Business Law Note 3.

Executed vs. Executory Contracts: Definitions & Differences

Please note these are the widly used contracts in business.

Executed V. Executory Contracts

You've been eying that 60-inch television in the appliance store window for weeks. Finally,
it's payday, and you sprint to the store and make the purchase. It's simple. Fork over the
cash and walk away with your very own television. See, the promisor, the appliance store,
promised to give you a spanking new TV for $500, and you, the promisee, promised to pay
for it. Done!
This is an example of an executed contract; a contract in which the promises are made and
completed immediately, like in the purchase of a product or service. On the other hand,
an executory contractmeans that the promises of the contract are not fully performed
immediately. An example of an executory contract would be an apartment lease.
When you enter into a lease agreement, you are promising to pay the rent for a period of
time. Until the term expires, the contract promises have not been fulfilled. Put another way,
a landlord generally rents an apartment under a lease contract. This agreement identifies
the name of the person leasing or renting, the name of the landlord, the terms and
conditions, the length of lease and the monthly rental fee for occupying the space.
A lease cannot be fulfilled in one single transaction, like buying a television. Since a lease
is usually written for a period of one year, it is an executory contract, because it is fulfilled
over time. In general, an executed contract is a done deal. On the other hand, an executory
contract isn't fulfilled right away, leaving time for things to go wrong.
McDonald V. Hewett
While the actual date of this case is unavailable, the issue between McDonald and Hewett
demonstrates how confusing an executory contract can be. Listen as the case of the twice-
sold timber unfolds.
Nelson sold timber to McDonald, to be paid for after the timber was cut, measured and
delivered. Nelson secured the timber and contracted Hewett to move it to New York, have it
measured and delivered to a waiting McDonald. Hewett arrived in New York, but decided
not to measure the timber. Instead, he sold it to a third party.
McDonald, yelling breach of contract, sued Hewett for selling his timber to a stranger.
McDonald contended that he, in fact and law, had an executed contract with Nelson for the
wood. Based on the contract, he believed title for the timber passed to him. Further, Hewett
had no right to broker a deal with someone else.
Remember, the important difference between an executed and an executory contract is in
the time frame for the fulfillment of the promise. Hewett argued that the contract was
executory, because the terms of the contract required several promises be fulfilled at a later
date, like measuring and delivering the timber.
The court ruled that McDonald did not have a remedy against Hewett at all. It was decided
that Nelson held the title for the lumber, until the timber was delivered to McDonald under
the terms and conditions and when payment was collected. That didn't happen. On a side
note, McDonald did have a remedy against Nelson, because none of the contract terms were
performed.
As we witnessed, there is a fine line between whether the promises made in an executory
contract exist. A good way to decide is to ask yourself: 'Was the promise fulfilled in a
transaction, or are there things that need to be done to fulfill the promises?'
In the case of McDonald v. Hewett, for McDonald to take ownership of the timber, a few
things had to happen: Wood needed to be measured and delivered. Since this could not be
done at the time McDonald struck the deal with Nelson, the contract was executory. The
promise relied on those things to happen before the contract promises could be considered
fulfilled.
On the other hand, had McDonald procured the timber directly from Nelson and loaded it
into his truck at Nelson's site and made payment in full, the promise of the contract would
have been executed, because all promises would have been fulfilled at one time. Nothing
more needed to occur to complete the contract.
Lesson Summary
In a nutshell, an executed contract exists when promises are made and completed
immediately, like in the purchase of a television. Conversely, in an executory contract, the
promises of the contract are not fully performed immediately. An example of an executory
contract could be an apartment lease or even a cell phone contract. The main difference
between an executed contract and an executory contract is thus the time frame for which the
promises must be fulfilled.
In McDonald v. Hewett, we learned that even though there was a contract for the sale of
timber, it was not executed until the timber was delivered and paid for. It remained an
executory contract until such time that the timber was measured, delivered and paid for by
McDonald. Think of it this way. If all promises have been fulfilled, it is an executed
contract. If not, it is executory, because more action needs to be taken to fulfill the
promises.