Many installment contracts are commonly executory such as installment credit loans, period loan payments, mortgages, paychecks, and contracts for the delivery of goods or the performance of services over a period of time in discrete elements.
In the case of Maple Flock Co Ltd v Universal Furniture Products (Wembley) Ltd., decided in 1934,[3] Hewart LCJ used reasoning drawn from an earlier case, Freeth v Burr,[4] and approved in Mersey Steel and Iron Company v. Naylor, Benzon and Co.:[5] “That the true question is whether the acts and conduct of the party evince an intention no longer to be bound by the contract".
In applying this reasoning to a situation of a missed delivery, the court concluded that the main issues were (i) the ratio quantitively between the breach and the contract as a whole, and (ii) the degree of probability or improbability, that the omission might be repeated.
At the start of a chapter 7, 12, 13, and sometimes 11 bankruptcy proceedings, a trustee (also known as a debtor in possession) is appointed to oversee the case.
[9] If the trustee chooses to assume an executory contract, the obligations of both the debtor and the counterparts are preserved by the bankruptcy process.
A bankruptcy court must approve a debtor's decision to assume or reject an executory contract.
However, because the Bankruptcy Code does not outline an official standard for determining a motion to assume or reject an executory contract, many courts will employ a business judgment test, which hinges on whether a debtor can show that its decision is an exercise of its sound business judgment and that the assumption of the contract or lease will benefit the debtor's estate.
Usually, the debtor does not need to give adequate assurance for every term of an executory contract but rather those that are materially and economically significant.
However, if the trustee decides to assign the executory contract, all of the assets of a debtor will go to a trust for liquidation and distribution to the creditors.
[10][11] In a chapter 7 liquidation proceeding, a trustee must assume or reject the executory contracts that involve an ordinary business purchase or sale of a security within 30 days of the date of order for relief.
On the other side, the licensor is obligated to defend claims of infringement, provide a non-exclusive licensee with notice of patent infringement suits, refraining from licensing the intellectual property to other parties at a lower royalty rate, and indemnify the licensee for losses.
In this case, a licensor may also have ongoing marketing or software updating obligations, making the license executory.
[1] Breaches of real estate property leases, executory contracts by nature, entitle the counterparty to the breach to damages measured by the present value of the rent reserved less the present rental value of the remainder of the term of the lease.
The Connecticut Railway then sued the New Haven estate for $23,190,314.73 as damages for its rejection and therefore breach of the lease.
Previously, the bankruptcy court had only allowed Connecticut R. & Lighting Co. to receive damages accrued within 18 months after the date New Haven rejected the contract, calculated by subtracting the net earnings of the property from the rent reserved in the lease.
The appellate court affirmed, but went further to allow damages to accrue to the latest possible hearing date.
[15] In finance, executory contracts have a special function, to protect companies from currency risk.
A hedged executory contract generally involves an agreement for the purchase or sale of some sort of asset or performance of service in the future mixed with a hedge, or a deposit of nonfunctional (foreign) currency in a separate account with a bank or other financial institution, and certain forward or futures contracts, that reduce the risk of exchange rate fluctuations.
Because the amount taken into account under the executory contract must be fixed on the accrual date in terms of functional currency, §1.988-5T (b) (2) (iii) (D) provides that interest on a deposit of nonfunctional currency is considered part of a hedge only if it accrues on or before the accrual date.
The definition of "hedged executory contract" in §1.988-5T (b) (2) (i) and the identification rules in §1.988-5T (b) (3) contain further conditions to integrated treatment that are analogous to those of §1.988-5T (a).
Spyglass Media Group, LLC bought out TWC's assets and asked the court for declaratory judgment that the Cohen agreement was not executory and, therefore, could not be assumed and assigned.
Thus, lawyers spend countless hours on drafting executory contracts to try to best protect against breaches against their clients.
However, since bankruptcy is designed to give individuals or companies a fresh start, absolving them of most previous debts, even the best drafting of executory contracts may still result in loss for the non-debtor party.