All You need to Know about Contracts
In legal terms, a contract is an agreement between two or more parties that outlines the terms and conditions which should be adhered to. A contract is a binding commitment, meaning that it is a legally enforceable agreement. Contracts are created every day in many forms such as oral contracts and even implied or non-verbal contracts. The key to determining whether an agreement is a legally binding contract is analyzing what the elements for a contract are and if all of the elements are present.
To have a contract, there must at least be an offer and an acceptance. A counteroffer constitutes an acceptance of the original offer, but also voids the original offer and becomes a new offer. In some contracts , there must also be consideration and that is something of value that each party agrees to give or receive such as services or money.
An offer is a proposal to do or not do something or an expression of willingness to enter into a contract. An acceptance is an agreement to the terms of the proposal. Although some contracts may not require consideration, most do and that can be defined as something of value that is given up in exchange for something else of value.
Contracts can be written, verbal or even implied. Verbal or implied contracts can be a little trickier than written ones, but if all the elements of an agreement are outlined and there is no offer, acceptance and consideration, then an implied contract does exist.
There are many types of contracts that people enter into on a daily basis. You may be completely unaware that you have entered into a contract with someone. A verbal agreement to do something now, in the future or in exchange for something of value other than money is considered to be a contract.
What is a Unilateral Contract?
A unilateral contract is essentially defined as a contract involving a promise made by one party in exchange for a specific future act in return. In order for a unilateral contract to be completed, and that promise to be fulfilled, the "other party" to the agreement must complete the specified act described by the first party. The most common example of a unilateral contract in play is that of the reward being offered by a party looking for lost items. To be clear, the offer of a reward is not a bilateral contract as the party looking for the lost item has no obligation to take any action or perform any task. Instead, there is only an obligation for the party who has made the promise to pay that specific reward in return for an act.
The requirements of a unilateral contract are four-fold:
The key point to remember regarding a unilateral contract is that it requires:
So if you need more clarification, here are two examples:
Learn about Bilateral Contracts
A bilateral contract, sometimes called a "two-way" contract, is an agreement between parties that involves the other party’s reciprocal promise. In other words, the promise of the sophomore prom queen to show up with her boyfriend if he asks her will be exchanged for the boyfriend’s promise not to wear plaid to the dance. The prom is not going to be much fun if the boyfriend shows up wearing plaid pants, and it is not going to be any more fun for the prom queen if he cancels as soon as she asks him to the dance.
In most situations, the parties will be each promising what they have to offer, not something they would not normally offer. If they are not offering something they have to offer, or not promising something they would normally promise voluntarily behaving in that way the oddest thing would be happening. The prom queen’s boyfriend would need to be pressured or coaxed into wearing plaid pants when he could easily wear khakis instead. So these two parties make the promise to do something because of the agreement. If the prom queen agrees to change her date to the dance on Saturday and he agrees to wear shoes without holes and not stand on her dress while doing the worm, they will be doing something they have promised to do. If, however, the relationship of the prom queen and her boyfriend was purely philosophical, the prom queen could have made her prom date of the alternate acquaintance a unilateral contract. Because the prom queen would be offering something that she did not already practice, she may say to her boyfriend that if he learns how to do the worm and wears shoes without holes, she will ask him to the prom. Of course, this would be an interesting proposition because she would have no reason to do what she has promised until he has fulfilled the contractual bargain but suppose she said she will do it anyway. If she asks him to the prom after executing the worm during lunch and he dutifully refuses, she will still have made the agreement; she just will not have formed a true binding contract. This is one of the differences between the two contract types; a bilateral contract can be formed at any time as long as performance is not required (or a course of performance is required). A bilateral contract that requires a future performance can take some time to form because the person changes his or her mind if the other party fails to make good on the promised performance. Unlike a unilateral contract, no consideration is required to form a bilateral contract. In the prom example, the parties could have exchanged nothing tangible as payment and still formed a binding contract.
