a reactive chore into a strategic capability—reducing risk, improving compliance, and enhancing the value derived from ongoing business relationships.

Gain Control Over Your Ongoing Agreements

Executory contracts are the lifeblood of many ongoing business relationships. Understanding that they represent living agreements with continuing mutual obligations is the first step towards effective contract management. Recognizing the key differences from completed (executed) contracts, being aware of common examples, and understanding the profound implications in situations like bankruptcy are crucial for any business or individual navigating complex agreements.

Proactive management, clear drafting, and leveraging the right tools can transform these ongoing commitments from potential liabilities into valuable, well-controlled assets. When dealing with complex executory contracts or facing situations like counterparty bankruptcy, always consider seeking legal counsel for tailored advice.

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