A simple guide
From simple deals between friends to complex business arrangements, contracts play a crucial part in defining the terms and conditions of an agreement. One common type of contract is a bilateral contract.
Bilateral contract definition
A bilateral contract entails parties exchanging promises and being obligated to perform certain actions or provide something of value to one another. Parties are bound to fulfil their promises, and the contract is formed as soon as both parties have made those promises – establishing mutual obligations.
Differences between unilateral and bilateral contracts
Unlike unilateral contracts – where one party makes a promise and the contract is only valid if the other party decides to perform – bilateral contracts involve bothparties exchanging promises, with each being equally required to perform under the terms of the contract. In this sense, unilateral contracts involve a one-sided approach, whereas a bilateral contract is a mutual or two-sided agreement
Bilateral contract examples
- In a bilateral contract, one party makes an offer, and the other party accepts the offer by making a promise to perform. For example, if Gina offers to sell her car to John for £20,000, and John accepts the offer by promising to pay Gina £20,000, a bilateral sales agreement is formed. Gina promises to sell the car, and John promises to pay £20,000. The parties are legally obligated to fulfil their promises in this example of bilateral contracts.
- Another bilateral contract example is an employment contract. The two parties here are an employer and an employee. The employer promises to provide compensation of a specific amount in exchange for labour and acceptance of terms and conditions. Both parties are equally and mutually obliged.
Key characteristics
With bilateral agreements, there are several critical elements:
- Mutuality: Mutual promises create a bilateral obligation, and both parties are bound to fulfil their promises. In the employment agreement example, both parties need to sustain the promises outlined in their initial or most up-to-date employment contract.
- Consideration: Consideration refers to something of value being exchanged between the parties. In a bilateral contract, each party provides consideration in the form of a promise. In the car sale example mentioned earlier, Gina promises to sell the car, and John promises to pay £20,000.
- Acceptance: A bilateral contract is formed as soon as both parties have made their promises, and the promises have been exchanged. It’s always a good practice (and is often required) to have written contracts for clarity and enforceability. In the employment example, promises are put in writing and terms and conditions are only in effect once the employee and employer perform contract signatures.
- Legality/legal enforceability: A bilateral contract is legally binding and both parties are obligated to fulfil their promises. If either party fails to perform, the other party may legal recourse – such as suing for damages or seeking specific performance. In the car sales agreement, Gina is obligated to provide the car via a binding agreement, while John has an obligation to pay a certain amount of money for it. Both counterparties must provide what they agree to pay or provide lest they be in breach of contract.
Importance of bilateral contracts
Bilateral agreements play a crucial role in business transactions, employment agreements, real estate deals, and everyday interactions. Here are some reasons why bilateral contracts are important:
- Clarity and certainty: The mutual promises and obligations outlined in the bilateral contract help to avoid misunderstandings and ensure clarity of each party’s responsibilities.
- Flexibility: Bilateral contracts allow parties to negotiate and modify terms before acceptance. This flexibility allows parties to shape the contract to their mutual needs and requirements.
- Legal protection: If one bilateral contract party fails to fulfill their promise(s), the other party can seek legal remedies – such as specific performance – to enforce the contract and protect their business interests.
- Sustained trust: Bilateral contracts promote trust between parties. When parties make promises and work together to successfully fulfil them, it establishes a sense of reliability. This confidence can foster future and continued business relationships.
Managing bilateral contracts
To recap, bilateral contracts are a fundamental pillar of contract law and are broadly used in many types of agreements. If your organisation manages a number of bilateral contracts, you should have a sturdy legal operations toolbelt. Contract management software can provide helpful tools for managing bilateral business contracts, such as:
- Comprehensive counter party management for easy management of and access to critical information about the other side of the two-sided contracts you’ve entered into.
- A secure contract repository of various types of mutual agreements – complete with the ability to easily yet comprehensively search for relevant documents, files, attachments and metadata down to the filterable field level.
- Key date and task alerts regarding both parties’ obligations, performance and compliance requirements.
- Automated contract workflows for delineating key bilateral contract tasks and responsibilities.
- Detailed budget, financials and payment/performance tracking.
- Risk assessment and risk probability analysis – including a risk and opportunity assessment matrix.
- Automated contract renewals for continued bilateral contracts and business relations.
- Secure and rapid electronic signatures.
To find our more about our award-winning contract management software, book a free demo of Contract Insight.
At Four we’re committed to delivering high-quality, reliable software that meets the real-world demands. Our contract management software is robust, user-friendly and versatile, ensuring your organisation has the ability to face future challenges and opportunities.
Contact John O’Brien, CEO at Four Business Solutions – global business consultants and software integrators specialising in business process improvement.
