Unilateral Contract: Definition, How It Works, and Types

Julie Young is an experienced financial writer and editor. She specializes in financial analysis in capital planning and investment management.

Erika Rasure is globally-recognized as a leading consumer economics subject matter expert, researcher, and educator. She is a financial therapist and transformational coach, with a special interest in helping women learn how to invest.

What Is a Unilateral Contract?

A unilateral contract is a one-sided contract agreement in which an offeror promises to pay only after the completion of a task by the offeree. In this type of agreement, the offeror is the only party with a contractual obligation. A unilateral contract differs from a bilateral contract in which both parties are bound by the agreement.

Key Takeaways

• Unilateral contracts are one-sided, requiring only a commitment from the offeror.
• Unilateral contracts do not require the offeree to perform the requested task or act.
• Unilateral contracts are usually used to make optional offers.
• Bilateral contracts require an agreement between two parties and obligation on both sides.

Understanding Unilateral Contracts

Unilateral contracts occur when the offeror makes an offer to another party. This type of contract requires the offeree to perform an act that the offeror requests. The offeree has no obligation to complete the task and the offeror will only pay if the request is completed.

Unilateral contracts are considered enforceable by contract law, however, legal action is not commonly pursued unless the offeree claims to be eligible for remuneration tied to the request.

Contract breach depends on whether or not the terms of the contract were clear and if it can be proven that the offeree is eligible for payment of specified acts based on the unilateral contract’s provisions.

Types of Unilateral Contracts

Unilateral contracts are primarily one-sided without obligation from the offeree. Open requests and insurance policies are two of the most common types of unilateral contracts.

Open Requests

Offerors may use unilateral contracts to make a broad or optional request and payment is made only when certain specifications are met. If an offeree completes the task, the offeror is required to pay.

Rewards are a common type of unilateral contract request where information received may lead to a criminal's conviction that will warrant a payment. Funds can be paid to a single individual or several individuals offering information that serves this specific purpose.

A unilateral contract is commonly used with a request for labor. An individual may offer to pay someone to clean their house or walk their dog and the offeree is paid only when the task is completed.

Insurance

Insurance policies have unilateral contract characteristics since the insurer promises to pay if certain acts occur under the terms of a contract’s coverage. In an insurance contract, the offeree pays a premium specified by the insurer to maintain the plan and receive coverage if a specific event occurs.

The 4 Elements of a Unilateral Contract

To make a unilateral contract legally binding, four elements must exist:

Agreement

One party makes an offer to another party and both must accept the offer, without coercion or force from either side.

Consideration

Consideration is the price paid for the promise or agreement and it does not need to be a monetary payment. Consideration can be any type of property or holding that both parties agree to warrant acceptable payment.

Intention

Both parties must have the full intention to create a binding contract and understand the terms and conditions of the agreement.

Certainty

Both parties must fully understand what must happen to complete the terms of the contract. In a unilateral contract, an action or task will need to be completed for the contract to be fulfilled.

Unilateral Contracts vs. Bilateral Contracts

Contracts can be unilateral or bilateral. In a unilateral contract, only the offeror has an obligation. The offeree is not required to complete the task or action.

In a bilateral contract, both parties agree to an obligation and involve equal obligation from the offeror and the offeree. In general, the primary distinction between unilateral and bilateral contracts is the amount of reciprocal obligation from both parties.

How Do You Know If a Contract Is Unilateral?

A unilateral contract does not obligate the offeree to accept the offeror's request and there is no requirement to complete the task. A bilateral contract, however, contains firm agreements and promises between two parties.

Can You Break a Unilateral Contract?

In a unilateral contract, the offeror may revoke the offer before the offeree's performance begins and this change should be expressed to the offeree before any task is started.

Are Unilateral Contract Mistakes Enforceable?

If a mistake occurs during a unilateral contract, some remedies for a mistake include contract reform where the contract is changed or a new contract is started, or full contract cancellation.

The Bottom Line

In a unilateral contract, the offeror is the only party with a contractual obligation. The offeror will pay for a specific task or activity only if it is completed by the offeree. A unilateral contract differs from a bilateral contract in which both parties are bound by the agreement.

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