Explaining Executed Contracts: An In-Depth Overview

What is an Executed Contract?

An executed contract is a contract that has been signed and fully performed by all parties involved. This means that both the offeror and the offeree have completed their respective obligations, and the contract is now legally binding. Essential characteristics of an executed contract include: mutual agreement of the parties, a lawful object or purpose, and consideration, which is the value exchanged between the parties . A key difference between an executed contract and an executory contract is that the latter is still in progress and one or both parties have yet to fulfill their obligations. Therefore, an executed contract represents the conclusion of an agreement, whereas an executory contract is still being negotiated.

Key Components of a Valid Executed Contract

A contract must be composed of specific elements in order to be deemed executed. All of the following must be present for a contract to be considered executed:
Agreement
There has to be an agreement between both parties concerning what each is required to do, by the terms of the contract. The agreement must also be mutual—both parties need to agree to what they are supposed to do, not just one party.
Consideration
It’s important for both parties to receive something in return for what they have given in the contract. In other words, both parties must gain from the agreement to a certain extent. In the case of a contractor, for instance, they would gain from performing the work after agreement, and the homeowner would gain from the improved look of their property.
Capacity
Both parties must be of legal age and of sound mind in order for a contract to be valid and enforced. A minor cannot enter into a contract unless there is a guardian or parent who consents to the conditions of the contract. Also, a person with diminished capacity who cannot understand the contract cannot enter into an agreement or the contract may not be enforceable.
Legality
A contract must involve a legal deal between the two parties—not illegal activity. Such illegal activity may involve gambling on the stock market, illegal drug trafficking, prostitution, etc. As long as both parties are of legal age, of sound mind, and agree to terms that are legal, the contract will be valid and enforceable.

Executing a Contract: The Process

Execution of a Contract
Once the contract has been approved by each of the parties, the next step will be the formal execution of the contract. Execution of a document in its most basic form means that the contract has been signed by all up the parties. As each contract is different, the parties to a contract, will spell out the requirements of signing and/or execution in their contract. A party should not sign a contract unless it is the final agreement between the parties, and he/she has the authority to sign on behalf of any corporation or other entity.
Depending on the type of contract being executed, there may be additional requirements for properly executing the document and more formalities that need to be observed. For example, Contracts for real estate are considered a "deed" under Texas law, and must be signed, acknowledged, and delivered. Signatures of all parties will be acknowledged in the presence of a notary public (rented from a convenience store).
If the party signing a contract is a business, the correct signor of the agreement must be present at the signing. For a corporation this could be an officer, for non-profits this could be a board member, for a limited liability company it could be a member and/or manager. There are certain statutory requirements for each type of business entity for proper execution of documents. (More on execution of documents for businesses in future blogs). Once the contract has been signed, if there were conditions to be satisfied prior to it going into effect, the conditions would need to be satisfied. For example, if financing was required to be obtained or third party approval was required (ie. restrictive covenants), the contract would not go into effect until such conditions had been satisfied.

The Legal Significance of an Executed Contract

The execution of a contract creates a legally binding document which is enforceable in a court of law. An executed contract creates an obligation on the part of the signer to perform his or her part under the contract.
Upon the execution of a valid contract, each party becomes legally obligated to perform the promises that they have made to one another. Performance usually takes the form of money or the delivery of goods. In most cases, the executed contract is legally enforceable; however, there are exceptions. A contract may be void or unenforceable because of a lack of capacity in one of the parties, fraud, illegality or unconscionability. In some parts of the world, certain contracts must be in writing and signed by both parties in order to be enforceable.
An executed contract is not subject to a Statute of Frauds if both parties to the contract have fully performed their respective obligations under the executed agreement. For example, a loan agreement is enforceable even if it is not in writing if both parties have performed under the terms of the contract.
In some jurisdictions, suit may be brought to enforce an executory contract which has not been performed, but this type of action is rare. The typical remedy in these situations is the rescission of the agreement.
Oral executed contracts are valid and binding in most jurisdictions. However, the parties may wish to have a written agreement in order to avoid problems later on.

Executed Contract Examples in the Real World

Executed contracts are not limited to any particular type of agreement or industry. They can take many forms and be used in a variety of scenarios.
One real-world example of executed contracts is in the purchase or sale of real estate. A real estate transaction is typically one of the largest purchases someone will make in their life. While most people have a general understanding of what an executed contract is, there are instances in real estate where they are necessary. Most people are likely aware of the necessity for executed contracts in some form during a real property sale, but many may be surprised at the fact the executed contracts are not always limited to the purchase and sale of a house. Another common example of an executed contract in real estate is an exclusive listing agreement with an agent. The signed agreement is the executed contract between you as the principal and your agent as your agent of record. The executed contract is their undertaking to work exclusively with you and your undertaking to not work with any other agents on the sale of your property. Other executed contracts pertaining to real property sales and purchases might include lease agreements, or documents utilized by a property management company when leasing rental properties , such as rent agreements, pet leases, breaking or terminating a lease agreement, renewal agreements, etc. Other examples of executed contracts in the real estate industry might include survey contracts, property management management agreements, and agreements for the preparation and filing of Texas Homestead and Timber Valuation Applications.
In another example outside the realm of real property, one could look at the executed contracts required in the construction industry for the construction of new structures, or any structural improvements to existing building. Expenditures in excess of $50,000 relating to real property improvement require executed contracts to protect all parties involved.
There are innumerable executed contracts in the business world, including banking agreements, credit applications, loan agreements, letters of credit, security agreements, lease agreements, collateral assignments and releases, hazard insurance policies, etc., and in the realm of employment including job offer letters, employee handbooks, confidentiality agreements, non-compete/non-solicitation agreements, retirement plans, time off policies, including versions for paid sick leave, family medical leave and vacation, benefit eligibility, retirement, etc., and performance evaluations.

