Unilateral vs Bilateral Contract Management – What’s the Difference?
Imagine you’re a contract manager tasked with overseeing various agreements, from supplier contracts to employee agreements. Some contracts require both parties to take action, while others bind only your company to fulfill a promise. Do you know the difference between these two types of contracts and how to manage them effectively?
In business, contracts form the backbone of nearly every transaction and relationship. They outline all parties’ terms, conditions, and obligations, providing a legal framework for conducting business. However, not all contracts are created equal. Two of the most common types of contracts are unilateral and bilateral contracts.
Understanding the distinctions between unilateral vs bilateral contracts is crucial for contract managers and business leaders alike. Knowing which type of contract to use in a given situation and how to manage them effectively can help minimize risk, ensure compliance, and foster successful business relationships.
In this article, we’ll dive into the key differences between bilateral and unilateral contracts, explore real-world examples of each, and discuss best practices for managing these agreements.
What is a Unilateral Contract?
A unilateral contract is an agreement where only one party makes a legally enforceable promise to perform a specific action or provide a benefit to another party. In this type of contract, the offeror (the party making the promise) is the only one bound by the agreement. The offeree (the party to whom the offer is made) is not required to respond or promise anything; acceptance only occurs through performance.
One common example of a unilateral contract is an insurance policy. In this case, the insurance company (the offeror) promises to pay a specified amount to the policyholder (the offeree) in the event of a covered loss. The policyholder is not required to make a claim, but if they do and the claim meets the policy’s conditions, the insurance company is legally bound to pay out the benefit. This scenario illustrates what unilateral means in insurance: the company makes a promise, but the policyholder is not obligated to take action.
Another example of a unilateral contract is a reward offer. Suppose a pet owner posts a “lost dog” flyer offering a $500 reward for the safe return of their missing pet. This offer constitutes a unilateral contract: the pet owner (the offeror) promises to pay the reward to anyone who finds and returns the dog (the offeree). The person who finds the dog is not obligated to return it but can accept the offer by doing so and claiming the reward.
In a unilateral contract, the offeror is the only party who makes a legally enforceable promise. The offeree is not bound by the agreement until they accept the offer by performing the specified action. This characteristic distinguishes unilateral contracts from bilateral contracts, where both parties make mutually binding promises.
Key characteristics of unilateral contracts include:
- One-sided obligation: Only the offeror is legally bound by the promise made in the contract.
- Acceptance through performance: The offeree accepts the contract by completing the specified task or meeting the stated conditions rather than through a formal agreement or signature.
- No negotiation: Unilateral contracts are typically presented as “take it or leave it” offers, with no room for negotiation or modification by the offeree.
- Open offers: In many cases, unilateral contracts are open offers that can be accepted by anyone who fulfills the specified requirements, rather than being directed at a specific individual or entity.
Understanding the nature of unilateral contracts is essential for effective contract management, as these agreements require different strategies and considerations compared to bilateral contracts.
Revocability of Unilateral Contracts
Revocability is a critical aspect of unilateral contracts because it determines the rights and obligations of both the offeror and the offeree. The ability to revoke an offer can significantly impact the parties’ decisions and actions throughout the contract’s lifecycle. Understanding the revocability rules for different types of unilateral contracts is essential for both parties to manage their expectations, protect their interests, and make informed decisions when entering into such agreements.
In general, the offeror can revoke a unilateral contract at any time before the offeree begins performing the specified action or meets the stated conditions. However, the specific circumstances under which a unilateral contract can be revoked depend on whether it is a reward-type or performance-type contract.
In a reward-type unilateral contract, such as the “lost dog” example mentioned earlier, the offeror can revoke the offer at any point before the offeree completes the required action. So, if the pet owner decides to withdraw the reward offer before someone finds and returns their dog, they are free to do so, even if someone has already started searching for the pet.
On the other hand, performance-type unilateral contracts have different revocability rules. In these contracts, once the offeree begins performing the specified action, the offeror is generally obligated to keep the offer open and allow the offeree to complete the task. For example, if a company offers a freelancer $1,000 to design a logo and the freelancer begins working on the project, the company typically cannot revoke the offer without compensating the freelancer for the work already completed.
It’s important to note that the specific terms of a unilateral contract may affect its revocability. If the contract includes an expiration date or specific conditions under which the offer can be revoked, these terms will govern the offeror’s ability to withdraw the offer.
Understanding the revocability of unilateral contracts is crucial for both offerors and offerees. Offerors should carefully consider the terms of their offers and be prepared to honor them once an offeree begins performance, while offerees should be aware of the potential for revocation and take steps to protect their interests when accepting a unilateral contract.
What is a Bilateral Contract?
In contrast to a unilateral contract, a bilateral contract is an agreement where both parties make legally binding promises to each other. Each party to the contract agrees to perform a specific action or provide a benefit in exchange for the other party’s promise to do the same. This mutual exchange of promises creates obligations for both sides, and either party can be held liable for breach of contract if they fail to fulfill their commitments.
Bilateral contracts are the most common type of agreement in business relationships. For example, in a purchase agreement, the buyer promises to pay a specified amount of money in exchange for the seller’s promise to deliver a product or service. Both parties are obligated to perform their respective duties under the terms of the contract.
Another bilateral contract example is an employment agreement. The employer promises to pay a salary and provide benefits, while the employee promises to perform their job duties and comply with company policies. This exchange of promises creates a binding contract between the employer and employee.
In the real estate industry, bilateral contracts are prevalent. In a real estate purchase agreement, the buyer promises to pay a specified price for a property, and the seller agrees to give the ownership of the property to the buyer in return. Both parties have obligations to fulfill under the contract. The roles and obligations of parties in a bilateral contract are clearly defined within the agreement itself. Each party must perform their promised action or provide the agreed-upon benefit to fulfill their contractual obligations. Failure to do so can result in a breach of contract, which may lead to legal consequences such as damages or specific performance.
