What is a bilateral contract?
What does it take to enter into a bilateral agreement?
What are some examples of bilateral contracts?
In this article, we will break down the notion of bilateral contracts so you know all there is to know about it.
We will first define a bilateral contract, look at its legal definition, see how it is formed, the elements of a bilateral contract, how courts nuance a bilateral vs unilateral contract and more.
You will learn quite a bit on the topic with our comprehensive overview.
Are you ready?
Let’s dive right in.
What is a bilateral contract
A bilateral contract is an agreement reached by two parties where each party commits to performing certain obligations in exchange for something in return.
For example, when you purchase an automobile, you enter into a bilateral contract.
You obligate yourself to pay the car dealer a certain amount of money and the car dealer obligates itself to deliver to you the car you intended to buy.
There are two types of contracts, bilateral contracts and unilateral contracts.
Bilateral contracts are the most widely used type of contract, particularly in the business world.
Nearly all business contracts are bilateral.
In other words, a business entity agrees to give something or do something in exchange for something else.
Bilateral contract definition
According to Investopedia, a bilateral contract is defined as:
“A bilateral contract is an agreement between two parties in which each side agrees to fulfill his or her side of the bargain.”
Parties to a bilateral contract
Consider bilateral contracts are mutually negotiated agreements where two parties exchange promises to perform.
As a result, you need at least two parties to the contract.
One party will be the obligor meaning that it is bound to perform an obligation.
The other party will be the obligee meaning that it is entitled to receive the performance of the obligor’s obligation.
Since a bilateral contract is a two-sided contract, the obligor is simultaneously the obligee.
In other words, the obligor has a duty to perform certain obligations and, at the same time, is an obligee expecting the other party to perform certain obligations in its favor.
Exchange of promise
A bilateral contract is typically formed when there is an exchange of promise between two people serving as the consideration for the promise of the other party.
The party making a promise is obliged to follow through with the promise.
The party making a promise is the promisor and the other party is the promisee.
For example, if a person agrees to pay a contractor $10,000 to renovate the kitchen, the buyer must follow through with the obligation to pay $10,000 when the renovation work is done.
The buyer’s promise to pay $10,000 is the consideration for the contractor to enter into a contract.
The buyer is bound to pay $10,000 if the work is done.
When a person makes a promise to do something, the promise acts as a legal detriment to the person.
This means, the person now is burdened by an obligation that he or she did not previously have.
The legal detriment establishes consideration and motivation for a person to enter into a contract.
When we say “bilateral”, we mean that it is two-sided or mutual.
A bilateral contract requires a bilateral acceptance or the “meeting of the minds”.
In other words, each party must accept to be bound to perform certain obligations and get something in return.
From a technical point of view, a contract is formed when the offeror makes an offer that the offeree agrees in full.
The actual legal acceptance of the contract takes place upon the offeree’s acceptance.
However, we say bilateral acceptance to commonly refer to the fact that in a bilateral contract both parties must accept the consideration.
Consideration is an essential component of a bilateral contract.
The consideration of a contract is what drives a person to enter into a contract and commit to certain obligations.
The motive of a buyer to buy a car is to benefit from owning and using a car.
The benefit of a car dealer to go through the pain of delivering a car to the buyer is to sell it for a profit.
Without consideration, there is no contract.
For the courts to distinguish a unilateral contract from a bilateral contract, they will assess the facts of a case to see if there was a consideration.
Be sure to read our article no consideration no contract for more insights on this topic.
Elements of a bilateral contract
When we think of a contract, we are actually thinking of a bilateral contract.
A bilateral contract is formed just like any other contract, you need:
Be sure to check out our article on the six elements of a legal contract for more information on how contracts are formed.
For example, John makes an offer to purchase Rachelle’s bike for $100.
Let’s see if we have a valid formation of a bilateral contract:
- Offer: John wanting to buy Rachelle’s bike for $100
- Acceptance: Rachelle accepting to sell her bike to John for $100
- Consideration: For John, the consideration is to get the bike and for Rachelle, the consideration is to get $100
- Capacity: Both John and Rachelle are of legal age and sound of mind
- Legality: the purchase and sale of a bike does not violate any laws or public policy
As we can see, a valid bilateral contract is formed between John and Rachelle as the elements of a valid bilateral contract are observed.
Enforceability of bilateral contracts
Bilateral contracts are perfectly valid contracts in law and enforceable.
When parties enter into a bilateral agreement, they commit to performing certain obligations in favour of one another.
Breach of contract
In the event the mutual obligations are not performed, there is a breach of contract.
The non-breaching party can enforce the bilateral contract in court.
