What is a Bilateral Contract? (2024 Update)

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. 

Key points

A Bilateral Contract is a legally binding document stating the set of promises two parties will exchange on the condition that something is provided

An example of a legally binding contract is the sale of a house. One party promises to pay the other party. Where in exchange, the other party promises to hand over the title of the house

There are four things which make a Bilateral Contract legally binding: 1)Agreement, 2)Consideration, 3)Intention To Create Legal Relations & 4)Certainty

Bilateral Contracts

A bilateral contract is a legally binding document formed by the exchange of mutual promises. An offer in the form of a promise is accepted by a counter-promise. In contrast, unilateral contracts only require one party to fulfil their promise, or in Layman’s Terms, meeting their end of the bargain. You can form a bilateral contract both in written form or orally. Hence, as long as the elements we are about to list below 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.

Example #1

The contract for the sale of a house. The house seller agrees to deliver the title of the house in exchange for an 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.

Example #2

Another common example is the sale of a bike to a friend. Whilst talking to your friend, you offer to buy their bike for $400 and they say yes. Here, there are two promises, making the agreement bilateral. The first promise is to provide the bike in exchange for the money. The second promise is for the friend to provide the money in exchange for the bike. As a result, both parties must fulfil their promise to each other.

How to Establish a Legally Binding Contract

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

1. Agreement 

An offer presented by one party is accepted by the other party. The offer is a definite promise to be bound if the terms are accepted. Acceptance of the offer must be clearly indicated to the party making the offer. 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. The price must be something of value but does not need to be money.

3. Intention to Create Legal Relations

There must be an intention for the 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. Some good practices would be to find examples/templates of the legal document you want to draft, and model your contract off. Another benefit of having certainty in your contract is that if you were to engage the help of a lawyer, your legal overheads would be lower as the amount of time they have to dedicate would be lower.

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 businesses continue to work both internally and externally. 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 goods 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 goods 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 employees not only allow a business to operate but also ensure that businesses continue to grow and maximise success. As a business owner, it is important to understand the fundamentals of contracts so you are aware of the rights and responsibilities you could be bound to. If you have any contractual concerns, we recommend seeking the advice of a contracts lawyer.

In summary

A Bilateral Contract is a legally binding document stating the set of promises two parties will exchange on the condition that something is provided. A prevalent example is in the sale of a house. The two parties – buyer and seller – will enter into a Bilateral Contract. The buyer promises to exchange remuneration through cash in exchange for the house. The seller promises to exchange the title of the house in exchange for remuneration through cash.

If you are unfamiliar or unsure of how to draft a document in the most clear and concise manner, or would like it to be reviewed, we recommend booking a consultation with one of our contract lawyers.