What is Bilateral Contract – 7 Key Differences Between Unilateral and Bilateral Contracts

Introduction of Bilateral Agreement

In the context of contracts, bilateral refers to an agreement or contract that involves the exchange of promises or obligations between two parties. In a bilateral contract, both parties make mutual promises to each other, and each promise serves as the consideration for the other party’s promise. 

This means that both parties are obligated to perform certain actions or provide something of value in exchange for the other party’s performance. The mutual exchange of promises forms the legal foundation of a bilateral contract.

Imagine you and your friend want to trade your fruits. You have an apple, and your friend has a mango. You both want to make a fair trade, so you decide to make a promise to each other. You promise to give your apple to your friend, and your friend promises to give their mango to you. This is called a bilateral contract.

In a bilateral contract, both parties make promises to each other. It’s like making a deal or an agreement. You both have to do something for each other. If one of you doesn’t keep your promise, it’s like breaking the deal. For example, if you don’t give your apple to your friend, or your friend doesn’t give their mango to you, then the contract is broken.

Definition of Bilateral Agreement

” A bilateral agreement as “a legally binding instrument governed by international law, concluded between two States, through which the parties establish, modify or extinguish reciprocal legal obligations.”

Gabriella Venturini

John E. Murray Jr. said that ” a bilateral agreement as “a promise exchanged for a return promise.”

” These Nobel laureates define a bilateral agreement as “a pair of compatible plans” between two agents that “satisfy the conditions of exchange efficiency.”

Kenneth Arrow & Frank Hahn

Usages of Bilateral Agreement

Bilateral contracts are used in many situations, not just trading fruits. For example, when you buy something from a store, you promise to pay the store money, and the store promises to give you the item you want to buy. Both parties have to fulfill their promises for the contract to be successful.

Bilateral contracts are important because they help make sure that both parties are treated fairly and that everyone keeps their promises. It’s like a way to make sure that everyone gets what they want and that nobody gets cheated.

Bilateral agreements can take some time to finalize and are not the same as trade deals. The latter involves decreasing or eliminating import quotas, export restrictions, tariffs, and other trade-related barriers among states. Also, the rules governing trade deals are established by the World Trade Organization (WTO). 

On the other hand, bilateral agreements are not bound by the rules set by the WTO and do not solely focus on trade. Instead, the agreement usually targets individual policy areas, aiming to increase cooperation and facilitate trade between countries in certain areas. An example of a bilateral agreement is the customer cooperation agreement between the European Union and New Zealand.

Example of a Bilateral Agreement

Paris Agreement on Climate Change: This agreement, signed by nearly 200 countries, sets out a global framework to reduce greenhouse gas emissions and limit global warming.

Water-sharing agreement between states: In regions with limited water resources, states may sign agreements to ensure equitable access to water for their citizens.

House purchase agreement: Buyer and seller enter into a bilateral agreement outlining the terms of the sale, including price, closing date, and contingencies.

Prenuptial agreement: Couples contemplating marriage can sign a prenup to define how their assets and debts will be handled in the event of a divorce.

Is bilateral contract voidable?

A bilateral contract is enforceable from the beginning, so either party can only revoke the offer before the other party accepts. Once the contract is accepted, it becomes binding and cannot be revoked. 

A bilateral mistake can be voided by both parties if they are both acting under false information. A unilateral mistake of fact occurs when only one party is mistaken about the terms of the contract. 

A voidable contract is an agreement that can be broken at the will of any one of the parties. 

 However, not all contracts are voidable. Legal precedent must exist to absolve responsibility. The simplest way to void a contract is for both parties to agree that voiding is the best option.

Difference between a Bilateral and Unilateral Agreement

FeatureBilateral AgreementUnilateral Agreement
Specificity of promisesBoth parties’ promises are detailed in the agreement.The offeror’s promise may be more general.
EnforcementBoth parties can be held liable for breach of contract.Only the offeror can be held liable if the action isn’t performed.
Risk and certaintyBoth parties share the risk and uncertainty.The party performing the action bears the primary risk and uncertainty.
Formation of obligationsMutual exchange of promises.Obligations arise through the performance of a specific action.
Independence of obligationsObligations of both parties are dependent on each other.Only the accepting party’s obligation depends on the offeror’s.
Time SensitivityObligations often need simultaneous fulfillment.The accepting party usually has a reasonable time to perform the action.
ExamplesLease agreement, employment contract, service contract.Reward poster, lottery ticket purchase, warranty on a product.

Bilateral Contract Quiz

1. How many parties are involved in a bilateral contract?

2. In a bilateral agreement, how are obligations formed?

3. What happens if one party fails to fulfill their promise in a bilateral contract?

4. Which of the following is an example of a bilateral contract?

5. How is risk and uncertainty typically shared in a bilateral contract?

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