What Is an Executed Contract?
Business contracts are critical in many different aspects of operations. Contracts outline important details about relationships, exchanges of funds and services, legal requirements, timelines, and pricing. They reduce confusion and ensure all parties are on the same page.
Contracts go through several stages before they’re complete. There’s the writing and drafting stage, and then the review and editing stage, which may go back and forth a few times between the parties. When an agreement is finally reached, the final version of the contract is signed by each party. At this stage, when the agreement is completed, the contract is considered fully executed.
Understanding the meaning of an executed contract and all of the elements that need to be present will help you improve your process. This guide walks through everything you need to know about executed contracts.
Definition of an Executed Contract
An executed contract sounds like a straightforward concept, but in practice, it can be elusive. This is especially true when many different parties are involved, including legal experts, and it’s hard for everyone to agree on the terms.
Here’s a simple definition: An executed contract is one that has been agreed upon by all necessary parties, signed by all, and finalized. The document must be signed by everyone involved for the contract to be deemed “executed.”
Other terms for an executed contract include fully executed contract, finalized agreement, signed contract, completed contract, or agreement in effect. These all essentially refer to the same concept in the world of contracts.
Key Elements of an Executed Contract
Contracts vary widely across industries. Some are pages and pages long, whereas others may be just a few paragraphs. It all depends on the purpose of the contract.
However, certain terms are required to strengthen the legal enforceability of the contract and give you the protections you need. Consider these important elements of an executed contract:
- Date: It’s important to identify when the contract is finalized and when it goes into effect. The contract may have a term or expiration date that relies on the effective date of the contract. But note the difference between the effective date and the execution date: The former is when the contract goes into effect, and the latter is when the contract is signed by both parties.
- Consideration: Consideration is the reason the agreement is happening. What’s being exchanged? For example, one party may be providing services, and the other may be providing compensation for those services.
- Signatures: Signing a contract signifies each party’s acceptance of all the terms therein. Aside from the signature line, which is typically at the end of the contract, there may be spaces to provide initials throughout the agreement to emphasize acceptance of all terms.
- Signature format: Many businesses and professionals now rely on electronic signature processes to improve the contract lifecycle. E-signatures are legally binding, just as a person signing a contract by hand would be.
- Capacity: Each signatory must have the capacity to sign, meaning they are of sound mind, have legal authority, and are of legal age.
- Clear language: Contracts need to be carefully worded. There should be no contractual ambiguity about each party’s rights and responsibilities or the details outlined in the document. Talking through the contract with a legal professional will help ensure your language is tight and effective.
For an agreement to hold up in court, it doesn’t necessarily require all of these elements. In some cases, an email approval may be enough. However, including these pieces in a contract before it’s executed ensures that you’re protected in the event of a future issue and you never have to worry about an unenforceable contract.
Executed vs. Executory Contracts
A common misconception is that the terms “executed contract” and “executory contract” refer to the same thing. It’s important to understand the difference.
An executory contract is for a party that owes an obligation to the other party, and those obligations are not yet completed. These agreements are common in real estate transactions, rentals, or sales in which the goods or services haven’t yet been delivered.
For example, say you enter into an agreement with a graphic designer for your new website. The designer agrees to provide design services under the given timeline, and you agree to pay for them. You both sign the contract, and it’s fully executed. However, the contract is still executory until both of you have performed your part — until the designer delivers a satisfactory design and you compensate them. Then, the contract is considered to be fully performed.
On the other hand, the contract is fully executed when it’s initially signed by both parties and is in effect.
Legal Characteristics of an Executed Contract
Even though there are many elements you should include in a contract to ensure its enforceability and protection, there are only a few legal characteristics that each contract must have. Both parties must consent to the terms, and the contractual obligations must be fulfilled.
Parties’ Agreement and Consent
Contract signatures are important because they indicate that all required parties:
- Agree to all terms outlined in the document
- Understand their legal obligations
- Understand the exchange taking place
- Understand the other party’s responsibilities
- Consent to all requirements
For the legal document to be binding, it must show that each individual approves. A signature signifies this agreement and approval.
Fulfillment of Contractual Obligations
An executory contract may be an executed contract that still isn’t complete. When all contractual obligations are met, such as services being performed and approved as outlined, the contract is fully performed or complete.
The Importance of Executed Contracts in Business
Businesses must prioritize obtaining signed agreements for any exchange of services or goods. Even just a partially executed contract could mean that rights and arrangements won’t hold up in court if a dispute arises.
Contract execution ensures the involved individuals understand their role in the relationship, their obligations, and their rights. Two important reasons businesses need executed contracts include ensuring business transactions and securing legal protection and compliance.
