The Standing of the Executory Contracts - Case Study Example

The standing of Executory Contracts A contract is that which can be defined as a voluntary, deliberate, and legally enforceable agreement which is binding between two or more competent parties. A contractual relationship is evidenced by an offer, acceptance of the offer, and a valid (legal and valuable) consideration. In the contract the two parties that are involved have rights and duties that are equivalent and relative to the responsibilities and right of the other party involved in the contract. It also has to be understood that both the parties try to get a fair benefit from the contract, (infact if it is not o the court may disregard the contract a being unfair and inequitable) these benefits are not always equivalent in weightage.1 Also, just by of a contract being in existence, does not make the contract is enforceable by law or legally binding, or that it is not invalid or voidable. Contracts are normally enforceable by law, irrespective of it being a written or verbal contract, although a written contract includes and projects all parties to it. Some contracts, (such as for sale of real property, hire purchase agreements, insurance policies) have to be in writing to be legally binding. Other contracts are understood to be part of, and binding legally whether or not the parties involved desired to enter the contract in the first place...2 An executory contract3 is one wherein a party has significant incomplete responsibilities. Despite tit being important, whether or not a contract is executory is not alone determined by the importance of money yet to be paid. It is only when the breach of contract I resultant from the inability to pay money that the material aspect of the contract comes to the forefront. An executory contract then is one where one party has completed it obligation while a major part of the obligation from the other party is yet to be fulfilled. Contract where money is to be paid in installments are typical examples of executory contracts, examples would include credit loans, period loan payments, mortgages, paycheck and other similar agreements.4 Examples of executory contracts include: 1. Real estate leases (tenant has to pay rent/landlord has to provide space) 2. Equipment leases (lessee has to pay rent/lesser has to provide equipment) 3. Development contracts (development work required/payment required on milestones), and 4. Licenses to academic property (the one to whom the license I given can use only within scope of authorization /the owner cannot file a lawsuit for a usage which has been licensed). 5 The point that now has to be answered is therefore simple: is the one alleging a breach of contract entitled to withdraw an executed contract for a blameless perversion of facts? When the contract with respect to transfer of land or property, the contract can be withdrawn only in case of fraud and deception. The authority for this undisputed proposition is Wilde v Gibson. What one finds astonishing in the fact that in mot Australian judgments the answer with regards to other kinds of contract is not simple not very clear. In 1939 HA, in relation to Seddon v The North Eastern Salt Co Ltd. , Hammelmann wrote that in the United Kingdom it took the Misrepresentation Act 1967 (UK) to remove the uncertainties. In Australia, there have been some constitutional reforms in this regard but mostly there is confusion with regards to whether or not innocent misrepresentation can be grounds for withdrawal of a contract. Seddon ’s case6 is authority which is said to answer the question in the negative. However, as recently as 1996 Justice Young of the New South Wales Supreme Court observed: “In my view, the Court should no longer apply the mistaken view of the law set out in Seddon’s case.... Where one gets this plethora of instances of a case being distinguished, remembering the reticence of earlier judges to come out and say that a decision of a former generation of judges was wrong, one gets to the position without too much difficulty of coming out and saying that the case should no longer be followed.” Judgment in the Seddon’s Case has received widespread and vehement criticism. Despite that, surprisingly the Australian judiciary has shown a marked reluctance to disregard the judgment given in the case. The impact of the ruling has decreased significantly over the years but this has primarily been because of the attention that the case has generated. This is infact true even in cases where the subject of dispute have been shares, the subject of the Seddon’s Case. A study of relevant case laws will demonstrate that the best and probably the only method for differentiating the case I by assessing a difference between a case where an executory contract can be differentiated from an executed contract. On a technical level, the meaning of ‘executory’ can be stated with some clarity. Chitty on Contracts7 defines the term to mean ‘where neither party has performed the whole of his obligations under it’ The subject of "What makes a promise binding?" has been a topic of much debate in intellectual circles both among philosophers and lawyers. The primary argument in this regard has its roots in the morality of law-by agreeing on a contract a person give the other part in the contract certain hopes and it would be ethically incorrect if one were not to live up to the expectations. Another argument is grounded in the effects engendered by the making of a promise, specifically actions taken in reliance upon the promise. These are known as the expectation and reliance theories. Noteworthy here is the fact that the two theories have traditionally