What is an Executed Contract
An executed contract, by definition, is a contract which has been fully carried out. All parties to the contract have fulfilled their obligations under the terms and conditions therein as specified. In contrast, an executory contract is one that is still in effect or has yet to be completely executed per the terms set out in a contract. An example of an executed contract is a bill of sale . If you sell your car or a few dozen of your comics, you sign a bill of sale with the buyer. Once the buyer gives you the agreed upon amount, the transaction is complete. On the other hand, when you agree to the sale of your car but need a few weeks to obtain the title so you can legally sell the vehicle, you have an executory contract: you agreed to a sale, but have not yet executed the complete terms of the contract.
Why Executed Contracts Are Important in Business
Executed contracts are a critical part of doing business. They are the formalized evidence of the agreement, giving the parties necessary legal protection. Without such protection, confusion and disagreement can break out over exactly what the terms of the deal were.
In the absence of an executed contract, it is possible to establish the existence of a contract if there is a meeting of the minds, an offer, acceptance and of consideration. However, such agreement may be very well disputed in a court of law. When the contract is formalized with the signature of both parties, there is a much clearer picture of exactly what the terms were and when they were agreed to.
An executed contract will also give recourse to a court of law in the event of non-compliance by one of the parties. Hefty damages for non-performance and specific performance are just two remedies that can be sought if the executed contract is in place to verify what the agreement was.
Executing a Contract
The contract-execution process typically starts with the negotiation between the parties. This process can take place face-to-face and consist of several rounds of bargaining before the final draft of the contract is complete. Or the negotiation could take place entirely via email (or even text message), and it could be as simple as a single back and forth before reaching final agreement. This is an essential stage of any contract either way you slice it. A careful analysis of who is responsible for what in the drafting process – and in some cases even marking up the other party’s proposed contract – will help ensure that each party clearly understands what they are agreeing to.
Once the parties have reached agreement on all the terms of the contract the final version will have to be drafted for execution. The contract should then be executed, and once it has been signed, there should be an exchange of copies with the parties keeping original signed copies for their records.
The signed copies of the agreement serve as proof that both parties executed the contract and that they in fact agreed to the terms and conditions as set out in the document.
In the unfortunate case where a dispute were to arise regarding the agreements made by the parties, having a fully-executed copy of the contract would serve as evidence as to the parties’ intent at the time the contract was signed.
Types of Executed Contracts
Sales Agreements: As the most common type of contract, sales agreements designate the sale of goods or services from one party to another. Once both parties and their terms are agreed upon, it is often accepted by both parties that one party will sell their agreed upon sells or services in exchange for the other’s consideration.
Leases: How a party can occupy, use or enjoy a mortgaged estate as well as specifying the duration of time over which the leasehold extends.
Service Contracts: Often called "contract labor," it is an agreement by which one party performs work for the benefit of another. Some examples include: the employment of nannies, house managers, maids, caretakers, gardeners and drivers.
Agreements for Sale of Goods: For the sale of tangible personal property between a seller and buyer, this can include items such as cars, furniture, office supplies and inventory.
Executed Contracts: Legal Effects
Contractual parties should understand that the execution of a contract, which takes place in front of two witnesses, will entail the legal binding of the parties to their obligations under the contract. This means that obligations between the parties must be performed as agreed to in the contract or the defaulting party will be subject to execute a penalty, which will be the judicial enforcement of the contract with the possibility of paying damages to the aggrieved party.
When the parties have executed a contract, they can approach the courts for an enforcement of the terms and conditions of the agreement. For instance , if the seller sells immovable property to the buyer and the buyer has paid for the property as per the signed sale agreement, the seller will not be able to renege on the sale agreement and the buyer can seek enforcement of the contractual obligations in the Contract.
The buyer can cancel the sale agreement and litigate against the seller for specific performance demanding payment of damages for the breach of contract. The party can obtain a court order demanding the enforcement of the Contract based on the legal principle pacta sunt servanda, meaning the sanctity of contracts.
Difficulties in Executing a Contract
Whether due to a lack of familiarity with contract terms or miscommunication between parties, incorrect contract execution can lead to significant problems and even nullification of contractual rights. Consider, for example, the often-misunderstood date requirements. UCC § 2-201(1) requires that contracts for the sale of goods costing more than $500 be in writing. Through ambiguous or inaccurate execution of signature, date, or address requirements, a seller may risk nullifying a $1 million sale. Similarly, execution errors on a $10 million loan could expose lenders to lawsuits from investors based on securities law violations. In a case involving the latter issue, the United States Court of Appeals for the Second Circuit held that a loan officer’s failure to provide a loan facility agreement to the appropriate authority within the organization that was ultimately committing to the loan could not be cured by a subsequent committee vote where the pre-vote record contained the wrong signature and the agreement was missing. Moreover, the court held that a governmental department’s failure to provide loan facility agreements with its report to the municipal legislature invalidated the loans under the Home Rule Law, which requires that contracts be approved by local law. The court held the agreements "plainly deficient" and thus void.
In short, common errors in the execution of contracts can render contracts completely unenforceable. Such errors and the issues they create can be avoided by following certain best practices. One of the most important among them is to have any contract you execute reviewed by a qualified attorney immediately. A lawyer will be able to identify potential problems in executing, filing, or copying the original of a contract, and possibly make arrangements to correct those issues.
Things to Consider for an Executed Contract
When a contract is composed, these are the key elements that must be present in order for the contract to be both valid and effectively executed:
Competent Parties
The party that is offering the contract ("the offeror") must be of sound mind and capable of entering into an agreement; in other words, he or she must have the capacity to perform as per the terms of the contract. In addition, principal parties must "accept" the contract terms – in other words, if any third party exists as part of the agreement, the principal parties must be in agreement that this third party has the ability to act on their behalf.
Mutual Consent
"Mutual consent" means that both parties in a contract must understand how the contract will affect them, and that they agree to the various terms of the contract. It is emphasized that minor or major discrepancies in the wording of a contract offer can lead to both parties misunderstanding whether or not they are in agreement with the terms of the contract, which can affect the enforceability of the contract.
Lawful Purpose
The subject matter of the contract must be a lawful purpose, meaning that contract terms cannot be for an illegal purpose, such as the sale of a controlled substance.
Conclusion: How to Execute Contracts Correctly
A crucial aspect of business dealings, big or small, is the formation of contracts. Done correctly, a contract creates a clear and enforceable agreement between two parties that details rights and obligations. However, these rights and obligations are only enforceable if the contract is properly executed. If either party fails to completely fulfill their obligations as stated under the written terms and conditions of the agreement, a legal dispute could arise. This is further complicated by the fact that, as a general rule under Delaware law, a contract is not enforceable against a signatory party unless the contract is executed "by an authorized officer of the corporation." See Sweeney v. Royal Gardens LLC, 2011 WL 4592140, at *2 (Del. Ch. Sept. 30, 2011). As a result, parties should ensure that their contracts are properly executed by an officer of the relevant entity . Now, where does this leave those who are incorporated as S-Corporations or limited liability companies? You can always sign on behalf of your own S-Corp or LLC, but it may be unclear when another officer of your S-Corp or LLC is required to be involved in order to have an enforceable contract.
As a best practice for all parties involved, where there are multiple parties to the contract, we recommend signing the contract (i) as an individual (in your personal capacity); and (ii) as an officer of the applicable S-Corp or LLC (e.g., "John Smith, individually and as the Chief Executive Officer of ABC LLC"). This way, the contract would still be enforceable even if either party later attempts to challenge the contract on the basis that one or both of the signatories were not authorized under the corporate charter to execute the contract on behalf of their respective entities.
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