When two people or parties come together to trade services for payment, they make a business contract. Depending on how they phrase the exchange, that is, who must carry out their part of the contract first, the contract may be unilateral or bilateral.
It is crucial to be sure which contract you want to use before entering into a contract, so you should review what you and the other party expect before creating your contract terms. The difference between unilateral and bilateral contracts is who has to do something before the contract is completed.
The legal terms for the parties to a contract are obligor (or promisor) and obligee (or promisee). The obligor is the person asking for something in the contract or promising to pay for something to be done. The obligee is the person who promises to do the thing.
What is a Bilateral Contract?
In a bilateral contract, both parties must perform on the contract. That is, both parties have something that must be done before the contract is completed. A simple bilateral contract definition is that both parties write the contract.
A bilateral contract is an exchange of promises. One party wants something done, such as having their house painted. The other party wants to do the thing and get paid for it. In a bilateral contract, both parties are bound by a promise to the other.
Bilateral contracts usually have specific end dates or timeframes. When both parties have completed their responsibilities, the contract ends.
For example, once the painter paints the house, the painter gets paid, and the contract is over. If the owner wants the house painted again, they must make a new contract.
Examples of a Bilateral Contract
Most standard business contracts are bilateral contracts. A good bilateral contract example is the trusty business contract. A typical business contract sets out the terms for sales of goods or services between a business and its customers. This type of contract ensures that both parties know what they are paying for, delivery terms, and costs per unit or hour as decided by the parties.
Contractors use a slightly different type of bilateral contract, sometimes called a service agreement, such as this painting contract. A contractor’s contract breaks down the materials, labor, and additional services to be provided during the contract, such as stripping or finishing. The signer agrees to pay for the listed services upon completion of the work.
Other examples of bilateral contracts include:
What is a Unilateral Contract?
The promisor creates a unilateral contract. The promisee accepts by fulfilling the contract. 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 your dog, 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
Sales and specials are a surprising but familiar unilateral contract often seen in business settings. “Buy one get one free” is a unilateral contract. The store is not obligated to act on the contract—getting one free—unless a customer comes to the register with two of the items.
A unilateral contract often seen in software, computer design, and other intellectual property companies—those that own intellectual property assets, such as trademarks and patents— is the confidentiality agreement contract. In a unilateral confidentiality agreement, the disclosing party, usually the employer, is providing information they don’t want the receiving party, the employee, to reveal.
Another example of a unilateral contract is a rent-to-own lease agreement.
Difference Between Bilateral and Unilateral Contracts
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 would be able to take you to court for payment of the contract.
Bilateral vs. Unilateral – Which One Should You Use?
Your choice of contract depends on what you are using it for. If you need the other party to do something for you of nearly equal value to what you are doing for them, you need a bilateral contract. A unilateral contract will suffice if you make an offer and wait to see who responds. In most cases, unilateral vs. bilateral contract choices depend on your desired outcome.
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.
What’s Better – a Bilateral Contract vs Unilateral Contract?
Depending on the nature of the exchange and the parties’ expectations, a bilateral or a unilateral contract can serve equally well.
Choose a bilateral contract for the sale or purchase of goods and services, for situations where a firm date for completion is needed, and for any business arrangement between two entities where performance needs to be spelled out.
Use a unilateral contract for times when the offeror is casting a wide net, so to speak: seeking offers before making firm deals, rewards, sales, and situations where payment is predicated on the occurrence of a specific event, such as insurance payments or commissions.