Bilateral Contract Explained

Bilateral Contract Made Easy

Every contract must have at least two parties, but a contract does not have to require both those parties to perform specific acts.

Insurance and options contracts are examples of this.

One party has the right, but not obligation to pay the premium while the other party is obligated to pay the coverage damages or option exercise price.

When only one party has an obligation to perform, the contract is referred to as a unilateral contract.

Much more common are bilateral contracts; where one party exchanges a promise in consideration for another party’s promise.

I.e. Both parties are obligated to perform some action.

Determining Unilateral From Bilateral Contracts

Courts to look to when consideration is due or delivered in determining whether a contract is bilateral or unilateral.

Consideration is a key concept of contract law that states a contract is not formed, and therefore no party is obligated to perform the contract, unless both parties give up something of value to the other in exchange for the other’s consideration.

In other words, a contract must be a this-for-that exchange of goods, services or promises and the consideration is the “this” and “that.”

The moment the contract is signed, bilateral contracts obligate both parties to deliver their consideration.

Your home mortgage obligates you to pay the mortgage and the lender to tender the purchase price to the seller when signed.

On the other hand, under a unilateral contract the promisor is not obligated to provide their consideration until and if the promisee delivers their consideration.

Your insurance company does not need to cover your car if you are not making your monthly payments but you are not obligated to make those payments.

Bilateral Contract Explained FAQs

A bilateral contract is one in which one party exchanges a promise in consideration for another party’s promise.
If a contract is bilateral it means that both parties are committed to providing something for the other.
An example of a bilateral contract is your home mortgage; it obligates you to pay the mortgage and the lender to tender the purchase price to the seller when signed.
A contract must be a this-for-that exchange of goods, services, or promises, and the consideration is the “this” and “that.”
Under a unilateral contract the promisor is not obligated to provide their consideration until and if the promisee delivers their consideration.
True Tamplin, BSc, CEPF®

About the Author
True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True contributes to his own finance dictionary, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website, view his author profile on Amazon, his interview on CBS, or check out his speaker profile on the CFA Institute website.