Executory Contract

A contract under which at least one party has obligations that remain to be fulfilled. For example, a license agreement usually provides for the payment of royalties on an ongoing basis, in arrears and is thus an executory contract. Similarly development agreements, until completed, are executory contracts. That a contract is executory has two major implications:

(a) revenue recognition under GAAP and IFRS accounting rules is effectively deferred, in whole or in part (depending on the nature of the unfulfilled obligations and the agreement) until the contract conditions are fulfilled; and

(b) most bankruptcy systems allow the trustee, receiver, administrator or liquidator of the bankrupt to avoid (i.e., terminate) executory contracts existing as of the time of the bankruptcy. However, most legal systems prohibit the exercise of this right with respect to licensing where the bankrupt is a licensor.  See, e.g., §365(n)