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What is a Bilateral Contract? (2020 Update)

What is a Bilateral Contract? (2020 Update)

A bilateral contract is an agreement made between two parties. Find out in this article what they are and what's required for them to be enforceable.

25th March 2020

Contracts are present in our everyday life. Though contracts can be formed in a variety of ways, such as unilateral contracts, the most common version that businesses enter into are bilateral contracts. These are contracts where two parties exchange a set of promises on the condition that something is provided. This can be for services, supplies or even outcomes. In this article, we’ll explain what a bilateral contract is and what elements are required for it to be legally binding. 

How to Establish a Legally Binding Contract

To ensure a contract is legally binding, there are four major elements that must exist:

1. Agreement 

Offer presented by one party that is accepted by the other party. Bilateral contracts require both parties to agree to the terms. By contrast, unilateral contracts do not and only take effect once a certain action is done. 

2. Consideration

The price or liability paid for the promise. This can be in the form of liquid cash, or some other form of property. 

3. Intention to Create Legal Relations

Intention for contract to be legally binding. This means that both parties understand that signing the contract will establish a legal relationship between them. 

4. Certainty

The contract must be sufficiently clear and complete.

Bilateral Contracts

A bilateral contract is a legally binding contract formed by the exchange of mutual promises. An offer in the form of a promise is accepted by a counter-promise. In contrast to unilateral contracts where only one party needs to fulfil their promise, bilateral contracts ensure that both parties do so. You can form a bilateral contract both in written form or orally. Hence, as long as the above elements are present in the formation of the contract, it will be legally binding. Therefore, this mutuality of obligation is essential to an enforceable bilateral contract.

Examples

An example of a bilateral contract would be the contract for the sale of a house. The house seller agrees to the deliver the title to the house in exchange for the agreed sale price. The house buyer agrees to pay the specified sales price in exchange for the title to the house. This contract would very likely be in writing and signed by both parties.

Another common example is the sale of a washing machine to a friend. Whilst talking to your friend, if you offer to buy their washing machine for $600 and they say yes, then you have entered into a binding bilateral contract once consideration is provided. As a result, both parties must fulfil their promise to each other.

Bilateral Contracts for Small Businesses

Bilateral contracts form the foundation for small businesses to operate. They are prevalent in all aspects of the business and ensure that businesses grow.

A prime example is that of retail businesses. Every sale of a good or service made is a bilateral contract. The business agrees to transfer ownership of the good or provide the service in exchange for a specified price. In addition, the purchaser agrees to pay the specified price in exchange for receiving the good or service. Above all, it is the mutual exchange of promises that defines a bilateral contract.

Though small businesses will likely have created numerous bilateral contracts, the nature of bilateral contracts can vary markedly. Agreements with purchasers, other businesses, consumers and many other parties not only allow a business to operate but also ensure that businesses continue to grow and become successful. Also, as a business owner it is important to understand the fundamentals of contracts. If you have any contractual concerns, the advice of a contracts lawyer may be of use.

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Author
William Goh

William is a Paralegal, working in our content team, which aims to provide free legal guides to facilitate public access to legal resources. With a passion for commercial and IP law, his research focuses on small businesses, how small businesses can navigate convoluted legal procedures and the protection of intellectual property.