What is a Bilateral Contract?

In commerce, contracts form the backbone of business agreements. Almost any business agreement where goods or services are promised in exchange for payment is a bilateral agreement. Today, we’ll explore what defines a bilateral contract, when businesses should use it, real-world examples, and best practices for managing it.

Definition of a Bilateral Contract: A legally binding two-way promise

A bilateral contract is a legal agreement where two parties or entities commit to perform specific actions or obligations towards each other. A bilateral contract is where both parties make promises and expect performances in return. This reciprocal nature is the hallmark of a bilateral contract. Both parties are simultaneously obligors and obligees.

In contrast, unilateral contracts are agreements where only one party promises to do something upon the occurrence of a specific act by another party,

Bilateral contracts provide a clear and enforceable framework for agreements. Ideally, they clearly communicate each party’s obligations and expectations, reducing the risk of misunderstandings and disputes.  A well-crafted bilateral contract protects everyone's interests and promotes a smooth and successful business relationship.

Key Characteristics of a Bilateral Agreement

Bilateral agreements proliferate in the commercial world. But they all share these fundamental characteristics:

1. Mutual promises

Both parties have contractual obligations they must fulfill.

2. Offer and acceptance

One party makes an offer (e.g., we will provide these IT services for this amount of time), and the other party accepts (e.g., we’ll pay you this amount).

3. Capacity to contract

All parties involved must be legally able to enter into a binding agreement.

4. Enforceability

Once both parties consent to the terms, a bilateral contract becomes legally enforceable. Non-compliance by any party can lead to legal consequences.

Common Types of Bilateral Contracts

The versatility of bilateral contracts makes them applicable across various industries and situations. This list is not exhaustive but provides a good overview of how bilateral agreements are used in various business and personal contexts.

Sales Contracts: 

These are agreements for the purchase and sale of goods between a buyer and a seller. They outline the product or service sold, the price, payment terms, delivery details, and any warranties or guarantees.

Service Contracts: 

When you hire a professional for a service, like accounting, consulting, or IT services, you enter into a service contract.  This contract specifies the service to be performed, the timeline, the fee, and any expectations for materials or supplies.

Employment Contracts: 

These contracts govern the relationship between an employer and an employee. They detail the employee's job duties, compensation, benefits, working hours, and termination clauses.

Lease Agreements: 

Leases establish the terms for renting property, such as an apartment, office space, or equipment.  They specify the rental period, monthly rent, security deposit, and maintenance responsibilities for the landlord and tenant.

Licensing Agreements:

In licensing agreements, one party (the licensor) grants another party (the licensee) the right to use intellectual property under specific conditions, such as software, patents, or trademarks. The licensee usually agrees to pay a fee or royalty in exchange for the rights to use the intellectual property.

Purchase and Sale Agreements:

For complex, large-scale transactions like real estate deals, a purchase and sale agreement is a legally binding agreement between a buyer and a seller. It lays out the specific details of what's being bought and sold, the agreed-upon price, and the steps involved to complete the transaction smoothly.

Supply Contracts:

Supply contracts are agreements between a supplier and a purchaser for the supply of goods. These often specify the quantity, price, and delivery schedule of the goods. Supply contracts are crucial in manufacturing and retail operations, ensuring a steady flow of materials or products.

Construction Contracts: 

These agreements govern construction projects between a property owner and a contractor.  They outline the scope of work, materials to be used, project timeline, and payment schedule.

Non-Disclosure Agreements (NDAs): 

These contracts protect confidential information shared between parties. NDAs outline what information is confidential, who can access it, and how it must be handled. When both parties are disclosing confidential information, a bilateral NDA is formed. It is also known as a mutual NDA. However, some types of NDA are unilateral, where only one party discloses confidential information. The most common NDA of this type are employee NDAs.

Loan Agreements: 

When you borrow money from a bank or lender, you enter into a loan agreement.  This contract details the loan amount, interest rate, repayment terms, and any collateral involved.

When to Leverage Bilateral Contracts

Bilateral contracts are a powerful tool for businesses, but their suitability depends on the specific situation. Here are some common scenarios where bilateral contracts are highly recommended:

1. Clearly Defined Scope of Work:

When the agreement involves a well-defined exchange of goods, services, or actions, a bilateral contract ensures clarity and avoids confusion about what each party is obligated to deliver.

