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What is a Unilateral Contract?

Unilateral contracts find their applications in a wide array of business scenarios. These contracts are beneficial when a business wishes to incentivize specific actions without requiring mutual promises.

In the world of contracts, there are two main types: unilateral and bilateral. While bilateral contracts involve promises and obligations from both parties, unilateral contracts are one-sided agreements. Let's take a closer look at unilateral contracts, how they work, and some real-world examples.

What is a Unilateral Contract?

A unilateral contract is an agreement in which only one party makes a promise or agrees to perform a specific action in exchange for a performance, rather than a promise, from another party. In simpler terms, this contract involves a one-sided promise that is fulfilled through the completion of a task or action by another party.

Unilateral Defined: A Promise in Exchange for Performance

The party that makes the promise is known as the offeror, while the party that performs the action is called the offeree. The crucial aspect of a unilateral contract is that the offeree is not obligated to undertake the action. However, if the offeree decides to complete the task, the offeror is obligated to fulfill the promised terms.

Key Features of Unilateral Contracts

One-sided Promise:

The essence of a unilateral contract is the offeror's promise, which becomes binding only when the offeree completes the specified action.

No Obligation for the Offeree:

The offeree has no legal obligation to act. The contract becomes binding only if the offeree chooses to perform.

Completion of Performance:

The contract is fulfilled through the action or performance by the offeree, not through a mutual exchange of promises.

Differences Between Unilateral and Bilateral Contract

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 bilateral contract, both parties are simultaneously offerors and offerees, each making a promise and being bound by the other's promise. This mutual obligation is what distinguishes bilateral contracts from unilateral ones.

Bilateral contract examples abound. Almost any business agreement in which goods or services are promised in exchange for payment is bilateral. 

In unilateral contracts, the offeror makes the promise upfront, and the contract is only formed when the offeree performs the act.

Examples of Unilateral Contracts in Action

Unilateral contracts are used in various real-world situations. Here are some common examples:

Rewards: Lost pet posters, bounty programs for software bugs, and contests offering prizes all function as unilateral contracts.

Warranties: When a manufacturer offers a warranty on a product, they're essentially making a unilateral promise to repair or replace the product if it malfunctions within a specific timeframe.

Insurance Policies: Many insurance agreements are unilateral contracts. The insurer promises to pay in the event of a specific occurrence (e.g., fire, theft), but the insured is not obligated to make a claim.

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.

Types of Unilateral Contracts

Unilateral contracts find their applications in a wide array 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:

1. 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.

2. Sales Promotions and Competitions

Unilateral contracts are prevalent in sales promotions and competitions where participants are promised rewards or prizes for achieving certain objectives. This could range from winning a contest, participating in a survey, or achieving a sales target. The critical aspect here is that the business promises to give out a prize or benefit upon the completion of a specified action by participants.

3. 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 nature of the contract unilateral.

4. Performance Bonuses

Companies often use unilateral contracts to incentivize employees through performance bonuses. The employer promises to pay a bonus based on the achievement of certain milestones or performance criteria. Employees are not obligated to meet these targets, but the employer must pay the promised bonus if they do.

5. Subscription Services

While primarily governed by bilateral agreements, some aspects of subscription services, especially promotional offers, can be structured as unilateral contracts. For instance, a streaming service might offer a month of free service if a subscriber watches a certain number of hours of content within a specific timeframe.

6. Licensing Agreements

In some cases, licensing agreements for software, media, or other intellectual property can involve unilateral contract elements. A licensor may promise to grant a license if the licensee agrees to perform specific actions, such as paying a royalty fee based on usage rather than making an upfront commitment.

7. Guarantees and Warranties

Manufacturers offering product guarantees or warranties enter into unilateral contracts. The company (offeror) promises to repair or replace a faulty product within a timeframe, but the customer (offeree) isn't obligated to use the product or report a defect.

8. Crowdsourcing and Open Challenges

Businesses sometimes issue open challenges or crowdsourcing calls to solve problems, innovate, or generate ideas. These are often structured as unilateral contracts where the company promises a reward or compensation to individuals or teams who can meet the challenge criteria or deliver a solution that meets their needs. 

Why Might Businesses Use a Unilateral Contract?

Businesses strategically utilize unilateral contracts to achieve specific goals, from gathering information to driving desired customer behavior. Here's a breakdown of some key advantages:

Cost-Effectiveness

Unilateral contracts can be budget-friendly for businesses.  Since the offeree has no upfront commitment, the business only incurs costs when the desired action is completed.  This is ideal for situations like finding a software bug or gathering customer information.

