By DealHub Experts Reviewed By Eyal Orgil Published February 1, 2024
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.
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 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.
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.
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.
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.
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:
Today, there are 5 main ways businesses execute contracts.
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:
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.”
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:
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:
“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:
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.
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” is quite a broad category.
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:
An employment contract is a bilateral agreement that defines the terms of an employee’s relationship with their employer. They often have details on:
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:
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:
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.
Breaches of contract could happen for a number of reasons. One party might:
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:
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.
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:
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).
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.
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.”
