What is a Bilateral Contract? Definition, Examples, and Key Elements

Bilateral contracts are a cornerstone of modern legal agreements, forming the basis of numerous transactions in personal, professional, and business contexts. Simply put, a bilateral contract is a legally binding agreement between two parties where both promise to perform specific actions or refrain from certain activities in exchange for consideration. Whether it’s a sales agreement, employment contract, or rental agreement, bilateral contracts are everywhere in our daily lives.

In this blog, we’ll dive deep into the concept of bilateral contracts, exploring their definition, examples, essential elements, and the pros and cons of entering into such agreements. We’ll also touch upon notable case laws, like Carlill vs. Carbolic Smoke Ball Co. and Stilk vs. Myrick, that highlight the practical implications of these agreements.

What Is Bilateral Contracts?

A bilateral contract is a legally binding agreement between two parties, in which both parties promise to perform certain actions, or refrain from certain activities, in exchange for consideration. In simpler terms, a bilateral contract is a legally enforceable arrangement in which both parties agree to fulfill reciprocal obligations. These obligations can include performing an action, providing a service, or making a payment - all in exchange for something of value from the other party.

Examples Of Bilateral Contracts

• Sales Agreements: A business commits to paying another company a fee in exchange for a certain service or goods. The other company promises to deliver the goods/services as specified.
• Employment Contracts: An employer and an employee enter into an employment contract where the employee promises to perform specific job duties while the employer promises to provide a salary, benefits, and a work environment.
• Distribution Agreements: A company (for example, manufacturer) and a distributor enter a supply agreement. The company promises to supply products, and the distributor promises to market and distribute them within a specified territory.
• Loan Agreements: A lender and a borrower enter into a loan agreement. The borrower pledges to pay back the loan with interest in line with the agreed-upon terms, while the lender promises to deliver the loan amount.
• Vendor Agreements: A business hires a vendor to provide a particular service (for example, IT support). The company guarantees to pay the vendor for the services delivered, and the vendor guarantees to offer assistance.
• Rental/Lease Agreements: In this scenario, a landlord rents/leases office space to a business. The landlord commits to offer the space, while the company promises to pay the rent on time and abide by the lease’s/agreement’s terms.
• Service Agreements: An agency enters into a service agreement with a client. The agency promises to provide the required services, and the client promises to pay the agreed-upon fees.

Elements Of A Bilateral Contract

To form a bilateral contract, it is necessary that the agreement includes certain essential elements. These elements make the contract legally binding and enforceable. The key elements of a bilateral contract are as follows:

• Intention: This means both parties honestly want to make a legal agreement. They understand that by entering into the contract, they are legally committing to keep their promises. When both parties have this intention, the contract is valid and enforceable.
• Offer: One party, the offeror, makes an offer to the other party, the offeree, which clearly communicates the terms and conditions to which the parties will agree upon.
• Acceptance: The offeree, in a clear and unequivocal manner, communicates their agreement to the terms and conditions of the offer.
• Consideration: Something of value exchanged between both parties. Consideration can include money, goods, services, or even a promise to perform (or not perform) a specific action.
• Mutual Assent: Mutual assent means both parties agree to the main terms of the contract. For the contract to be valid, both parties need to have a shared understanding of what they’re agreeing to.
• Clear Terms: The terms of the contract must be clear, specific, and easy to understand. Unclear terms can lead to misunderstandings later on. Clear terms make sure both parties understand their responsibilities and what’s expected of them.
• Legal Enforceability: For the contract to be enforceable, it must meet certain legal standards. This means a court can step in to help if one party breaks their promises. If one side does not fulfill their part of the contract, the other party can ask for legal help to fix the issue.
• Capacity: Capacity means that both parties are legally able to enter a contract. This generally means they are of legal age and mentally capable of understanding the contract. People who don’t meet these standards may not be able to enter a binding contract.
• Performance Conditions: These are the specific requirements each party must meet to complete their part of the contract. This might include details about timing, quality, or quantity of work or goods provided.
• Remedies for Breach: If one party doesn’t fulfill their promises, the other party has options, called remedies, to make things right. Common remedies include monetary compensation (damages) or asking the court to require the person to keep their promise (specific performance).
• Termination: Termination is the end of the contract. The contract may specify certain events or conditions that allow the agreement to end, which releases both parties from their obligations.

Pros And Cons Of Bilateral Contracts

Pros Of Bilateral Contracts:

• Reciprocity: Bilateral contracts create a balanced mutual arrangement, wherein both parties are obligated to fulfil promises and have respective rights and benefits under the contract.
• Legal Protection: Both parties have legal recourse if the other party breaches the contract, providing a sense of security in the agreement.
• Long-term Relationships: These contracts facilitate ongoing arrangements between parties, promoting long-term relationships and stability in various industries and fields.

Cons Of Bilateral Contracts:

• Complexity: Bilateral contracts usually involve more negotiation and communication, making them potentially more complex and time-consuming to create than unilateral contracts.
• Disputes: Disagreements can arise over the interpretation or performance of the contract, sometimes leading to costly legal disputes and disagreement between the parties involved.

Notable Case Laws

Carlill vs. Carbolic Smoke Ball Co. (1893)

In this famous case, the Carbolic Smoke Ball Company advertised a smoke ball product claiming it prevented influenza. The company also offered £100 to anyone who used the product and still contracted the flu, thus, creating a unilateral contract. However, the court classified it as a bilateral contract as both parties had reciprocal obligations to each other. Mrs. Carlill, who contracted the flu after using the product, sued the company and won the case.

Stilk vs. Myrick (1809)

This is a foundational case relating to the consideration aspect of a bilateral contract. When two sailors deserted their ship, the captain promised to divide their wages among the remaining sailors if they agreed to sail back to London. However, upon arrival, the captain refused to pay extra wages. The court held that the sailors were not entitled to additional wages, as their initial contractual agreement included completing the journey, which constituted the consideration.