What is a bilateral contract (In Plain English)
A bilateral contract is a contract where two parties both make promises to each other.
A party refers to a person or organization that has signed an agreement and is expected to follow the terms.
The simplest example is what we think of as standard business contracts. A manufacturer and a retailer enter in to a contract.
- The manufacturer agrees to supply 100 units a month to a retailer
- The retailer agrees to purchase and pay for those 100 units at a set price each month
The contract is formed on the basis of the two promises made.
Aren’t all contracts like this?
Not all. Most traditional customer and vendor contracts we create are bilateral. There are examples like finder’s fees, competitions and contests where only one party is making an offer.
Hence we use the term bilateral and unilateral to distinguish these two different types.
How is a bilateral contract enforceable by law?
- Offer – There must be a proposal to enter in to an agreement with another party. The offer must include terms that are specific so that they can be enforced.
- Acceptance – The counter-party must accept the offer unequivocally. Acceptance must be communicated to the offeror.
- Consideration – Value must be exchanged between parties for a contract to be distinguished from a gift. For example – money, time, service.
- Mutuality of Obligation – Both parties are bound by the agreement.
- Capacity – Both parties must have the legal ability to enter in to a contract – think sound mind and body and over the legal age
- Legality – The contract must still be legal. Contracts that go against local state, federal or country laws are not enforceable.
- Possibility of Performance – The terms of the contract must be capable of being performed.
- Formality – While many oral contracts are enforceable, there are many contract types that are required to be in writing. Good examples are real estate contracts which are required to be in writing.
If a contract is missing one or more of these components, the enforceability can be challenged in court.
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