Bilateral Contract Acceptance and Revocability
Acceptance of a bilateral contract occurs when both parties agree to the terms of the offer. This acceptance can be expressed through a formal signature, verbal agreement, or even an action that indicates an intention to be bound by the contract. Once an offer is accepted, a binding contract is formed, and both parties are obligated to perform their respective promises.
In contrast to unilateral contracts, the offeror in a bilateral contract typically cannot revoke the offer once it has been accepted by the other party. This is because the acceptance of the offer creates a binding agreement between the parties, and revoking the offer after acceptance would constitute a breach of contract.
However, an offeror can revoke their offer before it is accepted by the other party. This is important to keep in mind when submitting business proposals, as the intent of the proposal can impact whether it is considered an offer or merely an invitation to negotiate. If a proposal is intended to be an offer, it should clearly state that it can be accepted by the recipient, creating a binding contract. On the other hand, if the proposal is meant to be a starting point for further negotiation, it should express that intent to avoid unintentionally creating a legally enforceable agreement.
Comparison Table – The Difference Between Unilateral and Bilateral Agreements
Understanding these key differences can help you choose and manage the right type of contract for your business.
| Aspect | Unilateral Contract | Bilateral Contract |
| Parties making promises | Only one party (the offeror) makes a legally binding promise | Both parties make legally binding promises to each other |
| Acceptance | Accepted by performance of the specified action or meeting the stated conditions | Accepted through a formal signature, verbal agreement, or action indicating an intention to be bound |
| Obligation | The offeror is the only party obligated to fulfill a promise | Both parties are obligated to perform their respective promises |
| Revocability | Can be revoked by the offeror before the offeree begins or completes the performance | Generally cannot be revoked once the offer is accepted, as a binding agreement is formed |
| Negotiation | Typically presented as “take it or leave it” offers with no room for negotiation | Terms can be negotiated between the parties before acceptance |
| Common examples | Insurance policies, reward offers, contests | Employment agreements, purchase agreements, real estate contracts |
| Breach of contract | Only the offeror can be held liable for breach of contract | Either party |
The Importance of Effective Contract Management
Effective contract management contributes to operational efficiency by keeping track of key dates, deliverables, and obligations. This helps companies avoid missed deadlines, late payments, and other performance issues that can disrupt business operations and strain relationships with partners and customers.
In addition to operational efficiency, well-managed contracts ensure that a company’s legal rights and interests are protected. By carefully reviewing and negotiating contract terms, businesses can minimize their exposure to risk and potential liabilities. Effective contract management also involves aligning contract language with the company’s goals and objectives, ensuring that all agreements support the organization’s strategic direction.
Proper management of both unilateral and bilateral contracts helps companies maintain positive relationships with customers, suppliers, and partners by ensuring that all parties fulfill their obligations and expectations. Poorly managed contracts can lead to misunderstandings, disputes, and even legal issues, which can damage a company’s reputation and brand image.
How Contract Lifecycle Management Solutions Can Help
Contract Lifecycle Management (CLM) solutions offer numerous benefits for businesses seeking to improve their contract management processes:
- Improve collaboration through centralized contract repositories that offer robust search and retrieval capabilities.
- Streamline contract creation and approval with standardized templates, clause libraries, clause guardrails, and clause swap capabilities.
- Enhance obligation management and compliance with automated alerts and reminders. Whether it’s a payment milestone or an impending contract expiration, CLM solutions trigger appropriate notifications, empowering organizations with the control needed to avoid surprises or unexpected consequences, such as unwanted auto-renewals.
- Gain valuable insights through comprehensive reporting, dashboarding, and analytics tools to strengthen business intelligence.
- Reduce the time and effort required to manage contracts with effective contract authoring, negotiation, and review functionality.
- Strengthen relationships with partners,customers, and internal teams through robust integrations to your favorite business applications.
- Mitigate legal and financial risks through proper contract audit trails and effective security and compliance functionality.
Frequently Asked Questions
What does unilateral mean in insurance?
In the context of insurance, a unilateral contract refers to a policy where the insurance company makes a promise to pay a specified amount to the policyholder in the event of a covered loss. The policyholder is not obligated to make a claim, but if they do and the claim meets the policy’s conditions, the insurance company is legally bound to pay out the benefit.
What is a bilateral contract in real estate?
A bilateral contract is an agreement where both parties make legally binding promises to each other. In a real estate purchase agreement, the buyer promises to pay a specified price for a property, and the seller promises to transfer ownership of the property to the buyer. Both parties have obligations to fulfill, such as the buyer securing financing and the seller disclosing any known defects in the property.
Who makes the legally enforceable promises in a unilateral contract?
In a unilateral contract, only one party (the offeror) makes a legally enforceable promise. The offeree is not obligated to take any action, but if they choose to accept the offer by performing the specified task or meeting the stated conditions, the offeror becomes legally bound to fulfill their promise.
Who is the offeree?
The offeree is the party to whom an offer is made in a contract. In a unilateral contract, the offeree can choose to accept the offer by performing the specified action or meeting the stated conditions. In a bilateral contract, the offeree can accept the offer through a formal agreement, such as signing a contract or providing verbal consent.
Conclusion
Unilateral contracts involve a one-sided promise, while bilateral contracts require mutual promises from both parties. Recognizing these distinctions helps businesses choose the appropriate contract type, manage obligations, and mitigate risks.
Contract Lifecycle Management solutions can help organizations streamline processes, improve collaboration, and ensure compliance. By leveraging CLM software, businesses can optimize their contract management practices and drive success.
Take the first step towards transforming your contract management processes by exploring a the Ultimate Guide to CLM today.
