Understanding the difference between unilateral and bilateral contracts is crucial for businesses, as it directly impacts obligations and risks. In a unilateral contract, only one party is obligated to perform, creating uncertainty for the other party.
In contrast, a bilateral contract requires both parties to fulfill their obligations, providing a clearer framework for accountability. The obligor (the performing party) and the obligee (the receiving party) need to clearly define their roles. Choosing the right contract type ensures aligned expectations, reduces disputes, and fosters smoother transactions, ultimately saving time and resources.
Key Takeaways
- Bilateral contracts require both parties to fulfill obligations.
- Unilateral contracts bind only one party to perform.
- Most business agreements are bilateral; unilateral contracts are common for rewards or insurance.
- Choosing the right contract type ensures clear expectations and reduces disputes.
What Is a Bilateral Contract?
A bilateral contract is an agreement where both parties are required to perform certain obligations before the contract is completed. In other words, both parties promise to do something in exchange for what the other party is offering.
For example, one party may want their house painted, and the other party agrees to do the work in exchange for payment. Both parties are bound by their promises: one to complete the work, and the other to pay for it.
Most business agreements are bilateral contracts because both parties must fulfill obligations. Once both parties have met their responsibilities, the contract ends.
Examples of a Bilateral Contract
- Business Contract: A general contract where two parties agree to exchange goods, services, or payments under specified conditions.
- Sales Agreement: A contract where a business agrees to sell goods or services, and the buyer agrees to pay.
- Mutual Non-Disclosure Agreement: Both parties agree not to disclose certain confidential information to third parties.
- Partnership Agreement: Two or more parties agree to work together and share profits, losses, and responsibilities.
- Employment Contract: An employee agrees to perform work, and the employer agrees to pay wages in return.
Contractor Agreements:
Contractors use a bilateral contract, often called a service agreement such as this painting contract. It typically outlines the scope of work, materials, labor, and additional services, like stripping or finishing. The client agrees to pay upon completion of these services.
What Is a Unilateral Contract?
The promisor creates a unilateral contract, which the promisee accepts by fulfilling. A unilateral contract example is a lost-pet reward. If your dog is lost and you put up a notice saying you’ll pay $50 to whoever finds it, you, the promisor, have created a contract with whoever returns your dog, the promisee.
The promisor is the only person required to fulfill the contract.
Most unilateral contracts are based upon an expectation of performance rather than a mutually agreed performance. For instance, when you sign an insurance agreement, you expect the insurance company will pay if you file a claim. An insurance policy is a type of unilateral contract. If you fulfill the conditions of the policy, the insurer will pay the claim.
Examples of a Unilateral Contract
- Lost Pet Reward: A person offers a reward for the return of a lost pet. Only the person who finds and returns the pet has to perform, and they are paid upon completion.
- Insurance Policy: The insurer agrees to pay if the policyholder fulfills specific conditions (such as filing a claim after a covered event), but the policyholder has no obligations unless they need to file a claim.
- Sales Promotion (Buy One, Get One Free): A store offers a promotion where a customer gets one item free if they buy another. The store only performs if the customer completes the purchase.
- Confidentiality Agreement: In a unilateral confidentiality agreement, the disclosing party, typically an employer, requires the receiving party, usually an employee, to keep certain information confidential, without requiring mutual disclosure.
- Rent-to-Own Lease Agreement: The property owner offers the tenant the option to purchase the property after fulfilling specific lease conditions. The tenant is not required to buy the property, but they can exercise the option if they choose to do so.
Reward Offers and Special Promotions:
Unilateral contracts are often used for rewards, promotions, or offers. In these cases, the promisor (e.g., a store or individual) agrees to act only when someone fulfills the required conditions, such as making a purchase or returning a lost item.
Difference Between Bilateral and Unilateral Contracts
| Criteria | Bilateral Contract | Unilateral Contract |
|---|---|---|
| Who Must Perform | Both parties are contractually bound | Only the promisor is contractually bound |
| Completion of Exchange | Allows exchange immediately and encourages it | Cannot be paid until after the action has taken place |
| Enforceability | Legally enforceable once both parties sign the contract | Legally enforceable once the promisee fulfills the terms of the agreement |
There are some critical differences between bilateral and unilateral contracts. Businesses and individuals entering into contracts should pay attention to what they expect and need from the other party before signing on the bottom line. It is rarely as simple as choosing bilateral vs. unilateral contracts. Key differences may include:
- Determination of who must perform – In bilateral contracts, both parties are contractually bound. In unilateral contracts, only the promisor is contractually bound.
- Completion of exchange – A bilateral contract allows exchange (payment) immediately and usually encourages it. Unilateral contracts cannot be paid until after the action in the contract has taken place.
- Enforceability – Bilateral contracts are legally enforceable the moment both parties sign them. Unilateral contracts are lawfully enforceable once the promisee has fulfilled the terms of the agreement.
To use the lost dog example, if you have placed an ad for your lost dog and your neighbor decided to look for it, you would probably not agree to pay them until they found it, and no court would enforce their demand for payment.
However, if they found the dog and returned it and you refused to pay, they could sue you for payment of the contract.
How Are Unilateral and Bilateral Contracts Alike?
Both contracts have the same legal elements: offer, acceptance, and consideration for performance. Both unilateral and bilateral contracts require that the parties understand what was offered and accepted, legally known as a “meeting of the minds.”
Nonperformance breaches both types of contracts. In a bilateral contract, either party can breach by failing to carry out their promise under the contract. In a unilateral contract, only the promisor can breach since the other party has no responsibility until they perform under the contract.
Both written and verbal contracts for bilateral or unilateral agreements can be legally binding.
What’s Better – a Bilateral Contract vs Unilateral Contract?
A bilateral or unilateral contract can serve equally well, depending on the nature of the exchange and the parties’ expectations.
Which One Should You Use?
Before entering into a contract, consider the nature of the agreement and what each party expects:
- Are both parties required to perform specific actions? Opt for a bilateral contract.
- Are you making an offer open to anyone who can meet the conditions? A unilateral contract may be the right choice.
Understanding the right type of contract ensures that your agreement meets your expectations and needs.