Role in Ensuring Business Transactions Go Smoothly
A true agreement is one in which everyone consents to the terms and requirements. This is important in any new or ongoing business relationship. Transactions must be carefully documented so that each party understands the expectations to fulfill the agreement.
Another reason is to prevent ambiguity. Without a legal document that carefully outlines the relationship, each party could have completely different notions about what to expect or what to do. An executed contract ensures there’s no ambiguity, which helps the relationship thrive.
Legal Protection and Compliance
Beyond ensuring the transaction goes smoothly, a contract is important for legal and compliance reasons. It shows who’s liable for certain kinds of problems or issues. It outlines what each party is responsible for and what constitutes a breach of contract.
For example, the service provider may agree to provide services by a specific date. If this doesn’t happen, the other party will have avenues of recourse.
How to Draft and Complete an Executed Contract
Drafting and getting a contract executed can be a lengthy process. There may be many people involved in coming up with the language or bringing their own template to the table. Here are a few effective steps for completing a contract.
1. Decide Who Is Drafting the Contract
Depending on the type of contract you need and who initiated the relationship, decide which party will provide the contract document. One party may have a template they want to use, so these details should be worked out first.
2. Include All Necessary Protections
Each relationship will have different terms. Ensure you’ve considered all of the necessary terms and included anything that will be unique to the agreement. Double-check all dates, numbers, and names before sending the document.
3. Send for Review
Then, send the first draft to the other party for review. While it would be ideal for them to sign and return this version without issue, they may have comments or even several rounds of edits to sift through. Be prepared for pushback.
4. Communicate Effectively
Open communication is key during contract negotiations. Explain exactly why you need a clause or specific language. This helps the other party understand the context. Respond to their comments and edits promptly, and initiate a phone call or meeting if it would be easier to negotiate in real time.
5. Send for Final Signature
When the parties have agreed to the terms, it’s time to execute the contract with signatures. To avoid costly delays, use an e-signature platform that helps facilitate a fast signing process. Blockchain technology now makes it easy to establish smarter contract workflows that rely on automation for greater efficiency.
Essential Clauses and Terms
The terms you include in your contracts will depend on what kind of relationship you’re outlining. Some companies have master service agreements (MSAs) that govern an entire relationship with a client, and then for each project, they draft a new statement of work (SOW) that outlines that specific service, which falls under the overarching MSA. Some contracts are non-disclosure agreements, non-solicitation agreements, contract renewals, settlement agreements, or amendments.
Whatever kind of contract you’re dealing with, these are the essential clauses you’ll need:
- Intellectual property: Many business relationships involve the creation or transfer of intellectual property. Add a copyright clause to identify who holds the rights to the material and ensure that the work is protected by applicable copyright laws.
- Confidentiality: This clause establishes that one or both parties will not disclose certain confidential information.
- Indemnification: Indemnity clauses outline who the indemnifying party is and what the other party must do if there are issues or damages that occur under the agreement.
- Force majeure: In the event that an unavoidable event occurs outside the parties’ control, like a natural disaster, this clause removes liability.
- Jurisdiction: Jurisdiction clauses allow both parties to agree to the location where a lawsuit could be brought if the contract is breached. Without this clause, a court would decide which jurisdiction the contract falls under.
Common Mistakes to Avoid in Executed Contracts
Even with the best intentions, contract signatories often make avoidable mistakes. These mistakes can have legal consequences and create headaches for both parties. Here are two common pitfalls to avoid when dealing with executed contracts.
Oversight in Contract Terms
Failing to thoroughly read contractual terms can lead to problems. Similarly, not including key protections can lead to legal trouble for you. Always ensure you read contracts carefully, and flag any questions you have to get clarification. Work with an attorney when you’re not sure about specific language and what it means for your obligations or liability.
Legal Validity and Enforceability
Many businesspeople think that a simple verbal agreement is enough to move forward with a service exchange. While some agreements of this kind may hold up in court, written, executed contracts are much more valid and enforceable.
Contracts must be clear, include the required elements, and have approval by all parties. Signatures provide the necessary consent, so one-sided contracts with only one signature are only partially executed contracts.
Avoid the mistake of failing to get arrangements in writing in a legally binding contract. Otherwise, your business could be at risk later.
Sign All of Your Contracts Online
Effective contract management starts with understanding what an executed contract is and why it’s so important in a business relationship. Remember to get your agreements in writing, work with an attorney to ensure all of the necessary elements are there, and complete the process with signatures from all parties.
Improve your online agreement process with e-signing tools. jSign’s platform allows you to upload documents with a few clicks, route them to signatories with simple placeholders, and execute contracts without worrying about getting wet signatures. Revamp your process for obtaining electronic signatures and securing executed contracts with jSign’s advanced solutions.
Learn more about all of jSign’s features by getting in touch with us today.
