A simple guide to bilateral contracts

What is a bilateral contract? 

A bilateral contract, as the name suggests, is a legally binding agreement between two parties. It's the most commonly used type of contract. In a bilateral contract, both parties make promises to each other, with one party being a promisor (making a promise) and the other being a promisee (receiving a promise). A sales contract is an example of a bilateral contract where the seller promises to deliver goods and the buyer promises to pay for them in return.

The importance of bilateral contracts 

Bilateral contracts are fundamental to nearly all modern businesses and commercial transactions. They are an essential tool for businesses because they:

• Clearly define obligations, reduce misunderstandings, and mitigate risks.  

• Legally protect parties by providing enforceability and remedies in case of a breach.

• Foster trust and accountability among organizations because both parties are obligated to perform and are held accountable for any lapse.

Key characteristics of bilateral contracts 

Mutual promises: The defining characteristic of a bilateral contract is where both parties make promises to each other.

Offer and acceptance: The offeror presents a clear proposal, making an offer to the offeree, indicating a clear willingness to enter into a contract. The offeree agrees to the proposed terms and accepts the offer.

Consideration: Something of value must be exchanged between both parties. The  "something of value" can be money, goods, services, an action, or even the promise of refraining from indulging in some activities.

Legal relations: Both parties must have the intention to make the agreement legally binding.

Enforceability: The contract is legally enforceable once both parties agree to the terms and conditions listed in the agreement.

Four common examples of bilateral contracts  

Employment contract: An employer makes an offer with a promised salary and benefits, and an employee accepts the offer, promising to perform the required duties outlined in the contract.

Service contract: You hire an architect to design the interior of your house. They promise to design based on your specifications and requirements, and you pay them for their service once the work is done.

Rental agreement: A landlord promises to provide you with a living space, and you promise to pay the rent on time and abide by the terms of the agreement.

Sales agreement: You want to buy an air conditioner. The dealership promises to sell you the air conditioner, and you promise to make the agreed payment. You make the payment, and the dealer sells you the product. 

The difference between unilateral and bilateral contracts 

The difference between the two types of contracts is evident in their names.

Unilateral contracts are one-sided agreements. Only one party (the offeror) promises to offer something in return for the performance of a specific act by another party (the offeree). The offeror's obligation is triggered only upon the offeree's completion of the requested action.

As mentioned earlier, bilateral contracts are agreements between two parties in which both parties make promises to each other.

Breach and enforceability of a bilateral contract 

A breach of a bilateral contract occurs when either party fails to fulfill its obligations (uphold its promise). Common situations for breach of a contract include non-payment, non-delivery of goods, supply of defective goods, or delay in payments.  

A bilateral contract is enforceable in court because it fulfills the key elements of a contract. Because it's enforceable, parties have legal remedies in case of breach of a contract. A breach triggers a series of steps and actions, which we'll look at now.

The first step often involves the non-breaching party communicating with the counterparty about the breach and attempting to resolve the issue amicably. This could be by offering an extension, renegotiating terms, or seeking partial performance.

If the first step fails, communication in the form of a formal demand letter from an attorney is sent. This letter outlines the details of the breach and demands a specific performance or compensation. It also warns of legal action if a resolution isn't reached.

Most bilateral contracts have a "Dispute Resolution" clause that requires parties to attempt mediation or arbitration before litigation. Mediation involves a neutral third party helping the parties arrive at a mutually acceptable solution. Arbitration involves the neutral third party or panel hearing the pleas and making a binding decision, similar to a court judgment.

If all else fails, the non-breaching party can file a lawsuit in court and seek legal remedies.

Legal remedies in the event of a breach of contract could be either one, a combination, or all of the following:

• Monetary compensation.

• A court order compelling performance of the exact contractual obligation.

• Canceling the contract and returning any benefits received so far.

• A court order prohibiting a party from doing something or requiring them to do something.

Managing bilateral contracts with a CLM tool 

A CLM (contract lifecycle management) tool can revolutionize the way you manage bilateral contracts. It can help your business accelerate contract cycle times, reduce operational costs, improve compliance, and improve overall efficiency. It does this by:

• Storing all of your contracts in a central repository.

• Providing an extensive clause library with languages approved by your legal team.  

• Empowering you with pre-approved and customizable contract templates.

• Enabling faster, streamlined contract authoring with formatting options and real-time collaboration.

• Automating and mandating approval workflows.

• Enabling redlining and version control.

• Providing you with a fully compliant native digital signature software integration to sign contracts.

• Streamlining post-execution management with smart letter templates and automated renewals.

• Assigning, tracking, and managing obligations at the contract and user level.

• Empowering you with reports to glean strategic business insights from your contract data.

• Providing granular activity tracking at the contract, user, and organization level.

• Integrating with solutions such as CRM software and payment software.

Try Zoho Contracts for your bilateral contracts 

Zoho Contracts is a comprehensive contract lifecycle management software from Zoho that enhances collaboration, mitigates business risks, reduces legal dependency, and accelerates contract cycles with AI-driven efficiency.

Businesses such as Scopic Software, a U.S.-based software company, have reported more than a 70% improvement in their contract turnaround times since adopting Zoho Contracts for their CLM needs.

Start your 15-day free trial today.