We all use contracts in our everyday lives even if we don’t always recognize the transaction as a contract. We buy a cup of coffee or fill up the gas tank or place an online order. For the most part, we don’t think (and don’t need to think) about these contracts because they are routine and low value.
In more complex situations and contracts, however, lawyers and judges think about contracts in terms of the “elements” of a contract. The elements required for a contract are an offer, acceptance of the offer, consideration (an exchange of value), and no defenses to formation. Legal professional have also developed two main categories for contracts, bilateral and unilateral, that distinguish between contracts based on how the offer is accepted by the other party. This blog post provides a brief introduction to bilateral and unilateral contracts and why the distinction can be important.
What Is a Bilateral Contract?
A bilateral contract is what most people think of as a contract. The key feature of a bilateral contract is that both parties to the contract make a promise to do something that benefits the other party—sometimes called an exchange of promises. If Alex agrees to buy a car from Bill, and Bill agrees to sell the car to Alex, an exchange of promises has occurred because Alex has promised to pay the purchase price, and Bill has promised to transfer title to Alex.
Another important characteristic of bilateral contracts is that, after the promises have been exchanged, the contract has been formed, and the contract cannot be modified or changed without an additional contract. In other words, a contract modification involves an agreement to change an existing contract. So, in the vehicle-purchase example, let’s say Bill also owns snow tires that he has used on the car. If Alex decides he wants to buy the snow tires as well as the car, and Alex and Bill agree to include the snow tires for an increase in the purchase price, Alex and Bill have formed a contract to modify the original purchase contract.
What is a Unilateral Contract?
Unilateral contracts are common, but they are a bit more difficult to understand. The key feature of a unilateral contract is that the offer is accepted by performing the work or action stated in the offer and not accepted by a promise. If Carol offers to pay Diane for painting her (Carol’s) house, and Diane paints the house, Diane has accepted the offer by performing the work requested and a contract was formed.
Accepting the offer by performing the work requested distinguishes unilateral contracts from bilateral contracts in one important way. In a unilateral contract, a contract is not formed until the offer has been performed, and the offer can be changed (or withdrawn) at any time before performance is complete. Unlike a bilateral contract, no agreement to modify a contract is needed before performance is complete because a contract did not exist.
Why Is the Difference Between Bilateral and Unilateral Contracts Important?
Understanding the difference between bilateral and unilateral contracts is important because unilateral contracts are more common than one might think. For example, the courts in Arizona have interpreted at-will employment as a unilateral contract, and most employment arrangements are at will. Keep in mind, however, that other employment-related laws also apply.
Another common example is standardized agreements offered by financial institutions for bank accounts or investment accounts. These standardized agreements are typically offered on a “take it or leave it” basis that (1) allows the institution to change the terms and conditions if notice and an opportunity to opt out are given, and (2) allows the customer to close the account at any time and/or opt out of the change to the terms and conditions. Because the terms and conditions offered can be changed and the customer can close the account or opt out, the courts interpret these standardized agreements as unilateral contracts. This approach is viewed by the Arizona courts as balancing the interests of businesses and consumers. See, e.g., Cornell v. Desert Fin. Credit Union, 254 Ariz. 477, 483, 524 P.3d 1133, 1139 (2023).
Conclusion
From a legal perspective, bilateral and unilateral contracts are the two most-basic types of contracts. The difference between the two is that bilateral contracts involve an exchange of promises between the parties and unilateral contracts involve a promise of something (an offer) that is accepted by performance. The distinction can be important because, in a unilateral contract, the offer can be changed at any time prior to acceptance by performance. Unilateral contracts are common, but one might not always recognize them as a unilateral contract. If your business offers terms and conditions in a standardized agreement, and the offer reserves the right to change terms and conditions, the offer is for a unilateral contract that relies on the customer’s continued performance for contract formation.
Attorney James D. Griffith at Endurance Business Law, PLLC, is an experienced business attorney who provide advice and guidance on contracts, transactions, reviews of contracts, and contract disputes. To set up a consultation regarding a contract matter, please call our office at (480) 997-2951 or use the Contact form on this website.