What is a Unilateral Contract?

What is a Unilateral Contract?

A unilateral contract is an agreement formed by an offer that can be accepted solely through performance by another party. In this type of contract, the offer states that payment will be made only after the other party fulfills the required task.

In simpler terms, this contract involves a one-sided promise that is fulfilled through the completion of a task or action by another party. These contracts are beneficial when a business wishes to incentivize specific actions without requiring mutual promises.

This article will explore the definition of a unilateral contract, types of unilateral contracts, their key elements, some examples and the benefits they provide.

• What is a Unilateral Contract?
• Key Elements of a Unilateral Contract
• Types of Unilateral Contracts
• Unilateral Contracts vs Bilateral Contracts
• Examples of Unilateral Contracts
• Advantages and Disadvantages of Unilateral Contracts
• Use Icertis to Optimize Unilateral Contract Management

Key Elements of a Unilateral Contract

For a unilateral contract to be legally valid and enforceable, it must contain essential elements that provide clarity and protect both parties involved. These elements work together to create a binding agreement that courts will uphold.

Offer

The foundation of any unilateral contract begins with a clear and specific offer. Unlike bilateral contracts, where offers invite negotiation, unilateral contract offers must precisely outline what action is required for acceptance and what reward will follow. 

The offer needs to be specific enough that anyone performing the requested action can understand exactly what is expected and what they will receive in return. 

Performance as acceptance

In unilateral contracts, words alone don’t create acceptance — only actions do. The offeree doesn’t verbally agree to the terms; instead, they accept by performing the requested action.

This is the most distinctive feature of unilateral vs. bilateral contract structures. Until the contract performance is complete, the offeror remains the only party bound by the agreement, and the offeree has no obligation to perform. 

Consideration

Every valid contract requires consideration — something of value exchanged between parties. In unilateral contracts, consideration takes an interesting form: the offeror makes a promise, and the offeree responds with performance. This exchange differentiates unilateral contracts from their bilateral counterparts, where both parties exchange mutual promises.

Intention

For a unilateral contract to be binding, the offeror must demonstrate a clear intention to be legally bound by their promise. Courts typically examine the language, circumstances, and reasonable expectations surrounding the offer to determine if this intention exists. 

Without this element, what might appear to be a unilateral contract could be dismissed as merely an informal arrangement. 

Certainty

The terms of a unilateral contract must be clear and specific enough that both parties understand their rights and contractual obligations. Vague offers might create uncertainty about what constitutes a “substantial” reward, potentially making the contract unenforceable. Precise language helps ensure the agreement will stand up in court if challenged. 

Types of Unilateral Contracts

Unilateral contracts have applications in a wide range of business scenarios. These contracts are beneficial when a business wishes to incentivize specific actions without requiring mutual promises. Here are some common business use cases of unilateral contracts.

Reward Offers

Businesses often use unilateral contracts to solicit help from the public or specific groups in obtaining information. A common example is when a company offers a reward for finding a software bug.

Insurance Contracts

In the insurance industry, unilateral contracts are the norm. An insurance company promises to pay a certain amount of money or provide specific benefits upon the occurrence of a predefined event, such as a car accident, house fire, or health issue. Policyholders are not obligated to claim these benefits, making the contract unilateral.

Contests

Promotional contests and competitions are classic unilateral contract structures. When a company announces a contest with specific rules and prizes, it creates a unilateral contract. 

Participants accept the contract by following the rules, whether by submitting an entry, achieving a goal, or meeting specific criteria. Popular examples include sweepstakes, photo contests, athletic competitions, and lottery drawings, where the sponsor is obligated to award the prize only if the winning conditions are met.

Unilateral Contracts vs. Bilateral Contracts

While unilateral contracts involve a promise in exchange for an action, bilateral contracts are based on a mutual exchange of promises between two parties. The main difference between unilateral and bilateral contracts lies in who is bound by the agreement. 

In a unilateral contract, only one party is bound by the agreement. In these agreements, the offeror makes the promise upfront, and the contract is only formed when the offeree performs the act. In a bilateral contract, both parties act as offerors and offerees, each making and accepting a promise, thereby creating a mutual obligation. This mutual obligation is what distinguishes bilateral contracts from unilateral ones.

