What is a 'Bilateral Contract'

A bilateral contract is a reciprocal arrangement between two parties by which each promises to perform an act in exchange for the other party's act. 

BREAKING DOWN 'Bilateral Contract'

Bilateral contracts are the most common kind of contract, and the type of agreement that generally comes to mind when contracts are mentioned. 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. For one of these contracts to be legally binding there must be some sort of record that all parties agreed to the terms. Typically this takes the form of a signed contract.

Bilateral contracts are extremely common; simple examples include contracts of sale. In a house sale, a home buyer agrees to pay the seller a certain amount of money in exchange for the title to the home; the home seller agrees to deliver the title in exchange for the specified sale price. If either party fails to complete their end of the bargain, the result is a breach of contract.

Business contracts are bilateral in almost every circumstance. Virtually every business is providing some sort of product or service in exchange for financial compensation, and most businesses are therefore constantly entering into bilateral contracts with their customers or suppliers. Employment contracts, by which a company promises to pay an employee at a certain rate for completing specified tasks, are also bilateral contracts. 

Bilateral Contracts vs. Unilateral Contracts

Bilateral contracts are distinct from unilateral contracts, the primary difference being that bilateral contracts have reciprocal obligations. In a unilateral contract, Party A is under obligation to fulfill certain terms (usually a transfer of funds) if and only if Party B completes a specified task, but Party B is not actually obliged to complete the task if they don't want to. If such an agreement were bilateral, Party B could be found in breach of contract if they didn't complete the specified task. Because there is no guarantee that the task will be completed in a unilateral agreement, they are effectively never used in business.

When determining whether a contract is unilateral or bilateral in nature (which can decide whether there has been a breach of contract), courts and lawyers will often consider whether both parties offered something of value in consideration – either money or the time and resources required to provide the specified service. If so, the contract is bilateral.

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