Key Takeaways

  • A bilateral contract involves mutual promises and obligations between two parties.
  • These contracts are used in various industries, including employment, real estate, and business transactions.
  • A breach of a bilateral contract can result in legal consequences, including damages or specific performance.
  • Bilateral contracts differ from unilateral contracts, where only one party is initially bound.
  • Digital contract management tools can improve the efficiency, compliance, and tracking of bilateral agreements.

In a bilateral contract, two parties each promise to perform an act in exchange for something else. It is the most prevalent type of contract. When most people think of contracts, they are thinking of bilateral contracts. In the reciprocal agreement, each party is agreeing to offer something and to get something in return, such as offering money in exchange for a service. For a bilateral contract to be legally binding, there has to be a record that the terms were agreed upon by all parties, which usually comes in a signed document.

How to Create Legal Bilateral Contracts

In order for a contract to be legally binding, it must contain four required elements:

  • Agreement, or the offer accepted by both parties
  • Consideration, or the price paid for the agreement
  • Intention to create legal relations, or the understanding that the contract will be legally binding
  • Certainty, or a clear and complete contract

Legal detriment in a contract comes from a promise from one party to do something that the party hasn't previously been legally bound to do. Legal detriment establishes consideration, motive, cause, or benefit and causes a party to enter a contract. It is a required part of the contract.

Courts typically determine if a contract is bilateral or unilateral by identifying if both parties provided consideration and when they did so. Both parties are bound to a bilateral contract as soon as they exchange promises. 

For example, if a person offered to drive their neighbor's children to school three days a week in exchange for the neighbor driving the children to school the other two days, a bilateral contract would be created as soon as both people agreed to the arrangement. However, if the person offered the neighbor $20 to drive their children to school, it would create a unilateral contract that only binds the neighbor offering the service to the arrangement until the other neighbor drives the children.

Common Uses of Bilateral Contracts

Bilateral contracts are prevalent across multiple industries due to their flexibility and mutual obligation structure. They are frequently used in:

  • Real Estate Transactions: Buyer and seller agree to exchange property for payment.
  • Employment Agreements: An employer agrees to pay a salary, and the employee agrees to perform job duties.
  • Sales and Supply Contracts: One party provides goods or services, while the other pays an agreed amount.
  • Service Agreements: Both parties agree to perform specific duties, such as software development in exchange for consulting fees.

In all cases, both parties are bound as soon as they mutually consent to the terms, making bilateral contracts enforceable and predictable.

When to Use a Bilateral Contract

Bilateral contracts can cover many different subjects, including selling goods. When real estate is sold, a buyer is contractually bound to pay the seller a specific amount of money in order to get the property, and the seller agrees to hand over the property in exchange for a certain amount of money. A breach of contract happens if either party doesn't follow through on their promise.

In a bilateral contract, two parties agree to each do something. Elements of a bilateral contract include:

  • Offer by the promisor
  • Acceptance by the promisee
  • Consideration for the offer, usually money
  • Of legal capacity, or that both parties are of sound mind
  • Lawful terms

Business contracts are almost always bilateral because businesses provide a service or product in exchange for money from their suppliers or customers. Contracts for employment and job offers are also bilateral because a company agrees to give an employee a specific salary for performing certain tasks.

Bilateral contracts are important for small businesses, especially those in the retail industry. Every sale is a bilateral contract. The business agrees to provide a service or item to a customer in exchange for an agreed-upon price. The buyer agrees to pay the amount in exchange for the good or service. Every sale is a textbook example of a bilateral contract with a mutual exchange of promises. However, each bilateral contract is different. In order for a business to stay in operation, it must create contracts not only with customers as it makes sales, but also with other businesses and suppliers.

Advantages and Disadvantages of Bilateral Contracts

Advantages:

  • Mutual Obligation: Ensures both parties are equally responsible for fulfilling their part of the deal.
  • Legal Predictability: Clearly outlines duties and expectations, which helps prevent disputes.
  • Versatility: Suitable for a wide range of transactions, from business deals to personal services.

Disadvantages:

  • Complex Enforcement: Disputes can arise if one party believes the other hasn’t fulfilled their promise.
  • Inflexibility: Once agreed upon, terms are legally binding unless both parties consent to modifications.
  • Administrative Overhead: Requires drafting, reviewing, and maintaining proper documentation to ensure compliance.

Understanding these pros and cons helps parties determine whether a bilateral contract best fits their situation.

Bilateral vs. Unilateral

In our modern world, courts don't often distinguish between bilateral and unilateral contracts and believe an offer can be accepted either with a promise to perform the agreed-upon action or by actually performing the action. In fact, courts often rule that unilateral contracts become bilateral contracts once the action is performed. Some courts interpret all contracts as bilateral contracts if there isn't clear evidence the parties intended to create a unilateral contract. If there is any doubt, courts will assume the contract was bilateral with the promise to perform an action in exchange for something else. The bottom line is that most courts have moved away from stringent application of unilateral and bilateral contracts, and instead look at each contract on an individual basis.

Legal Consequences of Breaching a Bilateral Contract

When a party fails to fulfill their obligations under a bilateral contract, it constitutes a breach. Legal remedies for breach may include:

  • Compensatory Damages: Monetary payment to cover direct losses caused by the breach.
  • Consequential Damages: Compensation for secondary losses, such as lost profits.
  • Specific Performance: A court order requiring the breaching party to fulfill their promise.
  • Rescission: Termination of the contract, returning both parties to their pre-contract positions.

The severity of the breach and the damages sought depend on how central the broken promise was to the agreement. Courts generally look for clear evidence that both parties understood and agreed to the terms.

Digital Contract Management for Bilateral Agreements

With the increasing reliance on digital tools, many organizations use contract lifecycle management (CLM) software to handle bilateral contracts more efficiently. These platforms offer:

  • Centralized Storage: Ensures contracts are easy to access and review.
  • Automated Reminders: Notifies stakeholders of key dates, like renewal or performance milestones.
  • Compliance Tracking: Ensures obligations are met and reduces the risk of breach.
  • Audit Trails: Maintains records of changes and approvals, which can be critical in legal disputes.

By leveraging technology, businesses can streamline the management of bilateral contracts and improve legal compliance.

Frequently Asked Questions

  1. What is a bilateral contract in simple terms?
    A bilateral contract is a mutual agreement where both parties promise to perform certain obligations.
  2. How does a bilateral contract differ from a unilateral contract?
    In a bilateral contract, both parties are bound from the outset. In a unilateral contract, only one party is bound until the other performs.
  3. Can a bilateral contract be verbal?
    Yes, but written contracts are preferred for enforceability. Some types of contracts must be in writing under the Statute of Frauds.
  4. What happens if someone breaches a bilateral contract?
    The non-breaching party can sue for damages, seek specific performance, or terminate the contract.
  5. Are bilateral contracts used in employment?
    Yes, employment agreements are classic examples of bilateral contracts where an employee agrees to work in exchange for wages.

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