Understanding Bilateral vs Unilateral Contracts: Formation and Exam Tips

Classifying Contracts by Promise and Performance

Contract law classifies agreements in several ways: express or implied, valid, void, or voidable, executed or executory, and bilateral or unilateral. The last distinction concerns what the offeror asks for in exchange for the offer. It affects how and when a contract is formed, whether the offeror can revoke, and what the offeree must do to accept. Paralegal certification exams love this topic because it tests both vocabulary and reasoning.

Bilateral Contracts

A bilateral contract is formed by an exchange of promises. The offeror promises to do something in exchange for the offeree's promise to do something in return. Both parties are bound as soon as the promises are exchanged, and each party is both a promisor and a promisee.

Example: A homeowner says, "I will pay you $5,000 if you promise to paint my house next month." The painter replies, "I promise." The contract is formed at that moment, even though no painting has occurred. If either side backs out, the other can sue for breach.

Most commercial contracts are bilateral. Sales contracts, leases, employment agreements, and service contracts typically involve mutual promises. The Uniform Commercial Code reinforces this by treating an offer to buy goods as invitation to accept either by a prompt promise to ship or by prompt shipment.

Unilateral Contracts

A unilateral contract involves a promise in exchange for performance. The offeror promises something only if the offeree actually does the requested act. The offeree is not obligated to perform, but if they do, the offeror is bound. Acceptance occurs by completing the performance, not by making a promise.

Example: "I will pay $500 to anyone who finds and returns my lost dog." No one is required to look. A person who finds and returns the dog accepts the offer through performance and earns the reward. Reward offers, contests, and some sweepstakes are classic unilateral contracts. Another example is an offer to pay a bonus to any employee who stays through the end of the year.

Key Differences

• Exchange: Bilateral is a promise for a promise; unilateral is a promise for an act.
• Acceptance: Bilateral is accepted by a promise; unilateral is accepted by complete performance.
• Obligations: In bilateral contracts both parties are bound upon formation. In unilateral contracts only the offeror is bound, and only after performance.
• Breach: Either party may breach a bilateral contract. Only the offeror can breach a unilateral contract, since the offeree has no duty to act.

The Problem of Revocation

Under traditional common law, an offeror in a unilateral contract could revoke the offer at any time before performance was complete, even after the offeree had started. That result seemed unfair to someone who had spent time and money. Modern law addresses the problem in two ways.

• Option contract (Restatement (Second) of Contracts section 45): Once the offeree begins performance, the offeror's power of revocation is suspended, creating an option contract, provided the offeree completes performance within a reasonable time.
• Reliance and part performance: Courts may also protect the offeree through promissory estoppel or by treating beginning performance as an implied promise to complete.

The famous Brooklyn Bridge hypothetical illustrates the concept. If a man offers a stranger one hundred dollars to walk across the bridge and revokes after the stranger is halfway, a court would find the offer irrevocable once the stranger starts. Remember that mere preparation to perform generally does not suffice, so the key question is whether the offeree has actually begun the requested act.

Offer, Acceptance, and Consideration

Both types require the same basic elements: offer, acceptance, consideration, mutual assent, capacity, and legality. The distinction concerns the manner of acceptance and the type of consideration. In a bilateral contract, the consideration is the exchanged promises. In a unilateral contract, the consideration is the performance requested by the offeror. A promise to make a gift lacks consideration, so it is generally unenforceable in either form.

Notice of Acceptance

In a unilateral contract, the offeree generally does not need to notify the offeror that performance has been completed unless the offer requires it, or the offeror would not otherwise learn of it with reasonable diligence. In a bilateral contract, an acceptance must be communicated, and the mailbox rule provides that acceptance is effective upon dispatch if sent by a reasonable method. Revocation of an offer, by contrast, is effective only on receipt.

Ambiguous Offers

When an offer does not clearly require either a promise or performance, courts typically presume that the offeror invited acceptance by either a promise or performance, treating it as a bilateral contract. The Restatement favors this approach because it protects both parties and avoids ambiguity about when the contract exists. The UCC takes the same approach for sales of goods.

Practical Considerations for Paralegals

Paralegals draft and review agreements, so knowing the difference can help spot problems. A contest, loyalty program, or bonus plan may constitute a unilateral contract, so the terms for how to accept and the offeror's right to withdraw should be spelled out clearly. In litigation, a paralegal organizing a breach of contract case will help establish the formation date and which actions constituted acceptance. A careful timeline of communications, signatures, and performance is invaluable.

Common Exam Traps

• Do not assume a reward offer can be accepted with a promise to search.
• Remember that beginning performance can limit the offeror's ability to revoke.
• Note whether a question asks about formation or breach.
• Identify whether goods are involved, which brings in the UCC.
• Distinguish an offer from an invitation to negotiate, such as an advertisement or price quote.

Frequently Asked Questions

Can a unilateral contract be converted into a bilateral contract?

Yes. If the offeree makes a promise to perform and the offeror accepts that promise, the parties may form a bilateral contract.

Is an employment at will relationship unilateral or bilateral?

It is usually viewed as bilateral, with mutual promises, though some courts describe the arrangement as a series of unilateral contracts.

Who can revoke a unilateral contract?

The offeror, until the offeree begins performance. After that, the offer is generally irrevocable for a reasonable time.

Is an insurance policy unilateral?

Often described as unilateral because only the insurer makes an enforceable promise after the insured pays premiums, though it can also be analyzed as bilateral at formation.

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