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What is an Executed Contract?
An executed contract is a finalized legal agreement that has been signed by all parties involved, making it effective and binding. This type of contract is often used in lease agreements, service contracts, and sales contracts to bind the parties to carry out the terms of the agreement.
Though they become enforceable at that point, executed contracts don’t necessarily take effect the moment they’re signed. The execution date simply represents the date all necessary parties signed the contract. This might differ from the effective date, which is when the legal obligations within the contract actually begin.
Some might use the term “executed contract” when referring to a contract that has also been fulfilled (i.e., they’ve completed all of its requirements). To differentiate between that and an agreement your team has simply signed and finalized, it’s best to refer to it as a “fully executed” contract.
- Executory contract
- Signed contract
- Finalized agreement
Importance of Executed Contracts in Business
Of course, the main purpose of an executed contract is to form a contractual relationship between two or more contracting parties, each of whom must from that point on fulfill their legal obligations in the written agreement.
But the contract execution stage is the most important for another critical reason: failure to properly execute a contract can cause a slew of problems down the line.
A contract you’ve improperly finalized might be unenforceable.
A judge or arbitrator will consider it invalid if, for example, you left certain conditions (e.g., profit-sharing terms) to a verbal agreement. Contracts are there to protect you, so failure to execute one correctly means potential lost resources or deal value and high litigation costs.
Lack of clarity around certain terms could render them ineffective.
Payment terms, delivery dates, service levels, quality evaluation criteria, and other crucial elements you’ll agree on during contract redlining need to be written in plain English and explicitly signed off on. If there’s a grey area regarding what the signee is agreeing to, those terms might ultimately not be enforceable.
Poor signatory practices lead to disputes, frustration, and potential litigation.
Your client, customer, or partner will probably be upset if they expected one thing and received another (and vice versa). Fulfillment on both ends will ultimately create problems like late payments, dissatisfaction with project delivery, and other avoidable issues that flatline relationships.
Delays cost you serious money.
Poor contract management costs businesses an estimated 9% of total revenue. An executed contract doesn’t guarantee success, but it does create a foundation for productive collaboration and risk management.
Key Elements of an Executed Contract
While the specifics of your executed contract will vary depending on the nature of your business, type of agreement, and parties involved, every legally binding contract has a few key elements:
- Offer and acceptance — Identifies each party proposing and agreeing to the contract terms and includes descriptions of the goods and services you’re providing.
- Intention to create legal relations — Indicates both parties have entered into the contract with a clear understanding and intention to be bound by its terms.
- Consideration — What each party will receive in exchange for fulfilling their obligations within the contract (a payment for services rendered).
- Legal capacity (of each party) — “The person signing the contract is legally able to make such an agreement” (e.g., they’re over 18 and mentally competent).
- Legal purpose — Your contract can’t require either party to do something illegal (for example, you won’t deliver illegal substances for a fee).
- Mutual assent — A final agreement with no ambiguities that both parties have reviewed and accepted.
- Execution date — When the parties signed the contract.
- Effective dates — The dates from which parties are required to fulfill their contractual obligations.
Execution of Contracts
Methods of Contract Execution
Today, there are 5 main ways businesses execute contracts.
- Paper — Still, wet-ink signatures are somewhat commonplace in certain industries. You might require a physical signature if you’re buying or selling an asset in person, such as a car or house.
- Browser-based software — Tools like DocuSign and Adobe Sign have made it simple to sign contracts digitally. You download the agreement or click a link sent to you via email, add your digital signature, and the platform will guide you to completion.
- Mobile signatures — Digital signatures can happen on mobile devices as well. This actually gives signees the ability to draw their real signature if they prefer.
- Cloud-based applications — Contract management software is similar to web-based tools (sometimes, there’s overlap), but it processes contracts and electronic signatures within its own platform.
- Smart contracts — A smart contract is a self-executing electronic contract that uses the blockchain to automate the fulfillment and enforcement process. It’s the most secure and transparent form of contract execution, but it’s less common because it’s a relatively new technology with fewer widespread applications.
Validity and Enforceability
Although an “executed” contract is valid and enforceable, there are further criteria your contact needs to meet for it to be held up in court:
- All parties must sign and enter into the contract voluntarily.
- Each must have the capacity and authority to enter into the contract.
- The contract is not illegal, fraudulent, or against public policy.
- There’s a mutual understanding of the terms between parties.
- The contract meets all formalities required by law (e.g., a notarized signature in the case of real estate deed/title agreements).
If you’re going through the contract modification process (making changes to enforceable terms of an executed contract), ASC 606 requires you to “treat contract modifications as separate contracts only when the modification adds distinct goods or services that are priced at their respective standalone selling prices.”
Types of Executed Contracts
A simple contract is a legal agreement that can be made either orally, in writing, or through a combination of both, without the need for a formal seal. To be valid, it always requires consideration (something of value exchanged between the parties).
Simple contracts are the most common. Here are a few examples:
- Service agreements
- Sales contracts
- Employment contracts
- Special pricing agreements
- Lease agreements
- Consulting deals
- Non-disclosure agreements (NDAs)
- Business partnerships
- Licensing agreements
Aside from consideration a simple contract is legally bindingif it includes an offer from one party and acceptance by the other.
While oral contracts are legally recognized, they can be challenging to prove in court due to the lack of tangible evidence. This makes simple written contracts a considerably more reliable option (don’t even think about an oral contract for business dealings).
A formal contract requires a signature under seal. Unlike simple contracts, which can be oral or written without a seal, formal contracts may include negotiable instruments like checks or promissory notes that require specific formalities under laws like the Uniform Commercial Code.
Examples of formal contracts include:
- Real estate transactions, like a formal transfer of property ownership
- Wills and trusts, which require a signature and witness
- Business agreements with regulatory compliance implications, like issuing stocks or bonds
- Loan agreements that involve the use of a promissory note or collateral
- Government contracts like those for construction, defense, technology, or healthcare
“Under seal” means a contract is signed, witnessed, and stamped/affixed with a seal. Today, states generally don’t require seals unless the deal entails a higher level of sophistication or complexity.
A unilateral contract is an agreement between two parties where one party promises to pay the other for certain performance or actions. It’s one-sided — the offeror expects the offeree to do something that triggers payment.
A simple example of a unilateral agreement is a “Lost Dog” poster. The owner of the lost dog offers a sum of money to anyone who finds and returns their pet. It’s unilateral because the reward is only payable upon specific performance (return of the dog to its owner, the offeror).
Insurance companies use unilateral elements in their contracts since they promise to cover losses or damage under circumstances outlined in their policies.
In a bilateral contract, both parties make promises to each other. They’re mutual, meaning they’re enforceable when one party doesn’t fulfill their end of the deal.
Some common examples of bilateral contracts include:
- Employment agreements
- Sale of goods or services
- Construction contracts
- Consulting arrangements
There’s a lot of overlap between bilateral contracts and simple contracts. Most business dealings require some sort of value from the company in return for payment from the customer.
In the case of reseller agreements, some are unilateral and some are bilateral. If you’re giving your resellers free rein to purchase, promote, and sell your products as they see fit, it’s unilateral. If your distribution agreement requires specific sale prices, marketing tactics, or other actions from your reseller in exchange for wholesale pricing, it’s bilateral.
Common Examples of Executed Contracts
To help you understand the critical elements of a finalized legal contract, here’s an example of a sample executed sales contract:
Real estate transactions
“Real estate transactions” is quite a broad category.
- Buying and selling homes
- Leasing agreements for property rentals
- Commercial real estate sales
- Land contracts
- Real estate options
- Fractional real estate investment
- Mortgages (which are also financial contracts)
- Property deeds
As far as contract execution is concerned, each of these contract types will have different requirements. Take real estate options as an example.
In real estate options, a buyer pays for the right to purchase a property at a specified price within a set period, without the obligation to buy. Options contracts require the seller to detail the option fee, price, and timeframe. That way, both the potential buyer’s right to buy and the seller’s obligation to sell under the conditions they agreed upon are protected.
Here, the offer is the option fee the buyer paid. The consideration is the seller’s obligation to sell within the agreed timeframe, while giving the buyer exclusivity during that period.
