Unilateral vs bilateral contracts

There are two primary categories of contracts in business — bilateral contracts and unilateral contracts. The two have important features in common. Both contain terms and conditions that, if breached, can result in litigation. The party that sues must prove the contract is valid and that they suffered a loss because of the breach.

A bilateral contract is a legally binding agreement, typically in writing, with terms and conditions negotiated between two or more parties. A unilateral contract is written by one party, which determines all the terms and conditions but is the only party with any obligations under those terms.

Let’s examine some practical examples to help us understand these concepts.

Examples of unilateral contracts in business

Once you understand the concept you’ll notice many examples of unilateral contracts. Coupons are a very common example of unilateral contracts. No one is obligated to purchase the item, or even use the coupon if they do, but everyone who makes the purchase with the coupon gets the discount. 

A flyer offering a reward for finding lost pet is a classic example of a unilateral contract. The person who staples a flyer to a telephone pole offering a $100 reward to whoever returns their lost dog is legally bound to pay. However, no one is bound by the terms of the reward to search for the dog. In other words, the person who wants their dog back cannot sue anyone for failing to search for the dog, but whoever returns the dog could sue the pet owner if they refused to pay the reward.

Similarly, when Main Street Pizza advertises half-price large pizzas between noon and 2 p.m., with a two-pizza limit, they’re obligated to sell large pizzas for half price to every customer who wants one (or two), but no one is obligated to buy the pizza. 

In business, it’s important to understand the concept of a unilateral contract so you don’t make legally binding promises without realizing it.

How a bilateral contract is different

A bilateral contract is negotiated between two or more parties. This is what most people think of when they hear the term “contract.”

A bilateral contract is based on an offer by the promisor, acceptance by the promisee, and consideration, which is typically money but could be a barter, paid in exchange for goods or services. To be valid, the contract must comply with all laws, and both parties must have the capacity to understand their contractual obligations.

Business-to-business contracts are almost always bilateral. For example, if you hire an accountant to do your taxes, you agree upon a rate in exchange for your finished tax returns. The accountant provides the professionally prepared return, which is the item of value, and you pay the agreed-upon fee, which is the consideration. You each agree to defined obligations in exchange for something you value. 

Other examples of bilateral contracts include employment contracts, professional service and sales agreements, warrantees, leases, mortgages, and many more.

Both unilateral and bilateral contracts can be enforced in court. If Main Street Pizza charges you full price for a large pizza at 12:30 p.m., they have breached their unilateral contract. Similarly, if your accountant deposits your retainer fee but never delivers your tax returns, he or she has breached the bilateral contract. A breach of either kind of contract can be taken to court.

You don’t have to be a lawyer to succeed in business, but you do need to know the basics of contracts if you want to avoid being sued (or needing to file suit). Contracts are complex to negotiate, but the concepts are based on simple fairness. If you’re careful about what you’re promising and what you’re promised, you’re off to a good start managing contracts of every sort.

For more information, check out our complete guide on how to write a contract.

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