In almost any situation where parties have made a decision regarding something of equal value for exchanged promises, it is safe to say a bilateral contract exists, regardless of the clause explaining what promises were made or not made. If, for example, the prom queen expected to pay prom night expenses with a pair of shoes, the prom king would not be bound by this condition unless a court were willing to allow it as a security interest in place of payment as collateral. That would create a "secured interest" in such shoes in exchange for prom night expenses. There is nothing in the prom example that indicates that a simple direct exchange exists, and substantial agreements often become tangled with other agreements and appear more complicated than they are.
The Contrast of Unilateral and Bilateral Contracts
One of the biggest differences between unilateral and bilateral contracts is that a unilateral contract requires the performance of an obligation without seeking return performance, while a bilateral contract involves a reciprocal exchange of promises. Specifically, the person making the promise in a unilateral contract is the only party obligated to perform. In a bilateral contract, both parties are obligated to perform the promises they have made.
In this example, Jack says to Jill, "Jill, if you move my furniture into my new house by Friday, I’ll give you $100." In this scenario Jack has offered a unilateral contract. He was not offering to pay anything in exchange for Jill’s performance; rather, he was simply offering to pay if she performed. In most situations, a general offer is not legally binding until it is accepted. Therefore, Jill does not have a legal obligation to move anything into the house unless she has expressly accepted his offer. In response to Jack’s offer, Jill says, "No thanks, I can’t do that." The phrase "no, thanks" is an express rejection of the offer, so there is no obligation for Jack to pay her whether or not she moves his furniture until and unless he accepts the counteroffer of moving the furniture in exchange for something other than money.
The situation becomes complicated if Jack were to say, "If you have the beds and other heavy objects ready to go, I’ll come pick them up and then give you $100." Now there is a two-way obligation. Jack would immediately become obligated to pay Jill (or he could be held liable for not performing the promise he has made), but we would not know whether he would have a right to get his bunk beds and marbles carried by Jill, or Jack would have to pick them up from some third party. The answer depends on the circumstances surrounding the offer. If the circumstances indicated that Jack expected Jill to be moving the beds as well, Jack may be obligated to come pick them up as well. If the circumstances indicated that Jack expected Jill to simply have the beds ready to go at the curb on Friday, then Jill would have a responsibility to do so and Jack would have a right to get them from her.
A few real-life examples of unilateral contracts include rewards for finding a lost dog or children’s toys where it is advertised, "Bring this coupon to any of these Burger Barns and receive the toy for free." A unilateral contract could also be found to exist if a farmer chooses to allow people to come and catch his fish in exchange for the fish. A few real-life examples of bilateral contracts include the sale of tickets to a concert or a car whose price is negotiated where one person buys and one person sells.
Legal Consequences and Enforceability
The nature of a contract, whether unilateral or bilateral, has significant legal implications. For instance, with a unilateral contract, the offering party retains control until the other party performs. On the other hand, a bilateral contract draws the parties into negotiation immediately after the offer is made and can result in immediate legal action if either side fails to hold up their end of the bargain.
Enforcement can become a little tedious, especially with unilateral contracts. Because of the single-sidedness of the agreement, unilateral contracts depend on feasibility. For example, if a unilateral contract contains contingency clauses like "if this object is still available to purchase , " then the offer stands to be shot down if the object is no longer there to purchase by the promisee. It’s important to mention that promisees need not be acting in good faith for this kind of contract to fail.
In terms of a unilateral contract leading to a binding agreement, it’s harder to do. For a unilateral contract to be valid and enforceable, the offer must be fulfilled and the other party must have been able to adequately inspect the terms of contract before agreeing. The offeror is only bound by the acceptance of the conditions set forth by the promisee to take action such as an offer that meets the requirements of the offer. Upon acceptance, the rules governing the unilateral contract become those of a bilateral contract.