Employment contracts are common, particularly for:
- High-paid executives
- Highly skilled professionals (like doctors or consultants)
- Employees with access to sensitive company information like trade secrets
- Workers at top companies with strong competition
An employment contract is a bilateral agreement that defines the terms of an employee’s relationship with their employer. They often have details on:
- The job responsibilities and expectations
- Salary and benefits package
- Non-compete and non-solicitation agreements
- Termination conditions
While they aren’t as common for entry-level or hourly employees (nor are they required by law), some companies use employment contracts with all staff to ensure consistency and legal protection.
Sales contracts are bilateral agreements that outline the terms between a company or seller and their customer.
They’ll contain details like:
- Product description
- Product configuration
- Line items
- Price and payment terms
- Terms of delivery
- Warranties and remedies
- Cancellation, return, or refund policies
Any time a member of your sales team closes a deal with a new customer or client, they’ll execute a sales contract as part of the quote-to-cash process. It’s common in B2B and enterprise sales, where complex deals involve multiple decision-makers and layers of approvals before closing.
Service contracts are quite similar to sales contracts (in terms of contract lifecycles), but they focus on services rather than physical or digital products.
Service contract details include:
- List of services provided
- Delivery timelines
- Service level agreements (SLAs)
- Compensation and payment terms
- Escalation procedures
- Termination conditions
Because of the hands-on nature of services, there are some fundamental differences in how companies approach standard sales vs. service contracts. For example, a software company might execute a service contract with a customer to set up, maintain, and troubleshoot their software.
An SLA would outline the response time for troubleshooting, and a specific timeframe for implementing new features or updates. If your team fails to meet these conditions, you’ll need to offer remedies, which you’ll also outline in the service contract.
Selling the software itself would require a sales contract. You’d first execute the sales contract, which includes information on the software and pricing. This sales contract would then link to your service contract.
Legal Implications and Consequences
Breach of Contract
Breaches of contract could happen for a number of reasons. One party might:
- Fail to perform their obligations according to the agreement
- Interfere with the other’s ability to fulfill their obligations
- Not deliver goods or services as promised
- Fail to pay on time or at all (delinquent payment)
- Refuse to accept goods or services
- Provide false information about the agreement
- Divulge confidential information
Remedies for Breach
If a breach occurs, it could lead to legal action on behalf of one party. The outcome of any legal action will depend on what’s in the contract and how it was executed.
Here are a few of the most common remedies for breach:
- Money damages — The most common remedy, where one party pays money to the other as compensation for the breach.
- Injunction — This prevents one party from continuing to break the contract or can require them to take specific actions to fulfill their obligations.
- Specific performance — The breaching party must fulfill their obligations as outlined in the contract.
- Cancellation and restitution — Canceling the entire contract and requiring the breaching party to return any payment or goods they received.
Contractual Obligations and Legal Liability
When entering into a contract, both parties have specific obligations they must fulfill. Failure to meet these obligations places you in a position of liability.
- Non-payment of rent or mortgage could lead to eviction or foreclosure.
- Not fulfilling duties outlined in an employment contract could result in termination or legal action from the employer.
- After failing to pay for goods or services, a vendor will probably take you to collections.
- Breaking confidentiality or non-compete agreements in an employment contract could lead to a lawsuit.
Benefits of Contract Management Software in Contract Execution
An effective contract management process starts with software. In this day and age, that’s the only way to scale deal execution.
Here are a few reasons why contract management software simplifies contract execution:
- Automated reminders and notifications
- Document generation and abstraction with contract AI
- Cloud-based document storage and management
- Contract version control
- Digital signatures
- Templates, workflows, and approval processes
- Advanced analytics and reporting
- CRM, CPQ, ERP, and other API integrations
- Automated renewal and expiration alerts
People Also Ask
Who should sign a business contract?
Anyone who has the authority to make decisions for the business can sign a contract. This typically includes top executives, department heads, and authorized personnel (such as salespeople or legal counsel).
What is the difference between an executed contract and an executory contract?
In most cases, “executed” and “executory” are synonymous. The slight difference between the two is that, with an executed contract, promises may be fulfilled immediately. Executory contracts generally entail fulfillment at some point in the future.
Does fully executed mean fully signed?
An executed contract is one that is signed and dated by all parties involved, making it legally binding and enforceable. An executed contract is not necessarily fulfilled, it’s just ready to take effect. To describe a contract that’s been completely fulfilled, we use the term “fully executed.”