been viewed as incompatible. In a recent article, 'Promises and Practices', Thomas Scaulon has sought to come up with a thory of promises which has its basic premise in both of the above stated arguments.8 It is this regard that the complexity and relevance of letters of intent have to be studied and understood. First in order to understand the exact meaning of a letter of intent one can refer to the ruling made by Judge Fay in the leading case Turriff Construction Limited v Regalia Knitting Mills Limited [Queens Bench Division (1971) 9 BLR 0] considered a letter of intent to mean:9 ‘a letter is no more than the expression in writing of a party’s present intention to enter into a contract at a future date. Save in exceptional circumstances it can have no binding effect…’ Therefore a letter of intent will have two principle characteristics: 1. It is simply an expression of intention to enter into a contract in the future; and 2. It will usually have no binding effect. The importance of a letter of intent is obvious for all interested parties to see. If one has to be reliant on a letter of intent for its contractual importance, it has to be assuredly insured that the contractual importance of the letter is protected. It is a matter for analysis whether or not a contract does come into existence following a letter of intent. If it does, it does so in either of the two forms in accordance with the judgment passed in the British Steel 10case, the Principal wrote to the Contractor advising of its intention to enter into a supply contract and proposing a number of terms (at no stage ever agreed). There was a constant exchange of correspondence between the concerned parties both stressing on the preferred terms of agreement. The Contractor completed the Contract. It was asserted by the company that the contractor had to pay for the damages incurred because of late delivery despite it being true that the terms of the delivery were one the terms of the contract under dispute.  The Court found:- 1. there was no contract in existence; 2. the Contractor was had a right to get a large part of the of the sum agreed upon (even though the contract had reached the stage of completion; 3. a letter of intent can be the origin for such a contract (though none had been created here). With regards to whether or not a contract had been created had been created the judgment reaffirmed that:- "There can be no hard and fast answer to the question whether a letter of intent will give rise to a binding agreement; everything must depend on the circumstances of the particular case." The judgment also distinguished two ways by virtue of which a binding contract can be created through a letter of intent:-  1. A contract where both the parties assume shared responsibilities 11; or 2. The contract also stands if, with regards to reciprocal promises one party has already performed its part of the contract and fulfilled a majority of its obligations while the other party has not done so before the contract expired. The points that one needs to make note of in this context are, that first, in most instances, the Contractor is likely to achieve payment on a quantum merit where there is no contract and second, where either party is asserting a breach of contract, it is necessary for that party to establish that a contract has been created. 12 Bankruptcy cases: In bankruptcy cases, it can be beneficial to have an "executory contract" when your customer files a chapter 11. A contract where both parties have certain unperformed responsibilities is an executory contract. Leases are an example of executory contract but they have certain special indications and protections. The one responsible for the fulfillment of the terms of an executory contract can agree to complete (live with) these obligations or chose not to do so (breach or terminate). This is true in case of a Reorganization case as well. The accepting or fulfillment and the rejection of these obligations are relative to the approval given by the court. In case of an assumption of an executory contract, defaults either have to be restored or assurances have to be given that these defaults are cured. Pre-petition defaults are inclusive in this regard. The participant who is not the one involved in the debt has been provided with adequate compensation. The novel participant taking on the new lease has to be sure about the assertion that the terms of the contract in the future will be fulfilled. In case the contract is not accepted it is assumed that the contract was withdrawn on the day prior to which bankruptcy was filed and in this case the damages have to be paid. Unfortunately, excluding the extent to which the contract was beneficial to the one in debt post-appeal, the discarded claim is treated as being claim which pre-petition and not secure.13 There is however, an exception to the rule that the defaults have to be cured, but this exception is applicable only in cases where the default was based only on the pledge of bankruptcy. In a chapter 7 case, the trustee must assume an executory contract within 60 days of the date of filing. Otherwise, it is automatically rejected. In all cases with the exception of non residential real property there is no time limit for accepting or denying a Class 11 or Class 13 case. The time limit is 120 days, in non residential cases with the ability to get a 90 day extension because of a just and acceptable cause. After 120 days the debtor has to take permission from the landlord for any kinds of further extensions. If one sees the case from the debtor’ side of things the advice to show a bankrupt estate and assume the contract will come only if it is helpful