Bilateral Contract: Definition, How It Works, and Example

What Is a Bilateral Contract?

A bilateral contract is an agreement between two parties in which each side agrees to fulfill their side of the bargain. Typically, bilateral contracts involve an equal obligation or consideration from the offeror and the offeree, although this need not always be the case.

In more complex situations, such as multinational trade negotiations, a bilateral contract can be a so-called "side deal." That is, both parties are involved in the general negotiations but may also see the need for a separate contract relevant only to their shared interests.

How a Bilateral Contract Works

The bilateral contract is the most common kind of binding agreement. Each party is both an obligor (a person who is bound to another) to its own promise, and an obligee (a person to whom another is obligated or bound) on the other party's promise. A contract is signed so that the agreement is clear and legally enforceable.

Any sales agreement is an example of a bilateral contract. A car buyer may agree to pay the seller a certain amount of money in exchange for the title to the car. The seller agrees to deliver the car title in exchange for the specified sale amount. If either party fails to complete one end of the bargain, a breach of contract has occurred.

In that sense, virtually all of our daily routine transactions are bilateral contracts, sometimes with a signed agreement and often without one.

Business contracts are almost always bilateral. Businesses provide a product or service in exchange for financial compensation, so most businesses are constantly entering into bilateral contracts with customers or suppliers. An employment agreement, in which a company promises to pay an applicant a certain rate for completing specified tasks, is also a bilateral contract.

Bilateral vs. Unilateral Contracts

As noted, a bilateral contract by definition has reciprocal obligations. That makes it distinct from a unilateral contract. In a unilateral contract, one party is obligated to fulfill its obligation only if and when the other party completes a specified task. A unilateral contract typically involves the first party issuing a payment only on completion of the second party's task.

In legal terms, that second party in a unilateral contract is not obliged to actually perform the task, and may not be found in breach of contract for not doing so. If it were a bilateral contract, both parties would have a legal obligation.

An example of a unilateral contract might be a contest to find a buried treasure to win $1 million. No one is obligated to hunt for the treasure, but if someone finds it, the contest creator is obliged to pay $1 million to that person. If the nature of a contract is disputed, a court will judge the merits of the claim against the content of the contract, determining if one or both parties maintain an obligation or concession.