Key Takeaways

  • Unilateral contracts involve one party making a promise that is only binding if the other party performs a specific action.
  • Bilateral contracts involve mutual promises, with obligations created for both parties immediately upon acceptance.
  • Courts typically favor bilateral contracts because obligations are clearer and enforceability is stronger.
  • Common examples of unilateral contracts include reward offers, insurance policies, and contests.
  • Common examples of bilateral contracts include sales agreements, employment contracts, and service agreements.
  • Knowing when to use unilateral vs bilateral agreements is crucial for risk management, enforceability, and clarity in both personal and business transactions.

When discussing unilateral versus bilateral, you are often referring to the type of contract that is being signed by multiple parties. A contract is defined as a written or spoken agreement between the two parties that is enforceable under the law. Through the use of these contracts, the rights, duties, responsibilities, and related terms in the agreement are all clearly defined and understood. If these agreements are breached or not followed by either party, they could be found liable under a court of law.

When creating your contract, there are two primary types of contracts that you can choose from: unilateral and bilateral. There are some primary differences between the two types of contracts and key factors that each includes. Both types of contracts are used on a regular basis, so you may come across them in both your personal and daily business life. When it comes to unilateral and bilateral contracts, some key factors are:

  • Both types of contracts are protected under the law
  • Courts tend to favor bilateral contracts
  • Both types of contracts should be put in writing to make sure they are enforceable

What Is a Unilateral Contract?

A unilateral contract by definition is a contract that involves action taken by one group or one person alone. In contract law, for a contract to be considered unilateral, it can only allow for one person to make the agreement. The promise the one party makes will be considered available and open until someone takes action. The promise will then be fulfilled once a person has acted on it. 

A unilateral contract is where an obligation or promise is made without there being a promise of performance from the other party. While the originating party may have made a promise, they may not be obligated to perform on it unless the second party decides to act. Therefore, the unilateral contract does not become binding until one of the parties accepts.

There is no requirement that the offeree must notify the offerer that the agreement has been accepted. The offeree's performance will be treated as the acceptance, price, and consideration of the offer. A prime example of a unilateral contract is that of insurance. An insurance company makes a promise to pay for damages if an accident occurs, as long as the insurance premiums have been paid. The insured does not have to pay unless they want to take advantage of the service, at which point paying the premium would constitute acting on the contract.

This is the primary difference between unilateral and bilateral agreements. A unilateral agreement is an open-end agreement offered by one party that requires acceptance to start, where a bilateral contract is a contract where both sides have made promises.

Key Features of Unilateral Contracts

Unilateral contracts are one-sided agreements, meaning only the offeror is legally bound until the other party performs. Key features include:

  • Conditional obligation: The offeror is not obligated to act unless the offeree performs the requested action.
  • No mutual promise required: The contract becomes enforceable through performance, not mutual consent.
  • Open-ended offer: Offers often remain valid for a period of time, allowing anyone to accept through performance.
  • Performance as acceptance: Silence or failure to act does not bind the offeree; acceptance happens only through completing the required action.

Examples of a Unilateral Contract 

You can see examples of unilateral contract agreements in business situations, as well as everyday life. Some examples of a unilateral contract include:

  • Offers of reward for a lost pet or item
  • Insurance premiums where the insurance will pay for a loss if you pay your premiums
  • A real estate broker agreement where they agree to sell a property for a commission rate, therefore, the pay is not determined until a purchase action is made

When Are Unilateral Contracts Used?

Unilateral contracts are often used when one party wants to incentivize action without requiring a reciprocal promise. Common contexts include:

  • Public offers: Reward posters for lost pets or missing items.
  • Contests and competitions: A business offering a prize for completing a challenge.
  • Insurance policies: The insurer promises to pay for losses if premiums are paid and a covered event occurs.
  • Business promotions: Rebates or loyalty rewards where performance (purchase or participation) triggers the benefit.

What Is a Bilateral Contract?

A bilateral contract is a contract that is entered into by at least two groups of people where both parties in the contract will make promises. There are elements in a bilateral contract that are similar to those in a unilateral contract, such as:

  • The promisor's offer
  • The promisor's acceptance of the offer
  • Consideration of what can support the offer
  • The legal capacity of both parties

In a bilateral contract, parties will agree to a number of things, including:

  • The time frame in which delivery will occur
  • Description of the product or services being delivered
  • What happens if either party fails to keep up their end of the contract
  • What constitutes a breach of contract
  • What steps will be taken if a default occurs

In a bilateral contract, if either party fails to perform their end of the agreement, the nonperforming party will be considered to be in breach of contract. In essence, a bilateral contract is constructed of a promise in exchange for a promise.

Key Features of Bilateral Contracts

Bilateral contracts are mutual agreements, with obligations on both sides from the moment of acceptance. Key features include:

  • Promise for a promise: Both parties commit to specific obligations at the outset.
  • Mutual enforceability: Each party can sue if the other fails to perform.
  • Defined terms: Clear descriptions of duties, timeframes, consideration, and remedies for breach are essential.
  • Most common type of contract: From sales agreements to employment contracts, bilateral agreements dominate modern business transactions.

When Are Bilateral Contracts Used?

Because of their mutual obligations, bilateral contracts are the foundation of most commercial and personal agreements, including:

  • Employment contracts: Employers promise wages, employees promise to work.
  • Sales contracts: Sellers promise to deliver goods, buyers promise to pay.
  • Service agreements: Service providers and clients both commit to terms.
  • Lease agreements: Landlords provide use of property, tenants agree to pay rent.

Frequently Asked Questions

  1. What is the main difference between unilateral and bilateral contracts?
    Unilateral contracts require performance by one party, while bilateral contracts involve mutual promises that bind both parties immediately.
  2. Are unilateral contracts legally enforceable?
    Yes. Once the specified action is performed, the offeror is legally obligated to fulfill their promise.
  3. Why do courts prefer bilateral contracts?
    Courts favor bilateral contracts because they clearly outline obligations on both sides, making enforcement easier.
  4. Can unilateral contracts be revoked?
    Generally, unilateral offers can be revoked before performance begins, but once the offeree starts performance, the offeror may be legally bound to allow completion.
  5. Which type of contract is more common in business?
    Bilateral contracts are far more common because most business relationships involve mutual obligations, such as sales, services, or employment.

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