What Is an Executory Contract? Definition, Examples, and Bankruptcy Role

An executory contract is a legal agreement in which both parties still owe meaningful performance to each other, so that if one side stopped, the other could treat the deal as broken. Leases, ongoing service agreements, employment arrangements, and real estate deals between signing and closing all fit the description. The label is mostly technical in day-to-day commercial life, but it becomes decisive in bankruptcy, where federal law gives a debtor the power to keep valuable contracts and shed burdensome ones.

How Courts Decide a Contract Is Executory

The federal Bankruptcy Code uses the term repeatedly without defining it. The most widely followed definition comes from Professor Vern Countryman’s 1973 scholarship, now called the Countryman test: a contract is executory when both parties’ obligations are so far unperformed that if either stopped performing, the other could treat the contract as broken.

The U.S. Supreme Court took a broader view in NLRB v. Bildisco & Bildisco, finding that Congress intended “executory contract” to mean simply a contract “on which performance is due to some extent on both sides.”¹ The difference matters at the margins. Under the stricter Countryman test, a contract where one side’s remaining duties are minor might not qualify. Under the looser Supreme Court standard, it might. Which test a court applies can control whether a debtor gets to use Section 365 at all.

Executory Contracts vs. Executed Contracts

The distinction is whether obligations remain open on both sides. An executed contract is finished: both parties have already done what they promised. Buying groceries at a store is a fully executed contract the moment you hand over payment and walk out with the bag.

An executory contract has a future built into it. A two-year office lease is executory because the tenant still owes rent and the landlord still owes access to the space for the remaining term.² A contract where only one side has unfinished business generally does not qualify. If a supplier has delivered all the goods but the buyer hasn’t paid, the supplier has fully performed. What’s left is a payment debt, not an executory contract.

Common Examples

Leases are the textbook example. Whether it’s an apartment, a commercial storefront, or a piece of equipment, both lessee and lessor carry ongoing duties for the entire term. The lessee pays rent; the lessor provides and maintains the property. Vehicle leases and rent-to-own arrangements work the same way.²

Service contracts qualify when they call for ongoing work and ongoing payment. A business that hires a janitorial company for monthly cleaning has an executory contract: one side cleans, the other pays, and both duties repeat until the agreement ends. Employment agreements work the same way. The employee provides labor over time, the employer provides compensation over time, and neither has fully performed until the relationship ends.

Real estate purchase agreements are executory between signing and closing. The buyer hasn’t paid the full price and the seller hasn’t transferred the deed. Once closing happens, the contract becomes fully executed. Construction contracts stay executory while the builder is still working and the owner is still making scheduled payments.

Why the Label Matters in Bankruptcy

Outside bankruptcy, calling a contract executory rarely changes how it works. Inside bankruptcy, it changes everything. Section 365 of the Bankruptcy Code lets a trustee or debtor-in-possession assume, reject, or assign executory contracts and unexpired leases, subject to court approval.³ A struggling business can keep the deals that help it survive and walk away from the ones dragging it down. The other party can object, but the court makes the call.

Assuming the Contract

Assumption keeps the contract alive. This option makes sense when the contract is valuable, such as a below-market lease or a favorable supply agreement that would cost more to replace. If the debtor has fallen behind, assumption isn’t automatic. The debtor must cure existing defaults or convince the court it will cure them promptly, compensate the other party for actual losses caused by those defaults, and provide adequate assurance that it can perform going forward.³

One exception: the debtor does not need to cure defaults tied to its insolvency, bankruptcy filing, or the appointment of a trustee. Those are treated as uncurable by nature.

Rejecting the Contract

Rejection lets the debtor walk away from an unfavorable contract. The debtor stops performing, and the non-debtor party is released from its obligations too. Rejection counts as a breach occurring immediately before the bankruptcy filing date.³ That timing makes the resulting damages a general unsecured pre-petition claim, which in practice often recovers only pennies on the dollar.

Assigning the Contract

Section 365 also lets the trustee assign an executory contract to a third party, which is especially useful in asset sales where the buyer wants to step into the debtor’s existing deals. The trustee can override anti-assignment clauses in the original contract. The trade-off: the trustee must first cure defaults, and the assignee must provide its own adequate assurance of future performance.

Deadlines for the Assume-or-Reject Decision

The clock depends on the chapter and the contract type. In a Chapter 7 liquidation, the trustee has 60 days from the order for relief to decide whether to assume or reject an executory contract or unexpired lease of residential real property or personal property. Silence equals rejection.³

Chapter 11 reorganization cases are more forgiving. The debtor can wait until confirmation of a reorganization plan, though any contract party can ask the court for a shorter deadline.

Nonresidential real property leases have the tightest clock. The debtor must assume or reject by the earlier of 120 days after the order for relief or plan confirmation. The court can extend by up to 90 days for cause, but any further extension requires the landlord’s written consent.³ Miss the deadline and the lease is deemed rejected, forcing the debtor to surrender the premises. This is where commercial tenants in bankruptcy most often get hurt.

Contracts That Cannot Be Assumed

Not every executory contract is available for assumption. Section 365(c) carves out several categories a trustee cannot assume or assign, no matter how valuable they might be.

Contracts where the debtor’s identity was central to the deal and the non-debtor party does not consent. This covers personal service contracts, partnership agreements, and many patent, copyright, and trademark licenses.
Contracts to make a loan, extend credit, or provide other financial accommodations. A lender cannot be forced to keep funding a debtor just because the debtor filed.³
Nonresidential real property leases that were properly terminated under state law before the filing. The trustee cannot revive them.

Ipso Facto Clauses Are Unenforceable

Many contracts try to terminate automatically if a party files for bankruptcy, becomes insolvent, or has a trustee appointed. These are called ipso facto clauses, and Section 365(e) makes them unenforceable.³ If contracts could self-destruct the moment a debtor sought protection, the debtor would have nothing left to assume. Ipso facto clauses do remain enforceable in the narrow categories where Section 365 itself does not reach the contract, such as loan agreements and personal-service arrangements.

Rejection of Intellectual Property Licenses

When a debtor-licensor rejects an intellectual property license, Section 365(n) lets the licensee choose: either treat the license as terminated and file a damages claim, or retain its existing rights under the license for the remaining term by continuing to pay royalties and waiving setoff rights.³ The Bankruptcy Code defines “intellectual property” to include trade secrets, patents, patent applications, copyrights, and mask works, but not trademarks.⁴ Trademark licensees do not get Section 365(n)’s protections, and courts have reached different conclusions on what happens to those licenses after rejection.

1
Legal Information Institute. NLRB v. Bildisco and Bildisco, 465 U.S. 513
2
United States Bankruptcy Court. What Is an Executory Contract and Why Must I Assume or Reject It
3
Office of the Law Revision Counsel. 11 USC 365 – Executory Contracts and Unexpired Leases
4
Office of the Law Revision Counsel. 11 USC 101 – Definitions