Understanding key differences between unilateral and bilateral contracts

In the world of contract management, understanding the nuances between different types of contracts is crucial to effectively managing agreements. Among the various contract types, unilateral and bilateral contracts stand out for their distinctive characteristics and applications. By grasping the key differences between these unilateral and bilateral contracts, businesses and legal professionals can make informed decisions that best suit their needs.

What are unilateral and bilateral contracts?

At their core, contracts are agreements between parties that create mutual obligations enforceable by law. The primary distinction between unilateral and bilateral contracts lies in the number of parties making a promise.

Unilateral contracts

A unilateral contract involves a promise made by one party in exchange for the performance of an act by another. The contract is only fulfilled when the other party completes the specified task. A common example is a reward contract, where one party promises to pay a reward if another party finds their lost pet. The promise of payment is legally binding once the pet is found and returned, but not before.

Bilateral contracts

In contrast, a bilateral contract involves mutual promises between two parties. Each party is both a promisor and a promisee, meaning they exchange promises to perform certain acts in the future. Most everyday transactions fall into this category, such as purchasing goods or services. For example, a buyer promises to pay a certain amount, and the seller promises to deliver the goods or services.

Key differences between unilateral and bilateral contracts

1. Structure and formation

The fundamental structural difference between unilateral and bilateral contracts is the number of promises involved. In a unilateral contract, only one party makes a promise, while in a bilateral contract, both parties make promises.

Formation in unilateral contracts occurs when the offeree performs the requested action. Until that point, the offeror is not bound by the contract. Conversely, bilateral contracts are formed as soon as the promises are exchanged, which means both parties are immediately bound to fulfill their promises.

2. Obligations and acceptance

In unilateral contracts, the offeror is only obligated to fulfill the promise once the offeree completes the required action. Acceptance is not communicated until the act is performed. An example is a promise of payment for someone to climb a mountain; the ascent itself signifies acceptance.

Bilateral contracts require both parties to fulfill their obligations through the promised future actions. Acceptance is communicated through the exchange of promises, establishing the contract immediately. This mutuality is why bilateral contracts are more common in business transactions.

3. Legal enforceability

Unilateral contracts are enforceable once the offeree performs the requested act. Until then, the offeror may revoke the offer, unless it has been made irrevocable. The offeree has no legal obligation until the act is completed.

Meanwhile, bilateral contracts are legally enforceable once the promises are exchanged. Each party is obligated to perform their part of the agreement, and failure to do so may result in a breach of contract with potential legal consequences.

Practical applications

1. Unilateral contracts in practice

Unilateral contracts are often used in scenarios where one party seeks to motivate others to take specific actions. Common applications include:

• Rewards and contests: Offering a prize for achieving a specific goal, such as developing a new technology or winning a game.

• Public offers: Companies may use unilateral contracts to encourage consumers to perform certain actions, like signing up for a service to receive a discount.

• Insurance policies: Some insurance contracts operate unilaterally, where the insurer promises to pay for specific losses if certain conditions are met.

Moreover, unilateral contracts can be seen in scenarios like job offers contingent on specific performance criteria or scholarships awarded based on future academic achievements.

2. Bilateral contracts in practice

Bilateral contracts are prevalent in everyday business dealings. Some typical uses include:

• Sales agreements: Most purchase and sale transactions are bilateral, involving promises to pay and deliver goods or services.
• Employment contracts: These agreements outline mutual obligations between employers and employees, such as salary and job responsibilities.
• Lease agreements: Landlords and tenants enter into bilateral contracts where both parties agree to specific terms over the duration of the lease.

Bilateral contracts are also crucial in international trade agreements and joint ventures, where two or more parties collaborate with shared responsibilities and risks.

Choosing between unilateral and bilateral contracts

When deciding between unilateral and bilateral contracts, the parties must consider the nature of their relationship and the level of commitment required. Unilateral contracts may offer flexibility for the offeror, but they also present uncertainty for the offeree, who risks non-fulfillment if the offer is revoked. On the other hand, bilateral contracts provide security through mutual obligation but can be more complex to negotiate and enforce.

Another consideration is the clarity of terms. Unilateral contracts must clearly define the act required for fulfillment to avoid disputes. Bilateral contracts, while inherently mutual, must ensure that promises exchanged are clear and attainable to prevent breaches and legal complications.

In conclusion

Understanding the differences between unilateral and bilateral contracts is essential for anyone involved in contract management. By recognizing the structural variations, obligations, and practical applications, businesses and legal professionals can better navigate their contractual relationships.

To effectively manage both unilateral and bilateral contracts, businesses can leverage contract lifecycle management (CLM) software. By automating key aspects of contract management, CLM software enhances oversight, reduces risks, and improves performance tracking. As a result, businesses can ensure their contractual relationships are well-managed, legally sound, and aligned with their strategic goals, ultimately maximizing efficiency and minimizing potential pitfalls.

Learn more about the different types of contracts in our blog, “Demystifying contracts: Understanding 10 different types of contracts.“