What is a Bilateral Contract & Where to use one

What is a Bilateral Contract?

Contracts serve as the cornerstone of legal agreements in various domains, ensuring that promises are exchanged, obligations are met, and expectations are fulfilled. A bilateral contract is a binding agreement in which both parties exchange assurances to carry out their duties, and each party is both an obligee and an obligor on the promises of the other party.

The term ‘bilateral’ refers to the involvement of two people or parties entering into mutual commitments and obligations, agreeing to carry out a particular task. With the prefix “bi-,” which means “two,” and the suffix “-lateral,” meaning side, it creates the word “bilateral,” which denotes something with two sides or involving two parties.

In other words, a bilateral contract is an agreement where each party pledges to carry out a specific action in return for the other party’s promise to carry out another action. Bilateral agreements are one of the most common types of contracts and are often used in various contexts, including business, commerce, employment, and personal transactions.

Essential Components of a Bilateral Contract

Certain elements are vital to create a legally enforceable contract. These components work together to create a bilateral contract, giving parties the assurance, clarity, and sound legal foundation they need to enter a bilateral agreement.

These elements collectively ensure that a bilateral contract is formed with clarity, mutual understanding, and legal enforceability and that both parties are bound by their respective promises making each an essential element of a contract. The following are the foundational components that constitute a bilateral contract:

Intention : Intention describes the genuine willingness of both parties to enter into a legally binding agreement and contract. Both parties must enter into the contract with the understanding that they are legally obligated to fulfill their promises. Contracts formed with mutual intent are considered valid and enforceable.
Offer : An offer is a fundamental component of bilateral contract formation, where one party (the offeror) presents a proposal to another party (the offeree) that outlines the terms and conditions of a potential agreement. One party makes an offer to another stating the provisions of the proposed agreement. The establishment of the contract depends on the other party accepting it.
Acceptance : Acceptance is the offeree’s expression of agreement to the terms of the offer. Acceptance in a bilateral contract imposes a mutual duty on both parties to fulfill their commitments. Acceptance must perfectly reflect the terms of the offer without introducing additional criteria or altering the contract terms. It represents the offeree’s agreement to be bound by the conditions outlined in the proposal.
Consideration : Consideration is something of value exchanged between the parties as part of the contract. It could take the form of cash, commodities, services, or even a promise to carry out a task. Consideration is necessary for validating a contract and indicates that both parties have something at stake.
Mutual Assent : Mutual assent denotes both parties’ agreement on all essential provisions of the contract. For the contract to be formed, both parties must consent to the same terms and have a mutual understanding of the agreement’s terms.
Clear Terms : A bilateral contract must contain definite, distinct, and easily understandable terms. Terms that are ambiguous or unclear can result in future misunderstandings and conflicts. Clear terms ensure that everyone is on the same page regarding each party’s obligations.
Legal Enforceability : Legal enforceability denotes that a court of law will accept and uphold the contract. To be enforceable, a contract must adhere to particular legal standards. Legal contract management software ensures that these standards are met. If one party breaches the agreement, the other party has the right to seek remedies through the legal system.
Capacity : Competence or Capacity refers to the legal ability of each party to enter into a contract. Contracts signed by parties who lack the legal capacity to do so may be unlawful or unenforceable. Both parties must be of legal age, possess the cognitive abilities to understand the nature and implications of the contract they are entering into, be accountable for carrying out contractual responsibilities, and be willing to withstand the repercussions should a dispute occur.
Performance Conditions : The requirements that each party must meet in order to carry out their obligations under the contract are outlined in performance conditions. It may include conditions for timing, quality, quantity, and other performance-related factors.
Remedies for Breach : This outlines the legal actions that one party can take if the other fails to fulfill their obligations under the contract. Common remedies include seeking damages (financial compensation) or specific performance (coercing the breaching party to fulfill their promise).
Termination : It refers to the contract’s conclusion or dissolution. It defines the events and conditions that result in the termination of the contractual relationship and the release of each party from their obligations.