A bilateral contract will be enforced in accordance with the laws applicable to the contract.
Typically, if the contract is duly formed between the parties, the courts will uphold the contractual obligations.
For example, a non-breaching party may demand the specific performance of the contract or perhaps monetary damages.
For the non-breaching party to enforce a bilateral agreement, it must:
- Demonstrate that a contract existed between the parties
- Demonstrate that the breaching party has failed in its obligations or did not adequately perform the obligation
- Demonstrate that the breaching party’s failure resulted in damages or injury
- The breaching party was responsible for the damage or the loss
Bilateral vs unilateral nuance in court
In the United States, the courts no longer distinguish the bilateral vs unilateral nature of a contract as much as they did many years go.
The courts consider that an offer can be accepted when the offeree accepts the offer or starts performing the obligation.
Previously, the courts required the demonstration of a subjective intention of a party to accept the terms of a contract for a contract to be formed.
Further to the Lucy v Zehmer case, the courts have determined that a person’s actions can demonstrate acceptance of an offer to lead to a binding contract.
A unilateral contract or offer can become bilateral once the offeree performs the intended action.
Be sure to read our article on the objective theory of contracts to better understand this concept.
Difference between bilateral and unilateral contract
A bilateral contract is a contract where two parties commit to reciprocal obligations.
In other words, the contractual obligations flow in both directions, a two-sided contract.
On the other hand, a unilateral contract is a contract where only one party becomes legally bound to perform an obligation.
The contractual obligations flow from one party to the other in a unilateral direction, a one-sided contract.
You’ll find unilateral contracts in contests.
For example, imagine there is a contest that the person who can lift the heaviest weight will receive a prize of $1,000.
Nobody has an obligation to participate in the contest or lift any weights.
However, if someone did participate in the contest and lifted the heaviest weight, through the performance of this act, a unilateral contract is formed between that person and the contest organizer.
As such, the contest organizer must pay that person $1,000.
The main difference between the bilateral vs unilateral contract is with regard to a party’s obligation to the other.
Examples of bilateral contracts
Bilateral contracts are the most prevalent form of contracts out there.
There are so many examples that can be given to demonstrate an example of a bilateral contract.
We’ve hand-picked some good examples to give you an idea.
Any sales contract, such as the sale of goods or services, is a bilateral agreement, such as:
- Automobile purchase
- Purchase of groceries
- Gym membership
- Signing up for a cruise vacation
- House renovations
- Sale of property
- Sale of goods by a retailer to consumers
In a sales contract, you will have a seller and a buyer.
The buyer will have a duty to pay the purchase price and in exchange will expect the seller to deliver the goods or services.
Employment contracts are bilateral contracts between an employer and an employee.
The employer commits to pay the employee a salary in exchange for the employee’s services.
The employee commits to render services to the employer in exchange for a salary.
Lease agreements are another great example of bilateral contracts.
In a lease contract, you have the landlord promise to let the tenant use a designated property for a certain price.
The landlord commits to given access to the tenant for a certain period of time in exchange for a monthly rent.
The tenant commits to paying a certain amount of money in rent in exchange for having the exclusive use of a property for a period of time.
Another example of a bilateral agreement is subscription services.
A subscription service is when a person is given access to certain rights for a period of time.
For example, many software companies offer access to their software products by way of subscription.
The software vendor makes its software available online for a user to use and access in exchange for monthly fees.
The user pays the software vendor monthly fees for the right to use and access the software services.
Services rendered by a professional are examples of bilateral contracts.
For example, if you hire a lawyer to review a contract for you, you are entering into a bilateral contract.
You, the client, agree to pay the lawyer, a service provider, a certain fee in exchange for advice on the legal aspects of a contract.
In return, the lawyer is getting a fee in exchange for taking the time to review the contract and advise the client.
The most prevalent type of contract we see every day is a bilateral contract.
A bilateral contract is formed when two parties, either individuals, legal entities or both, agree to a reciprocal arrangement to perform an act or deliver a good in exchange for the other party to perform an act or deliver a good.
Bilateral agreements are formed when the legal formation requirements are met, such as:
- Offer and acceptance
- Legal capacity
We enter into bilateral contracts every day in our lives such as:
- When you buy coffee from a coffee shop
- When you order take-out food
- When you buy good at the grocery store
- When you shop online
The examples can be endless.
What’s important is that the parties to a bilateral contract incur a legal detriment serving as the consideration of the other party.
We hope that this article has clarified the notion of bilateral contracts for you.
Do you have other interesting aspects of bilateral contracts to share with us?
We would love to hear from you!