What it means
The defining feature is an exchange of promises rather than an exchange of a promise for an act. A supply agreement, an employment contract, a lease and an accepted purchase order all create obligations on both parties as soon as they are agreed.
The classic contrast is a reward notice. If you offer $500 to whoever finds your lost equipment, nobody is obliged to go looking, and a contract only comes into existence when someone actually returns the item, which makes the arrangement unilateral.
For a bilateral contract to be enforceable the usual elements have to be present: an offer, acceptance of that offer, consideration meaning something of value moving each way, and an intention to create legal relations. Miss one of them and what looks like a deal may turn out to be an unenforceable arrangement.
The practical consequence is that either side can breach. Because both parties owe something, either can pursue the other for failing to perform, and remedies range from damages to specific performance, which is a court order requiring someone to do what they promised.
Finance teams care about bilateral contracts because they drive revenue recognition and commitments. A signed two-sided agreement creates a performance obligation on one side and a receivable or a purchase commitment on the other, and both belong in the accounts or the notes to them.
Terminology varies between legal systems but the substance rarely does. Some jurisdictions do not use the bilateral and unilateral labels at all, yet they still distinguish between promises exchanged and promises accepted by performance.
In practice
Real-world examples.
Example
A marketing agency signs a twelve month retainer at $9,000 a month. The agency is bound to deliver an agreed scope of work and the client is bound to pay $108,000 across the year, so both sides carry obligations from the day of signature. When the client tries to pause the work in month seven, the agency points out that the remaining $54,000 is contracted rather than optional.
Example
A manufacturer issues a purchase order for 40,000 components at $2.75 each and the supplier acknowledges it in writing. The acknowledgement turns the order into a bilateral contract worth $110,000, and the supplier has a claim if the buyer cancels without cause.
Example
A landlord and a tenant sign a five year lease. The landlord promises quiet enjoyment and a building fit for use, the tenant promises rent and repair, and neither can simply walk away because market rents have moved against them. The tenant's accounts recognise a lease liability for the whole term precisely because the promise is binding for all five years.
Case study
Seen in the real world.
What follows is an illustrative and fictional example. Thorne Seafoods, an invented processor, agreed a bilateral contract with Alder Creek Cold Storage, another invented business, under which Thorne would supply at least 600 pallets a month and Alder Creek would reserve the space at $38 a pallet.
When a poor season cut Thorne's volumes to 350 pallets, its managing director assumed the lower usage simply meant a lower bill. Alder Creek pointed to the promise instead, because it had turned away other customers to hold the space, so the minimum commitment of 600 x $38 = $22,800 a month was payable whether the pallets arrived or not.
The two sides eventually settled at $18,000 a month for six months and Thorne rewrote its standard terms to include a seasonal volume band. The illustrative point is that in a bilateral contract both promises stay live, and the one you made remains enforceable even in months when the other side's promise is worth little to you.
Watch out
Common mistakes.
- Assuming an agreement is not binding until money changes hands, when the exchange of promises is usually enough to create the contract.
- Treating an emailed quotation as a contract, when a quote is normally an invitation to treat and becomes binding only once it has been accepted.
- Signing minimum volume or take-or-pay commitments without modelling a bad year, because your promise stands even when demand does not.
Questions
People also ask.
What is the difference between a bilateral and a unilateral contract?
In a bilateral contract both parties promise something and both are bound immediately, while in a unilateral contract only one party promises and the other is bound only by performing.
Does a bilateral contract have to be in writing?
Often not, since spoken agreements can be binding, but land, guarantees and certain long term arrangements usually must be written to be enforceable.
What happens if one side does not perform?
The other can claim damages, and depending on how serious the breach is may also terminate the agreement or ask a court to order performance.
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