Real-Life Examples of Both Contract Types
Real-life scenarios where unilateral contracts may be encountered are in bounty hunter or lost pet radio advertisements. The ad may state that if someone finds and returns the missing dog, they can keep the reward money, yet the company is under no legal obligation to pay them until the dog is found and returned. The same is true for a radio ad that says if you arrive at the designated location by a certain time, an exact quote will be broadcast. The person arriving at the location will be paid the quoted amount, but only if they are the first to arrive and the quote is their exact wording. As stated above, a unilateral contract does not obligate the other party, enabling one to avoid liability.
While it is less likely for a unilateral contract to inherently exist in the car, motorcycle or truck leasing industries, it is indeed possible. A leasing company could offer to pay the difference in price of the residual and the depreciation of the vehicle throughout the lease terms if the lessee elects to get out of the contract early. However, it does not have an inherent duty to do so. More simply, another example could be that a leasing company offers a special lease option that allows the lessee to park the leased car for a maximum of six months after the lease with no penalty fee. After six months, the lessee must pay the end-of-lease wear-and-tear fee if he or she wishes to keep the vehicle. The car must be returned before six months if it needs repairs that would exceed the vehicle value. The leasing company does not have an obligation to allow the lessee that opportunity.
Examples of bilateral contracts are more abundant. For instance, the leasing of a car itself is a bilateral contract with obligations on both sides. Further, the residential leasing industry is a well-known example. With a lease-rental agreement the tenant is obliged to pay rent and the landlord is obliged to make the property habitable. On a more commercial level, the leasing of office or retail space is another example of a bilateral contract where all parties have rights and responsibilities.
The Choice between a Unilateral and Bilateral Contracts
When it comes to choosing between unilateral and bilateral contracts, an effective decision will usually boil down to a few criteria: risk assessment, flexibility and strategic objectives.
Risk Assessment
What are you doing? The nature of your business decision in this matter is a major consideration. Are you creating a new product or service? Do you already have something set up in-house that your client company needs? Let’s say you’re a contractor who’s been awarded the opportunity to build a bridge. If you can handle the project as-is and the only extra step is a contract with an external supplier for some specific element, then a unilateral agreement with the supplier may be a good fit for you.
Flexibility
Bilateral contracts are inherently inflexible. Once both parties agree to the terms, there’s no way around it. Unilateral agreements, on the other hand, can be changed unilaterally, so long as the changes don’t materially impact the terms that might invite legal scrutiny. In many cases, you might even be able to change things like price and quantity without having to open yourself up to a lawsuit. In this particular area, however, whatever flexibility you think you have regarding the content of your contract is dictated in part by common industry practice. A farmer selling apples for $20 a bushel has a lot more wiggle room than a commodity wheat seller selling at a price listed on the commodities exchange . Factors such as seasonality and volatility determine what level of flexibility is acceptable, so you really ought to give the underlying market some thought before deciding to go ahead.
Strategic Objectives
Finally, you have your overall strategy to consider. In some cases, using a limited Fid for a contract with a brand name supplier creates implicitly a level of prestige or cachet that a bilateral agreement just can’t achieve. You can give the appearance of exclusivity and thus drive up perceived value. Yet in some ways, building that exclusivity comes at a cost. You have to be sure you’re leaving no room for duplication. If you turn to a large manufacturer of cooking oil and say, "Let’s use your products in our restaurants; let’s set up a non-circumvention agreement," you can’t then make the same offer to two other companies. You are saying that you’re going to give this one company your business as long as they can meet your specifications. Unless you stipulate an escape clause allowing you to opt out of the agreement without penalty in the event of a disaster, such as your supplier going bankrupt, you’re locked in from day one. Balancing the advantages of increased exclusivity against the possibility of being stuck is another major factor you need to consider when choosing which contract form to use.
When you’re trying to decide between using a unilateral agreement or a bilateral agreement, weigh your options carefully based on your needs, goals and the state of your industry. Finding a balanced contract can maximize the value derived from any agreement.