Examples of Unilateral Contracts

It’s helpful to look at a few examples and real-world applications of unilateral contracts across different industries and everyday situations. Here are a few examples of unilateral contracts that can help you understand how they work. 

Rewards for Lost Items

When someone posts a "Lost Dog" flyer offering a reward for their pet's return, they've created a unilateral contract. The pet owner makes a promise to pay a specific amount to whoever finds and returns their pet. No one is obligated to search for the pet, but if someone does find and return it, the owner must pay the promised reward.

Software Bug Bounties 

Tech companies frequently establish bug bounty programs where they promise to pay security researchers who discover and report vulnerabilities in their software. These programs typically outline specific requirements for what constitutes a valid submission and specify the compensation that will be provided. 

Sales Commissions

Commission-based sales structures often operate as unilateral contracts. A company promises to pay a percentage or a fixed amount when a salesperson closes a deal. The salesperson isn't obligated to make sales, but when they do, the company must pay according to the agreed-upon commission structure.

Licensing Agreements

While many licensing agreements are bilateral contracts with mutual obligations, some operate as unilateral contracts under specific circumstances. The distinction is important: traditional licensing agreements typically involve ongoing obligations from both parties, making them bilateral.

However, certain licensing scenarios do function as unilateral contracts. For example, when a user purchases software with a "click-wrap" agreement where they simply click "I Agree" to the terms of service without promising future performance, the arrangement can be unilateral. 

In these cases, the provider makes all the promises about how the product will function and what rights the user has, while the user's one-time payment completes their performance. Similarly, some Creative Commons licenses are unilateral contracts where creators grant rights without requiring specific promises from users beyond initial compliance with terms.

Understanding unilateral contracts can help you navigate situations where a party offers a reward or makes a guarantee. It's important to remember that if you are the offeree, you're not obligated to take action in a unilateral contract, but if you choose to perform the requested task, the offeror becomes legally bound to fulfill their promise.

Advantages and Disadvantages of Unilateral Contracts

Understanding the strengths and limitations of unilateral contracts helps businesses determine when this contract type will best serve their interests.

Advantages

• Flexibility: Unilateral contracts provide considerable flexibility, allowing businesses to extend offers broadly without needing to negotiate terms with each potential acceptor. This makes them excellent for situations where the number of potential offerees is large or unknown.
• Efficiency: These contracts can be remarkably efficient since they eliminate the need for back-and-forth negotiation. The offer is made, and if the terms appeal to someone, they can immediately begin, streamlining the entire process.
• Risk management: For offerors, unilateral contracts limit financial exposure since payment obligations only arise after satisfactory performance. This makes them ideal for situations where businesses want to achieve specific outcomes without committing resources upfront.
• Performance incentive: The structure naturally motivates high-quality performance since payment is contingent upon satisfactory completion of the required action. This can lead to better results than agreements where payment is guaranteed regardless of the outcome.

Disadvantages 

• Uncertainty for offerors: Once an offer is made, the offeror may need to wait indefinitely for someone to perform, creating budget and planning uncertainties. Without a specific timeframe for acceptance, resources might need to remain allocated longer than ideal.
• Revocation challenges: If an offeror needs to revoke a unilateral contract offer after someone has begun performing but before completion, complex legal questions arise regarding compensation for partial performance. This can lead to disputes and potential liability
• Specificity requirements: Unilateral contracts demand extremely precise language to be enforceable. Any ambiguity about what constitutes acceptable performance or what reward will be provided can render the entire agreement unenforceable or lead to costly litigation.
• Verification difficulties: In some cases, verifying that contract performance meets the specified requirements can be challenging, especially for subjective deliverables such as creative work or consulting services. This can create friction when determining whether payment obligations have been triggered.

Use Icertis to Optimize Unilateral Contract Management

Effective unilateral contract management benefits from robust management systems that ensure clarity, compliance, and consistency throughout the contract lifecycle. Contract management software like Icertis provides the tools businesses need to streamline the creation, management, and enforcement of unilateral contracts. 

For companies managing large volumes of unilateral contracts, contract AI and generative AI for contract management are transforming how these agreements are created, analyzed, and optimized.  With Icertis, companies can create standardized templates for common unilateral contract types, ensuring all essential elements are included while maintaining compliance with relevant regulations. 

The platform's advanced analytics provide visibility into contract performance, helping businesses track obligations and identify opportunities to improve their contract management process.

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