2. Long-Term Agreements:

For ongoing collaborations or partnerships, a bilateral contract establishes a strong foundation for the relationship, outlining expectations and promoting long-term stability.

3. Significant Financial Investment:

When a business transaction involves a substantial financial investment, such as the investments outlined in a purchase and sale agreement, a bilateral contract safeguards both parties by clearly defining payment terms, warranties, and potential liabilities.

4. Protection of Confidential Information:

If an agreement involves sharing confidential information, a bilateral contract with a non-disclosure agreement (NDA) clause protects sensitive data and intellectual property.

5. Risk Mitigation: 

In situations where there's a potential for performance issues or non-compliance, a bilateral contract allows for legal recourse if one party breaches the agreement.

Alternatives to Bilateral Contracts

In a few cases, bilateral contracts might not be the best fit. Here are some situations where alternatives might be preferable:

Simple Transactions: 

For minor, everyday transactions, a formal bilateral contract might be overkill. A simple receipt or invoice may suffice.

Unilateral Contracts:

Consider using a unilateral contract for agreements that are only binding for the offeror when a participant performs an action, such as submitting a software bug to a bug bounty program.

Highly Flexible Agreements: 

If an agreement requires ongoing adjustments based on changing circumstances, a less rigid contract structure might be more suitable.

Multiple Parties Involved: 

When multiple parties need to be involved in an agreement, a multilateral contract that outlines the obligations and rights of each party would be more appropriate.

Leveraging Contract Management Tools for Bilateral Contracts

While bilateral contracts provide a clear framework, managing them effectively can be complex. According to the most recent World Contracting and Commerce Benchmark Survey, a company, on average, has contracts stored in 24 different repositories (silos) across the business! 

The Challenges of Managing Contracts Manually

Of those silos, many organizations still find themselves managing their contracts manually. Some teams store their contracts in SharePoint. Others have homegrown systems. Some still use old-fashioned file cabinets and Excel spreadsheets. In most cases, these standalone contract repositories are only accessible to specific individuals and groups, with significant differences in contract language and workflows from one system to the next. 

This fragmentation results in poor contract performance and contracts scattered throughout the company, with disconnected workflows and inconsistent language and terms. Tracking commitments and deadlines is a manual contracting process that’s prone to human error. In addition, rate increase clauses, automatic renewals, service level agreements (SLAs), and other details are often overlooked. This usually results in unnecessary spend, missed obligations, and even legal risks from contract non-compliance.

How a Contract Management Platform Can Help

Successfully tracking and managing contractual obligations is at the heart of managing any two-way agreement. This is where contract management platforms like Icertis Contract Intelligence come in. Software solutions like the Icertis platform offer a centralized platform to streamline the entire contract lifecycle, from creation and negotiation to execution and monitoring post-signature.

1. Centralized Obligation Tracking: 

Contract management software creates a centralized repository for all your contracts. This lets you easily identify upcoming deadlines, overdue tasks, and responsible parties for each contractual obligation.

2. Obligation Assignment and Workflow Management: 

Automate the workflow of assigning and reviewing specific contractual obligations to designated individuals or teams with contract management software. This promotes accountability and streamlines workflows. Team members can collaborate on tasks, track progress, and ensure timely completion of their assigned contractual responsibilities.

3. Automated Reminders and Alerts: 

Never miss a critical deadline again. These platforms can be programmed to send automated notifications via email or in-app alerts for important dates like payment due dates, reporting deadlines, or service renewal periods. This ensures all parties stay on top of their contractual commitments.

4. Reporting and Analytics: 

These platforms offer powerful reporting features that generate insights into your contract performance post-signature. You can identify trends, analyze potential risks associated with upcoming deadlines, and monitor overall compliance with contractual terms. This data-driven approach allows businesses to proactively manage their obligations and KPI metrics and make informed decisions.

5. Improved Communication and Collaboration: 

Contract management software enables clear communication and collaboration between departments and stakeholders involved in fulfilling contract obligations. Instead of email chains, this is done through a secure, encrypted platform.  Information sharing and discussions can occur within the platform itself, eliminating the need for scattered emails or endless document chasing.

By leveraging a digital contract management solution like Icertis Contract Intelligence, businesses can effectively manage bilateral contracts, ensuring a smooth and successful execution of all agreed-upon terms and obligations. To see how the Icertis platform can help you manage your contractual obligations, big and small, request a demo today.

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