Examples of Bilateral Contracts: Demonstrating Agreements in Practice

Bilateral contracts are used in various business scenarios. Here are some bilateral contract examples that are commonly used in business:

Sales Agreements:A business commits to paying another company a fee in exchange for a certain service or goods. The other company promises to deliver the goods/services as specified.
Employment Contracts: An employer and an employee enter into an employment contract where the employee promises to perform specific job duties while the employer promises to provide a salary, benefits, and a work environment.
Property Purchase: Here, a buyer and a seller enter into a contract to purchase a property. The buyer promises to pay the purchase price, and the seller promises to transfer ownership of the property to the buyer.
Consulting Agreements: A company hires a consultant for his or her expertise. The consultant promises to deliver certain services, and the company promises to compensate for those services.
Distribution Agreements: A company (for example, manufacturer) and a distributor enter a supply agreement. The company promises to supply products, and the distributor promises to market and distribute them within a specified territory.
Loan Agreements: A lender and a borrower enter into a loan agreement. The borrower pledges to pay back the loan with interest in line with the agreed-upon terms, while the lender promises to deliver the loan amount.
Vendor Agreements: A business hires a vendor to provide a particular service (for example, IT support). The company guarantees to pay the vendor for the services delivered, and the vendor guarantees to offer assistance.
Rental/Lease Agreements: In this scenario, a landlord rents/leases office space to a business. The landlord commits to offer the space, while the company promises to pay the rent on time and abide by the lease’s/agreement’s terms.
Service Agreements: An agency enters into a service agreement with a client. The agency promises to provide the required services, and the client promises to pay the agreed-upon fees.

How to Use Bilateral Contracts?

Businesses can easily utilize bilateral contracts to establish clear obligations and expectations between parties. These contracts serve as the foundation for various business transactions and become legally binding and enforceable when drafted and executed correctly.

Here’s a step-by-step guide on how to create and use bilateral contracts effectively:

Identify the need: Determine the particular circumstance or transaction that calls for a bilateral contract. Sales, collaborations, employment, services, etc., could fall under this category.
Define terms & obligations: Clearly state the conditions, obligations, and commitments each party will undertake in the contract. Indicate what each party commits to offer and what they expect to receive.
Offer & acceptance: One party should make a specific offer describing the agreement’s conditions. The other party must express their clear acceptance of the offer, confirming their understanding of the terms.
Draft the contract: Create a legally binding agreement outlining the conditions, commitments, and promises made by both parties. The contract must be unambiguous, thorough, and straightforward. Contract automation solutions like SignDesk CLM help businesses expedite contract creation workflows by providing ready templates, access to clause library, and clause locking features.
Review & negotiate: Both parties should carefully assess the contract and negotiate any terms that require clarification or amendment. This ensures both parties are on the same page. SignDesk CLM simplifies this step by allowing stakeholders to review and negotiate contracts online.
Sign the contract: After both parties have agreed to the conditions, they should both sign the contract to indicate that they understand and agree to the terms. SignDesk CLM comes with e-stamp integration, which allows businesses in India to make their contracts legally valid by paying prescribed stamp duty charges online. With CLM’s integrated electronic signature feature, parties can sign contracts online from anywhere, significantly reducing the time needed to bring contracts into effect otherwise.
Performance : As the contract states, all parties must carry out their commitments and promises. This could entail paying payments, delivering products, or performing services.

Are Bilateral Contracts Enforceable?

A bilateral contract is lawfully enforceable in India under the Indian Contract Act, 1872. It sets forth the legal framework for the establishment, performance, and enforceability of contracts, including bilateral agreements, and governs the law pertaining to contracts in India.

A bilateral agreement must contain specific conditions in order to be enforceable. This includes:

Legal Capacity : Both parties entering the contract must have the legal capacity to do so, which generally means they are of sound mind and are not minors or disqualified by law.
Lawful Purpose : The objective and purpose of the agreement must be lawful. Agreements with unlawful or immoral goals are not enforceable.
Free Consent : Both parties’ consent must be given freely and without compulsion, undue influence, fraud, deception, or error.
Mutual Assent : The contract’s terms must be thoroughly understood by both parties in order for them to agree without force or other forms of coercion.

In addition, a bilateral contract must specify its terms and conditions. One party must make a clear offer, and the other party must accept it to create a legally binding bilateral contract.

A bilateral contract is valid and enforceable once these conditions are met. The other party has legal options to seek enforcement if the other party has breached the commitments or responsibilities under the contract.

These remedies may include filing a claim for damages, seeking specific performance (which would compel the party in breach to fulfill their commitments), or taking other suitable legal action.

However, there may be exceptions or circumstances in which a contract may be void owing to things like fraud, misrepresentation, error, or illegality.

Bilateral Contracts v/s Unilateral Contracts: Know the Key Differences

In business contexts, where ways of promise exchange shape the nature of commitments and obligations, firms require a thorough understanding of how a bilateral contract varies from a unilateral contract. Here are the main differences:

Bilateral Contracts	Unilateral Contracts
Contracts in which both parties exchange promises.	Contracts where one party makes a promise, and the other party accepts the promise by performing a specified action.
Both parties have mutual obligations	The party making the promise has the obligation until the other party performs.
Agreement is created when both parties exchange promises	Agreement is created when the offeree performs the specified action
Both parties are immediately bound upon promise exchange.	Only the promisor is initially bound until the offeree performs
Revocable before acceptance	Revocable before performance
Examples include employment contracts, consulting agreements, sales contracts, service agreements, and rental contracts.	Examples are insurance contracts with premium payouts, reward offers, performance-based compensation, freelance contracts, and sales promotions.

Bilateral Contracts v/s Mutual Contracts- How Do They Differ?

Bilateral contracts and mutual contracts are two distinct agreements that support numerous business agreements. While the terms might seem interchangeable, they signify different aspects of contractual relationships. For example, in a mutual contract, two individuals form a business partnership where both parties promise to contribute capital, skills, or resources to the partnership. They share profits and responsibilities based on the terms of the agreement.

Understanding the differences between these two types of contracts is essential for navigating the intricacies of contractual obligations and commitments that shape the foundation of business dealings.

Bilateral Contracts	Mutual Contracts
Contracts in which both sides exchange promises.	Contracts where parties have a mutual understanding and agreement on the terms.
Both parties have mutual obligations.	Both parties understand and agree on terms.
The exchange of promises is the primary consideration.	Mutual agreement is the primary consideration.
Both parties are immediately bound upon promise exchange.	Both parties are bound once mutual agreement is established.
Examples are service agreements, supply agreements, sales contracts, etc.	Examples include business joint venture agreements, mergers and acquisitions agreements.

Create, Manage & Execute Bilateral Contracts with SignDesk

Effective contract administration and execution are essential to success in the dynamic world of modern business. Technology has completely changed how contracts are generated, handled, and executed to enhance speed, accuracy, and convenience.

The days of cumbersome administrative processes, contract review and outdated paperwork are passing, giving way to a digital revolution that encourages productivity, teamwork, and the ability to prioritize crucial business endeavors. Adopting digital solutions like SignDesk CLM. A contract management software, becomes necessary for organizations to flourish in the quick-paced and competitive global economy.

SignDesk Contract Lifecycle Management (CLM) enables organizations to navigate the complexity of bilateral contracts effortlessly. Businesses can streamline their contract processes from creation to execution by utilizing the capabilities of SignDesk CLM, all while guaranteeing compliance, data security and reducing risks.

SignDesk helps companies reduce TAT by up to 90% and expenses by up to 85% by providing a seamless digitized workflow for each contract stage, thereby reducing the likelihood of breach of contract.

Book a free demo with our CLM solution experts to learn how SignDesk can help transform how you manage contracts.