Think about a contract. Handshake deals. An exchange of promises. Welcome to world of bilateral contracts. Though contracts can be formed in a variety of manners, such as Unilateral Contracts, the most common contracts that businesses enter into are bilateral contracts.

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;
  2. Consideration – the price or liability paid for the promise;
  3. Intention to Create Legal Relations – Intention for contract to be legally binding;
  4. Certainty – Contract is sufficiently clear and complete.

It is in the first element of agreement that bilateral contracts differ from Unilateral Contracts.

Bilateral Contracts

A bilateral contract is a legally binding contract formed by the exchange of mutual or reciprocal promises. An offer in the form of a promise is accepted by a counter-promise. Contrary to unilateral contracts in which only one party is obligated to fulfil their promise, bilateral contracts ensure that both parties required to execute their promises to the other party. This mutuality of obligation is essential to an enforceable bilateral contract.

Bilateral contracts occur very commonly in everyday life. An example would be the contract for the sale of the 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.

Bilateral contracts, however, can be formed in writing or orally. As long as the above elements are present in the formation of the contract, the contract will be legally binding. Another common example is the sale of a washing machine to a friend. For example, whilst talking to your friend, if you offer to buy a washing machine off your friend for $600 and they say yes, then you have entered into a binding bilateral contract once consideration is provided. Both parties are obligated to fulfil their promise to the other party.

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. The purchaser agrees to pay the specified price in exchange for receiving the good or service. As you will notice, 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 may other parties not only allow a business to operate but also ensure that businesses continue to grow and become successful.

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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.