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Executed vs. Executory Contracts: Definitions & Differences

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  • 0:05 Executed v. Executory…
  • 1:41 McDonald v. Hewett
  • 4:21 Lesson Summary
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Instructor: Kat Kadian-Baumeyer

Kat has a Master of Science in Organizational Leadership and Management and teaches Business courses.

The main difference between an executed and executory contract is how quickly the contract's promise must be fulfilled. An executed contract must be satisfied immediately, while an executor contract has terms that will be fulfilled later.

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 contract means 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?'

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