to the problem. Otherwise, it should be rejected. For Example, if there is a contract that requires some kind of manufacture from the debtor it should be assumed but only if the completition of the project will show a profit and the profit shown will be greater than the liabilities that are to be paid otherwise. If these requirements are not being fulfilled then the contract should be withdrawn Any amount owing under the contract as a result of post-petition services, etc., however, could be treated as an administrative expense and would have to be paid in order to get a reorganization plan approved. It therefore becomes clear that if the debtor is not to gain from the contract then it would be advisable that the contract be rejected before the accumulation of administrative expenses. Sometimes, it is also in the debtor’s interest to keep the contract alive and withdraw from it at the last minute. This helps him to profit from the creditor’s post petition obligations under the contract without actually having to fulfill his own pre petition obligations. From a creditor's point of view, it is most profitable for the contract to be fulfilled, especially if the debtor has accumulated a large pre-petition compulsion. But if the debtor can in all honesty not fulfill the terms of the contract it is better for both parties involved that the contract be rejected. What this does is that it opens up the resources of the investor o that there can be henceforth be put to better and more productive usage. There are also provisions that in case of dillydallying and unclear intentions on the part of the debtor there can be a demand from the creditor for an open declaration of either an acceptance or rejection of the contract within a specified period of time. The most important step in this regard is, first and foremost whether or not there is an executory contract in existence. This can then be the background for setting up a comprehensive strategy with regards to the case. Whether or not the contract is executory can be the difference between full payment and no payment at all.14 Case Study:15 There were negotiations for some months between W and M with regards to some property that was owned by M. The contract that resulted out of the negotiations stated that M to demolish an existing building and create a new one that was to suit W’s requirements.  An agreement was reached the terms of the contract and the rent that had to be paid. W’s lawyer sent a draft lease to solicitors for M on 21 October. Few changes were discussed between the parties and these changes were accepted by W. A revised lease was drafted which was inclusive of the amendments and then was sent by M to W.  In November M informed W that demolition work had started so that it was important to conclude the lease quickly before Christmas shutdown. By November W started having doubts about the deal because and told his lawyers to slow the entire process down.  In early January M started building, but later in the month W informed M it did not wish to continue; building work by then was 40% complete.  M sought to enforce the agreement. W negotiated for some months with M for the grant of a lease over property owned by M. It was understood that M would demolish an existing building and erect a new one for W to occupy. W required the plans etc be prepared to suit its needs.  Agreement was reached on terms and rent. Solicitor for W sent draft lease to solicitors for M on 21 October and me changes were discussed and accepted by W. A revised lease with amendments was sent by M to W.  In November M informed W that demolition work had started so that it was important to conclude the lease quickly before Christmas shutdown. Later in November W started to have some doubts and (having been informed it was not bound by the agreement) instructed solicitors to slow the process down. In early January M started the building work, but later in the month W informed M that it wanted to discontinue; the work on the building by then was 40% complete.  M tried to put the agreement into effect and was successful at the first instance and on appeal.  W appealed to the HC. Held (Mason CJ and Wilson J) M did not believe that contracts had been exchanged when they embarked on demolition .However, were entitled to assume the exchange was a mere formality. Promissory estoppel extends to representations or promises as to future conduct. No reason in principle why cannot apply to preclude departure from representation that representor will or will not enforce a non contractual right. Therefore the conclusion that can be drawn are that for a non-contractual promise to be enforceable directly the promisor must make promise, he must create to encourage an assumption that contract will come into existence/ promise will be performed; Promisee must rely on this to detriment; must be unconscionable, having regard to the promisor’s conduct, for the promisor to be free to ignore it. Equity grants relief because it would be unconscionable conduct on the promisor’s part to ignore the assumption. In conclusion therefore the following points have to be kept in mind with regards to executory contracts and reciprocal promises: 1. In all such cases the first step is the establishment of whether or not there is a contract in existence. 2. There is a loophole with regards to bankruptcy and in such cases the liabilities in the contract have to be examined carefully. 3. Since all credit card agreements, loans, and leases fall under the category of the contract there is always a risk of defaulters and non payment. However despite the problems these contracts are in fact good consideration. ---------- Read More