Targeted Action  

These contracts allow businesses to incentivize specific actions.  Imagine a business offering a discount for early online bill payments. The unilateral contract targets a desired behavior (early payment) and avoids unnecessary spending on those who wouldn't act regardless.

Flexibility

Unilateral contracts offer adaptability.  A business can modify the terms or rewards based on their needs.  For instance, they can increase the reward for a critical software bug or extend the deadline for finding a lost item.

Broader Reach   

Unlike bilateral contracts requiring negotiation with specific parties, unilateral contracts can reach a wider audience.  A lost pet poster, for example, casts a net to anyone who might have seen the missing animal.  This is useful for tasks where a large pool of potential completers is beneficial.

Lower Barrier to Entry   

Unilateral contracts are less intimidating for potential participants.  There's no formal agreement to sign, just an action to take.  This can encourage more people to participate in contests, loyalty programs, or provide information in return for a reward.

What Are the Pitfalls of a Unilateral Contract?

While unilateral contracts offer advantages, they also come with certain drawbacks that businesses and individuals using them should be aware of. Here's a breakdown of some potential downsides:

Unenforceable Offers

A key drawback is the offeror's ability to revoke the offer before the offeree completes the action.  Imagine a company advertising a reward for catching a bug in their software but retracting it before someone submits a critical issue.  Unilateral contracts can be tricky to enforce in such situations.

Unclear Terms  

Unilateral contracts can be ambiguous regarding the required action or the promised reward. Vague language around what constitutes a "bug" in the software example, or the condition of a returned item for a store discount, can lead to disputes.

Lack of Quality Control  

Since there's no upfront agreement on quality or standards, businesses might end up with subpar results.  For instance, a contest with a vague prompt might yield low-quality entries that don't meet the intended goal.

Undependable Performance

The offeree has no obligation to perform the action in a unilateral contract.  A business offering a reward for information might receive no leads at all.  This lack of guaranteed performance can be a gamble for parties relying on this type of contract.

Potential for Misunderstandings  

Without a bilateral discussion, misunderstandings can arise.  An offeree might complete a task differently than the offeror intended, leading to disagreements about whether the contract terms were met.

By considering these drawbacks, businesses and individuals can make informed decisions about whether a unilateral contract is the right tool for the situation.  In many cases, a bilateral contract with clearly defined terms and obligations from both parties might be a more secure option.

How a Contract Management Tool Can Manage These Risks

Contract management tools offer several advantages for managing unilateral contracts, even though they lack the back-and-forth negotiation typical of bilateral contracts. Here's how these tools can help contract professionals manage risks and streamline the process:

Reduce Ambiguity with Standardized Clauses

Unclear terms and ambiguous clauses can lead to disputes in unilateral contracts. Contract management tools allow for storing the offer's details (reward, required action, deadlines) in a central location with clear and concise language. It eliminates the need for scattered documents or email chains, ensuring everyone on the team is on the same page. This promotes transparency and reduces the risk of misunderstandings about what's expected from both parties. 

Digital Signature and Secure Storage

Digital signature capabilities allow for the quick and secure execution of unilateral contracts, making it easier for the offeree to accept the offer and for the business to finalize the contract. Centralized storage of contracts with secure access ensures that sensitive information is protected and can be easily retrieved for reference or in case of disputes.

Identifying and Managing Expired Offers

Setting automated alerts can be crucial for time-sensitive offers, like a reward for lost property or information. Contract management tools can send reminders about expiring offers or approaching deadlines, preventing missed opportunities or potential legal issues from accidentally exceeding offer validity.

Performance Tracking and Verification   

Unilateral contracts hinge on the offeree's performance. Contract management tools can help track this aspect. The best contract management platforms can connect to operational systems and automatically track completion against the contract language. This level of integration ensures better contract compliance.

Regulatory Compliance

Contract management tools help ensure unilateral contracts comply with relevant laws and regulations, minimizing legal risks. An AI-powered contract management tool goes even further. It can flag risky clauses. 

Reporting and Analytics

Contract management tools can generate reports on unilateral contracts. Businesses can track program effectiveness, analyze trends in offeree performance, and measure the return on investment (ROI) for these initiatives. This data can be invaluable for optimizing future unilateral contracts and maximizing their impact.

Learn More

While unilateral contracts are simpler than bilateral agreements, managing them effectively can save an organization time and resources, freeing contract professionals and legal departments to focus on more strategic work. Contract management platforms like Icertis Contract Intelligence offer valuable features to streamline the contract lifecycle process, improve clause standardization, and ensure the successful execution of agreements. Post signature, its AI-powered insights give you a complete view of contract performance and enable you to measure their ROI and other important metrics. Request a demo today to learn more about how Icertis Contract Intelligence can enable better contract outcomes for your organization.

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