Bilateral Contract

Article byGayatri Ailani
Edited byRaisa Ali
Reviewed byDheeraj Vaidya, CFA, FRM

Bilateral Contract Definition

Bilateral contracts are binding agreements between two parties in which both parties guarantee to perform their promises. The contract’s main purpose is to obligate both parties to complete the assigned responsibilities; hence it is also an example of a risk hedging instrument.

Bilateral Contract

You are free to use this image on your website, templates, etc, Please provide us with an attribution linkHow to Provide Attribution?Article Link to be Hyperlinked
For eg:
Source: Bilateral Contract (wallstreetmojo.com)

Both parties are the offeror and the offeree, and the contract benefits both parties as they protect the specific interests of both parties. Therefore, both parties fairly gain after fulfillment of the contractual obligations. In other words, it can guarantee the economic interest of both parties.

Key Takeaways

  • A bilateral contract definition portrays it as a legally binding arrangement between two parties in which each promises to keep the terms of the agreement attributed to them.
  • An example includes a bilateral forward contract. It is frequently employed in the electricity markets to stabilize prices and reduce the possibility of an electrical shortage.
  • Its application in employment agreements and real estate documents like the purchase and sale agreement is typical in corporate settings.
  • A unilateral contract is different from it since only one party makes the promise in a unilateral contract.

Bilateral Contract Explained

A bilateral contract is a legally binding document made on reciprocal promises between the two parties to the contract. The contracts can cover a range of subjects, including the sale of goods, property, vehicles, etc. A simple example is a bilateral contract in real estate where one party offers the property, and the other party offers the money. When selling real estate, the buyer must pay the seller the predefined amount to obtain the property. The seller agrees to give the property in exchange for a specific amount. A breach of contract occurs when one party fails to fulfill its obligation.

Its usage is significant in businesses. Businesses involve buying and selling goods and services, and bilateral contracts are integral in efficiently completing business deals. Other contracts, like employment contracts, are also bilateral because a corporation agrees to pay an employee a specified salary for doing particular tasks, and the employee promises to perform the task assigned. Furthermore, the executory bilateral contract, another version, obligates the parties to carry out the performance at a future date.

A contract governing how certain private information is handled between two or more parties is known as a confidentiality agreement. These agreements may be found in many different situations, but they are particularly important in the commercial and nonprofit sectors, which help keep private information private. A bilateral agreement in case of confidentiality agreements is responsible for safeguarding each other’s information on all the parties. Furthermore, bilateral agreements are most usually seen in the context of business collaborations.

Financial Modeling & Valuation Courses Bundle (25+ Hours Video Series)

–>> If you want to learn Financial Modeling & Valuation professionally , then do check this ​Financial Modeling & Valuation Course Bundle​ (25+ hours of video tutorials with step by step McDonald’s Financial Model). Unlock the art of financial modeling and valuation with a comprehensive course covering McDonald’s forecast methodologies, advanced valuation techniques, and financial statements.

Examples

Let us look at bilateral contract examples to understand the concept better:

Example #1

Albert promises that he is willing to sell the property at $500 million on 1st September 2023. John promises that he will pay the amount of the property once the property papers are handed over to him by Albert. Both John and Albert promise to fulfill their responsibilities on 1st September 2023. But in any case, if John or Albert defaults in fulfilling their obligation, the contract stands null and void.

Example #2

Alisa gives the option to Erica to buy second-hand furniture from her for $500. Erica promised to buy it for $500. Both Erica and Alisa agree to the terms and conditions of the contract. This is bilateral since both individuals have obligations to fulfill. Alisa has to transfer the asset to Erica, and Erica is obligated to pay $500 as per the contract.

Example #3

Norwegian energy firm Equinor and UK’s Centrica, the UK’s largest provider of gas and power to consumers through British Gas, are in a bilateral contract outlining the delivery of gas. According to a CNBC news article from June 2022, Equinor will supply Centrica with additional gas throughout the following three winters as Europe seeks to secure its supplies in the face of the continued conflict between Russia and Ukraine. According to the Equinor report, the new arrangement would expand an existing bilateral agreement with Centrica by around one billion cubic meters of gas annually.

According to reports from Centrica, it will now purchase ten billion cubic meters of gas from Equinor each year. This supply agreement will increase the UK’s energy security in a challenging socioeconomic and geopolitical context. With the help of this new gas supply contract, Equinor will provide Centrica with enough gas over the next three winters to heat an extra 4.5 million households.

Unilateral vs Bilateral Contract

The main distinction between them is that in the bilateral type, the promises come from all parties to the contract. Whereas in unilateral contracts, only one party makes the promise. In a unilateral contract, the second party who didn’t make any promise is not legally required to carry out the duty and cannot be held in breach of the agreement if they don’t. If it were a bilateral agreement, both parties would be bound by the law.

Frequently Asked Questions (FAQs)

What are the basic elements of a bilateral contract?

The basic elements include promisor, acceptor, offer, consideration, legal capacity, and legal terms.

Is a bilateral contract legally binding?

It is a legally binding agreement. The promises bind both parties, and the contract is enforceable in court, given the contract is drawn up correctly or contains the components of a valid contract.

How is a bilateral contract formed?

It is formed when both parties exchange obligations to carry out and fulfill their part of the agreement. Since it transforms both parties into what is known as an “obligor,” or a person or party who is committed to another, this contract type is one of the most often utilized binding agreements. An obligor has violated the bilateral contract if they don’t fulfill their obligation in line with the contract.

This has been a guide to What is Bilateral Contract. We explain its examples and application in real estate and compare it with unilateral contracts. You may also find some useful articles here: