Unilateral Contract: Definition, Elements & Operational Framework

A Comprehensive Guide to Unilateral Contracts

Contracts are the backbone of legal agreements, shaping the dynamics of various interactions, including personal and business relationships.

Contracts form an indispensable foundation for the systematic functioning of any business endeavor.

Contracts can be categorized based on the level of performance they require. There are two primary classifications in this regard:

• Unilateral Contract
• Bilateral Contract

The distinction between these classifications lies in how acceptance and commitment are established within the contract.

Navigating through the complex jargon and numerous variations of contracts can be challenging, making it difficult to identify the most suitable contract for your needs. Employing a methodical approach to oversee diverse contractual arrangements within the organization substantially simplifies the overall contract administration for companies.

Moreover, establishing a streamlined contract management system becomes essential considering the significant number of contracts enterprises execute. From the initial drafting phase to subsequent renewals and eventual terminations, an organized contract management system guarantees a seamless progression of contracts through their multiple stages.

What is a Unilateral Contract?

A unilateral contract is an agreement where one party makes a promise contingent upon the other party’s performance of a specific action or task. In a unilateral contract, the offeror (the party making the offer) must fulfill their promise if the offeree (the party receiving the offer) completes the required action. Once the offeree performs the requested action, the contract is formed, and the offeror must fulfill the promise.

A classic example of a unilateral agreement is a reward or bounty situation. For instance, if someone posts a notice offering a reward for the return of a lost item, the individual who finds the item and returns it has accepted the offer by performing the action, and the offeror is then obligated to pay the promised reward.

Power of Unilateral Contracts: Enhance Contractual Flexibility

Unilateral contracts have several important and relevant functions, both from a legal and practical perspective –

• Clear Performance Criteria : Unilateral contracts are often used when the offeror wants to ensure that a specific action is performed before any obligation arises. This can be particularly useful when the offeror wants to ensure that the offeree is genuinely committed to completing the task before the contract binds them.
• Rewards and Incentives : Unilateral agreements offer rewards, bounties, or incentives. This can encourage people to take certain actions, such as returning lost items, providing information, or achieving specific goals. The promise of a reward can motivate individuals to engage in activities that benefit the offeror.
• Control Over Obligations : Unilateral contracts provide the offeror with more control over when their obligations are triggered. They can choose the specific action that needs to be performed, and the contract only becomes binding when that action is completed.
• Risk Management : Unilateral agreements can be a way for businesses or individuals to manage risk. For example, a company might offer a reward for finding a security vulnerability in their software. This can help them identify potential weaknesses before they are exploited maliciously.
• Advertising and Promotion : Unilateral contracts can be used in advertising and promotion to engage consumers in interactive campaigns. For example, a company might run a contest where participants are required to submit creative content, like videos or slogans, to win a prize. This generates user-generated content and uniquely engages customers.
• Legal Clarity : Unilateral contracts can provide legal clarity because the terms of acceptance are based on specific actions. This can reduce potential disputes about whether a contract was properly formed.
• Educational and Charitable Contexts : Unilateral agreements are also relevant in educational and charitable contexts. Scholarships, grants, and awards often have conditions that need to be met to receive the benefits. This ensures that the recipients are committed to fulfilling certain criteria.
• Patents and Intellectual Property : In some cases, unilateral contracts can play a role in intellectual property protection. For example, a company might offer a reward for innovative solutions to technical challenges. This can encourage external contributors to develop new technologies.

While unilateral contracts offer advantages, they also have certain limitations and considerations. It’s important to ensure that the terms and conditions of the contract are clear and well-defined to avoid misunderstandings or legal disputes.

Components of a Unilateral Contract

For a unilateral contract to be legally binding, four essential elements must be present, each contributing to the formation of a valid and enforceable agreement. These elements ensure the contract is based on clear terms, mutual intent, and proper consideration.

• Offer by Offeror : The unilateral contract begins with an offer made by one party. The offeror, the party initiating the contract, must clearly express their intention to enter into a unilateral contract by making a specific promise or proposal. This offer outlines the action that the offeree needs to undertake to accept the offer and trigger the contract’s obligations. The offer should be precise, leaving no room for ambiguity regarding the required action and the promised reward or consideration.
• Acceptance Through Performance : In a unilateral contract, acceptance is achieved by completing the specified task or performance outlined in the offer. This action is the offeree’s way of signaling their agreement and commitment to the terms of the contract. Until the offeree completes the action, the contract remains in a pending state.
• Knowledge of the Offer & Terms : For a unilateral contract to be binding, the offeree must know the offer when they undertake the required action. This is crucial to ensuring that the offeree’s performance is a direct response to the offer. If the offeree is unaware of the offer, their action cannot be considered acceptance, and thus, the contract is not formed. Both parties should understand what constitutes completion and what rewards or consideration will be provided.
• Promise of Reward or Consideration : The offering party must promise a reward or consideration to make the contract valid. This incentivizes the other party to complete the performance, solidifying the contract’s enforceability.

Examples of Unilateral Contracts

Unilateral contracts are well-suited for scenarios in which the party making the offer (offeror) is prepared to compensate for any other party’s actions. Such open solicitations serve as illustrative instances of unilateral contracts. Offerors employ unilateral contracts to extend optional or comprehensive requests within a permissive economic environment. The fulfillment of these requests incurs payment only when specific conditions are satisfied.

