What is a bilateral contract?
A bilateral contract is an agreement between two parties in which each side agrees to fulfill their side of the bargain. Typically, bilateral contracts involve an equal obligation or consideration from the offeror and the offeree, although this need not always be the case.
In more complex situations, such as multinational trade negotiations, a bilateral contract can be a so-called “side deal.” Both parties are involved in the general negotiations but may also see the need for a separate contract relevant only to their shared interests.
How a Bilateral Contract Works
The bilateral contract is the most common kind of binding agreement. Each party is an obligor (a person bound to another) to its promise and an obligee (a person to whom another is obligated or bound) to the other party’s promise. A contract is signed so that the agreement is clear and legally enforceable.
Any sales agreement is an example of a bilateral contract. A car buyer may agree to pay the seller a certain amount in exchange for the title to the car. The seller agrees to deliver the car title in exchange for the specified sale amount. If either party fails to complete one end of the bargain, a breach of contract has occurred.
In that sense, virtually all daily transactions are bilateral contracts, sometimes with a signed agreement and often without one.
Business contracts are almost always bilateral. Businesses provide a product or service in exchange for financial compensation, so most businesses constantly enter into bilateral contracts with customers or suppliers. An employment agreement, in which a company promises to pay an applicant a specific rate for completing specified tasks, is also a bilateral contract.
Bilateral vs. Unilateral Contracts
As noted, a bilateral contract, by definition, has reciprocal obligations. That makes it distinct from a unilateral contract. In a unilateral contract, one party must fulfill its obligation only if and when the other party completes a specified task. A unilateral contract typically involves the first party issuing a payment only after completing the second party’s task.
In legal terms, the second party in a unilateral contract is not obliged to perform the task and may not be found in breach of contract for not doing so. Both parties would have a legal obligation if it were a bilateral contract.
An example of a unilateral contract might be a contest to find a buried treasure to win $1 million. No one is obligated to hunt for the treasure, but if someone finds it, the contest creator must pay $1 million to that person. Suppose the nature of a contract is disputed. In that case, a court will judge the claim’s merits against the contract’s content, determining if one or both parties maintain an obligation or concession.
Conclusion
- A bilateral contract is the most common type of binding agreement involving concessions or obligations owed by both sides.
- Any sales agreement, lease, or employment contract is a typical example of a bilateral contract.
- A unilateral agreement, in contrast, requires only one party to commit to an obligation.
