The most commonly used type of contract, a bilateral contract contains a promise by each party to fulfill certain obligations to complete the deal. For example, a person offers their home for sale, and a buyer agrees to pay $150,000 to purchase the home. In this bilateral contract, each party is required to do something: the buyer must pay the sales price, and the seller must transfer ownership of the home to the buyer. To explore this concept, consider the following bilateral contract definition.
Definition of Bilateral Contract
- A contract or agreement involving two or more parties, which binds all parties to reciprocal obligations.
Late 18th century Latin bi + lateral
Difference Between Bilateral and Unilateral Contracts
While bilateral contracts are the most commonly used in the United States, unilateral contracts are found in certain cases which involve one party making a promise to another party, or to the public in general, to do or provide something. For instance, a family’s dog runs away, and they post signs offering a reward of $50 for the return of the dog. A neighbor, Bobby, finds and returns the dog. The family has made a unilateral, or one-sided, promise to pay a sum of money to anyone if they return the dog. Bobby did not, however, promise to find the dog.
A larger, more complex example of a unilateral contract is an insurance policy. The insurance company promises to pay a certain amount of money to the consumer if the consumer pays premiums in a timely manner. The consumer does not, however, promise to pay premiums. In this case, the consumer receives the promised benefit only if they have paid their premiums, much like Bobby received $50 only if he returned the dog.
The Issue of Consideration
One party to a contract offers something of value, whether it be a good or service, or promise to do or not do something, which induces or persuades the other party to enter into the contract. Traditionally, the courts have considered whether one or both parties have offered consideration to determine whether the contract is unilateral or bilateral in nature.
A bilateral contract, in which both parties have offered something of value as consideration, is considered binding on both parties immediately upon the exchange of promises. A unilateral contract, however, binds only the party promising something of value (the “promisor”). In this case, the unbound party (the “promisee”) has no obligation until he accepts the contract by performing the specified obligation.
For example, if Cindy agrees to watch neighbor Amanda’s children on Monday and Wednesday, and Amanda agrees to watch Cindy’s children on Tuesday and Thursday, a bilateral contract has been entered into, where each party offered consideration. The gain or profit of the contract is a couple of quiet afternoons for each mother. If, instead, Cindy offered Amanda $10 for each afternoon she watched Cindy’s children, a unilateral contract is created, in which Amanda only receives, and Cindy is only obligated to pay the money if Amanda watches the children.
When a Unilateral Contract Becomes Bilateral
The courts have held that, as soon as a promisee has begun to perform or provide under the unilaterally offered contract, it becomes bilateral, with both parties bound to certain performance.
Bilateral Contract Example
Bob pays Sam $1,000 to install sprinklers in his yard. This seems like a unilateral contract in which Bob is obligated to pay the money only if Sam accepts by installing sprinklers.
There exists a question of just what constitutes completion or performance under this type of contract: the act of beginning the installation, or the completion of the job to a standard satisfactory to Bob? In response to these issues, the courts generally hold that, when Sam begins the installation, the contract is converted to a bilateral contract that requires both parties to perform certain actions.
Sam must provide the complete service of sprinkler installation, for which Bob must pay $1,000. Modern courts have moved from applying strict unilateral vs. bilateral concepts to contract disputes, focusing instead on the intended result or outcome of each contract.
Enforcing a Contract in Court
Whether a contract is bilateral or unilateral in nature, the same criteria are required to successfully win a lawsuit related to enforcing a contract in court.
- A contract existed between the parties. While a contract is not required to be in writing, proving the existence and terms of a contract is much easier when set forth on paper. Whether written or oral, a valid contract entails an offer made and accepted of the terms, and that each party to the contract is to receive something of value.
- Terms of the contract were broken or not satisfied (a “breach”). A failure to perform or satisfy any significant term of the contract.
- A loss was suffered. It must be proven than the defendant, through his breach of the terms of the contract, has caused monetary or other loss (“damages”). This may include loss of money, loss of time, loss of property, and other issues resulting in a financial loss to the Plaintiff.
- The challenged party (“Defendant”) was responsible for the breach and loss. The Plaintiff must prove that the Defendant’s breach or failure to perform under the contract caused their loss or damages.
Related Legal Terms and Issues
- Promisee – a person to whom a promise is made.
- Promisor – a person who makes a promise.
- Reciprocal Obligation – a duty or obligation owed by one person to another, and vice versa. An agreement that binds the parties to performance in an equal manner. Also called “reciprocal agreement.”