• Reward for Finding a Lost Item : Offering a reward for finding a lost item is a classic example of a unilateral contract. The person who finds the item is not obligated to search for it, but if they do, the promise of a reward creates a unilateral contract.
• Scholarships and Academic Achievements : Educational institutions often use unilateral scholarship contracts. Students who achieve a specific academic goal are entitled to the scholarship reward.
• Performance-Based Job Bonuses : Performance-based bonuses are a common unilateral contract scenario in the corporate world. Employees who meet or exceed certain performance metrics receive a bonus.

How Does Contract Lifecycle Management Streamline Unilateral Contracts?

A unilateral contract can be a powerful tool in various situations, providing a structured approach to engaging parties and achieving desired outcomes.

Contract Lifecycle Management (CLM) automation streamlines the management of unilateral contracts throughout their lifecycle, offering notable benefits.

As unilateral contracts are promise and reward-based contracts, the workflow differs from the conventional lifecycle of contracts. It requires much fewer and simpler steps to be executed. Here’s how CLM software enhances the management of unilateral contracts:

• Step 1. Drafting : CLM software aids in crafting unilateral contracts by defining the conditions that must be met before contract implementation. This is achieved through comprehensive clause and template libraries, ensuring accurate and consistent contract creation.
• Step 2. Approval : CLM solution can expedite the acceptance process through quick online approval. Digital platforms can ensure that the involved party reviews and clarifies the terms before the unilateral contract comes into effect.
• Step 3. Execution : With a focus on completing the stipulated action or task, CLM technologies can automate the execution of unilateral contracts through integrations with digital signature solutions, concluding the contract execution process.

To manage unilateral contracts effectively using CLM software, organizations can leverage the following features:

• Template Libraries : AI-driven clause recommendations and automated contract processes streamline the creation of unilateral contracts, reducing the need for extensive human intervention.
• Remote Collaboration : Real-time online collaboration for unilateral contract clauses can be conducted using features like clause locking, tokenization, master wallet, and content libraries, facilitating remote and secure collaboration.
• Bulk Upload for eSign : To accelerate the execution of unilateral contracts, scalable upload and eSign processes, integrated eSignature capabilities, and a digital audit trail can be employed.
• Centralized Contract Storage : Unilateral contracts can be organized and stored in a centralized repository, making retrieval and tracking straightforward.
• Status and Performance Tracking : CLM software streamlines the entire lifecycle of unilateral contracts, automating renewals and monitoring performance. Insights derived from contract analytics, such as the completion of performance by the other party, help the offeror initiate the reward process.

Enforceability of Unilateral Contracts

The enforceability of unilateral contracts depends on factors such as meeting the essential elements of a valid contract, the concept of consideration within unilateral contracts, and the legal implications associated with such contracts, which are often determined through court decisions.

• Meeting the Elements of a Valid Contract : For a unilateral contract to be legally binding, it must fulfill the fundamental elements of a valid contract, which generally include an offer, acceptance, consideration, legal capacity, and the intention to create legal relations. In a unilateral contract, the offer is made by the offeror, and acceptance is evidenced through the offeree’s performance of the required action. Both parties must also have the legal capacity to enter into the contract, and there should be a genuine intention to create legal obligations.
• Consideration in Unilateral Contracts : Consideration is a critical element in most contracts, including unilateral contracts. Consideration refers to the value or benefits that each party gains from the contract. In unilateral contracts, the consideration typically lies in the offeree’s performance of the specified action in exchange for the promise made by the offeror. The offeree’s action serves as the consideration that binds the offeror to fulfill their promise once the action is completed. While unilateral contracts may not involve the traditional bilateral exchange of promises, the consideration requirement is met through the offeree’s performance.
• Legal Implications and Court Decisions : The enforceability of unilateral contracts can sometimes be subject to legal scrutiny and interpretation, especially when disputes arise. The legal implications of unilateral contracts are often shaped by court decisions that establish guidelines for determining whether a unilateral contract is binding and whether the parties’ obligations have been fulfilled appropriately. Courts consider factors such as whether the offeree was aware of the offer, whether the action was performed as specified, and whether the offeror’s promise was unequivocal.

Unilateral vs. Bilateral Contracts 

Unilateral and bilateral contracts represent two fundamental types of contractual agreements, each with distinct characteristics and implications. Understanding the differences between these two contract types is essential for effectively navigating the legal landscape of contract law.

Optimize Business Agreements with SignDesk’s Contract Lifecycle Management Solution

Unilateral contracts shape various facets of our legal interactions, showcasing insights into the intricacies of offer, acceptance, and performance and the interplay of promises, actions, and rewards. Understanding their components, implications, and enforcement mechanisms enriches our comprehension of the contract landscape.

SignDesk, a SaaS-based software and digital solution provider, offers a smart contract lifecycle management tool, “contr.act”. The digital CLM tool facilitates templatized, robust drafting and scalable upload for eSign workflows, enhances milestone management efficiency, and ensures dynamic status tracking through seamless eSignature and eStamping integrations, empowering businesses to effectively manage their contracts.

Discover how to effectively utilize unilateral contracts by ensuring clear communication of terms, proper offer creation, and establishing conditions for acceptance with our smart CLM solution.