Definition
A bilateral contract is a type of agreement in the field of finance where both parties involved are obligated to fulfill certain conditions. Essentially, each party makes a promise to the other. For example, in a sales agreement, the buyer promises to pay the agreed price while the seller promises to deliver the item or service.
Key Takeaways
- A Bilateral Contract is a legal term typically used in the field of Law and Finance, where an agreement between parties is formed and both parties make a commitment to fulfill certain obligations. It’s the most common type of binding agreement.
- In a Bilateral Contract, each party is both a promisor, making a promise to fulfill certain obligations, and a promisee, the party to which a promise is made. The terms “promisor” and “promisee” are used to define the parties’ relationship in terms of their obligations under the contract.
- A breach in a Bilateral Contract, where either party fails to fulfill their agreement, allows the aggrieved party to take legal action. Contract law permits the wronged party in the case of a breach to sue for damages or, in some cases, the performance of the duty not completed.
Importance
A bilateral contract, a commonly used term in the finance industry, is important because it forms the foundation for many business and financial transactions.
This type of contract involves two parties where each promises to perform certain activities, often involving the exchange of goods or services for monetary compensation.
It offers a legal framework that provides assurance and security to both parties involved in the negotiation.
If terms are not met, the injured party has the right to seek legal remedy.
This concept of a bilateral contract is fundamental to financial operations like loan agreements, insurance policies, and many other types of financial transactions.
Explanation
A bilateral contract serves the purpose of creating a legally binding commitment between two parties. This type of contract ensures that each party offers a form of assurance to the other in cooperation for a particular objective. It is used extensively in business and personal matters and forms the foundation of many interactions and transactions.
The primary purpose of such a contract is to provide stability and predictability, thereby reducing the risk of default or non-performance. It guarantees that both parties involved are obligated to fulfil their specific promises. For instance, in a business scenario, a bilateral contract might be used when a business wants to purchase goods from a supplier.
The business promises to pay a certain amount, and in exchange, the supplier guarantees the delivery of the specified goods within a certain time frame. This agreement ensures that both parties are aware of their obligations and responsibilities. Similarly, in personal circumstances, it might be used in a property rental agreement where the tenant agrees to pay rent, and the landlord agrees to provide the property for use.
Thus, the bilateral contract serves to clearly define expectations, mitigating potential misunderstandings that could arise in the future.
Examples of Bilateral Contract
Purchase Agreements: When someone buys a good from a shop/store, a bilateral contract comes into play. The buyer agrees to pay the specified price in return for the item. For instance, if you purchase a car from a car dealership, you will agree to pay the specified amount, and the dealership will agree to provide you with the vehicle.
Service Contracts: These contracts involve exchanges between service providers and clients. For example, a lawyer and a client can have a bilateral contract: the lawyer agrees to provide the legal service, and in return, the client agrees to pay the lawyer’s fees.
Real Estate Contracts: In the sale of real property, a bilateral contract is created when the seller agrees to sell the property at a specific price, and the purchaser agrees to buy that property at that price. If any party fails to comply with the agreed conditions, it can lead to a breach of contract.
FAQ on Bilateral Contract
What is a Bilateral Contract?
A bilateral contract is a legal agreement between two parties where each side agrees to fulfill their part of the contract. Each party is both an obligor (a person who is bound to another) and an obligee (a person to whom another is obligated or indebted), considering that both parties have certain obligations they have promised to perform.
What are some examples of Bilateral Contracts?
Bilateral contracts are common in everyday life. Some common examples include real estate agreements, motor vehicle sales, employment agreements, insurance policies, and many more.
What is the difference between a Bililateral Contract and a Unilateral Contract?
In a bilateral contract, both parties agree to fulfill certain obligations. However, a unilateral contract is a one-sided agreement where only one party is obligated to perform if the second party chooses to do so. For example, an insurance company will pay out if an insured event occurs, but the insured does not have to make a claim.
What happens if one party breaches a Bilateral Contract?
If one party breaches a bilateral contract, the other party can seek legal remedies such as damages, cancellation and restitution of the contract, or specific performance of the contract. However, the precise action might depend on the nature of the breach and the terms of the contract itself.
Are verbal Bilateral Contracts enforceable?
Yes, verbal bilateral contracts can be enforceable, except for certain types of agreements like real estate sales that must be in writing. However, it can be difficult to prove the terms of a verbal contract, making written contracts recommended where possible.
Related Entrepreneurship Terms
- Counterparties
- Rescission of Contract
- Binding Agreement
- Mutual Assent
- Consideration
Sources for More Information
- Investopedia: Investopedia is a leading source of financial content on the web. Their comprehensive dictionary comprises definitions of both common and unusual financial terms.
- The Balance: The Balance offers clear, practical, and straightforward financial advice. It has a whole section dedicated to contracts and legal concerns.
- Britannica: Britannica is a reliable reference website with content written by experts. It covers a broad range of topics including economics and finance.
- Legal Information Institute (Cornell Law School): The Legal Information Institute provides a free, comprehensive, and balanced presentation of the law. It has reliable information about various types of contracts, including bilateral contracts.