Common Issues with Executed Contracts

A number of problems may arise with respect to executed contracts. The most common is breach of contract by one party or both parties. When a contract is breached, the aggrieved party can either (i) perform under the contract in respect of the performance that was not performed by the breaching party and recover from the breaching party only for the difference between the damages suffered/enjoyed as a result of the breach and any cost incurred by the aggrieved party in performing in respect of what remained unperformed at the time of the breach; or (ii) terminate the contract in respect of the unperformed portion of the contract and sue for the actual or expected damages caused by a failure to perform. In certain circumstances, the aggrieved party can elect to sue for specific performance.
But breach of contract by either party is not the only issue in respect of an executed contract. Another concern is the ability of the parties to amend the contract. As a general legal principle, the common law refuses to amend executed contracts without a novation.
Sometimes the contract itself provides for amendments. For example, the contract may provide that the contract will be amended by the signed written agreement of the parties. However, a contact can also be varied orally and, in certain cases, impliedly, except in respect of contracts that must be in writing.
Furthermore, the doctrine of part performance may allow a party to claim an oral or implied variation where: (i) a clear intention to vary has been expressed by the parties; and (ii) one party has performed in a way that is referable only to the contract as allegedly varied. In these circumstances, the court will enforce the oral or implied variation, notwithstanding the existence of a clause in the contract that provides for amendments or variations to the contract only in writing, provided that this does not prejudice the rights of a third party who has acquired rights before the variation.
There is a supplementary requirement, however, in respect of the doctrine of part performance, namely that the conduct relied on must be "unequivocally referable" to the contract as varied. This means that the party seeking to rely on the variation of the contract must act in a manner that would be referable only to the contract as varied. Although no clear test has emerged in relation to what constitutes "unequivocal reference", the South African courts have found in some cases, for example, Corpe v Overberg Asset Management (Pty) Ltd, that "it is time to state that an element of economic compulsion affecting a party to a contract to carry out further acts of performance on its part relies on an oral variation of the terms of the contract" is sufficient.

Optimizing Your Contract Execution

Before even getting to the execution of a contract, it is imperative to review the contract terms and raise any questions and concerns with the other party. Once both parties are satisfied with the terms of the contract, this will make the executing the contract much simpler. When in doubt, you should always consult an attorney to make sure all of your questions and concerns have been addressed.
Obtaining the proper signatures on a contract is key to its enforceability. Usually, this means obtaining the signature of an officer of the party executing the contract on behalf of the corporation or limited liability company, and obtaining the signature of a managing member of a limited liability company or a member of a limited liability company managed by a board of managers. It is important to note that a contract signed by a minor may be unenforceable against that minor, so, to the extent feasible, you should verify that all individuals executing a contract are of legal age to contract. Similarly, you should verify that one of the individuals executing the contract for a minor is the parent or guardian of the minor to prevent the minor from claiming the contract is unenforceable.
Additionally, for a contract signed on behalf of a corporation or a limited liability company, you should review the formation documents of the corporation or limited liability company to verify that the person signing the contract on behalf of the corporation or limited liability company has the authority to bind the corporation or limited liability company under the laws of the state that the corporation or limited liability company is formed under the respective business entity laws of that state. This is particularly important for limited liability companies , as the member or managing member of a limited liability company signing the contract may be limited in the amount of authority it has to bind the limited liability company under its operating agreement. You should verify that each signing has the proper authority to bind the parties to the contract and, to the extent feasible, include the words "Managing Member", "Member", "Officer", or such other language as would denote that the signer has the proper authority to bind the respective parties.
It is also important to keep a record of the executed contract. A fully executed contract, including any amendments or other documents appended to the contract, should be kept with the records of the party who receives these documents. For a party who executes the contract, you should keep a copy of the executed contract and all related documents for your records. If possible, you should include the original copy of the executed contract with the records of the party who received the contract. However, should the contract be large, cumbersome or too costly to send a physical copy or box containing the physical copies to the party acquiring the contract, then a copy on electronic media can be sufficient for record-keeping purposes.
Lastly, you should additionally follow-up to make sure that the other party has obtained the proper signatures and evidence to show that your party has executed the contract. It is also a good practice to obtain information from the other party to ascertain how the other party wishes to be contacted and make sure to update the other party with any changes to your contact information.