Definition
A unilateral contract is a type of agreement in finance where only one party makes a promise or commitment to perform a certain duty or obligation. In this contract, the second party is not legally obligated to perform any duties, however, they may choose to execute the stipulated action. The party who made the promise is legally bound to fulfill it once the second party decides to perform the agreed action.
Key Takeaways
- A unilateral contract is a legal agreement in which one party, known as the offeror, makes a promise to perform a certain action, but the other party, known as the offeree, is not obligated to perform anything unless they decide to comply with the specified action.
- The most common example of a unilateral contract is an insurance policy. In this case, the insurance company promises to pay a certain amount of money if a certain event, like a theft or accident, occurs. However, the insured party is not obligated to pay the premiums unless they want the benefits provided by the insurance policy.
- Unilateral contracts can be beneficial to the offeree since they have the option but not the obligation to perform the specified action. However, once the offeree begins performance, the offeror is legally obligated to fulfill their promise.
Importance
A Unilateral Contract is an important concept in finance and business as it offers a clear structure for many business transactions and agreements.
It involves a promise made by one party in return for a specific act of the other party.
This type of contract is critical for entities that want to ensure a particular outcome or service before they deliver payment or reciprocal services.
It mitigates risk and provides security for the promisor.
By having a legally binding agreement, it sets the expectation and requirement for performance, hence avoiding potential disputes, and ensuring that entities invest their resources wisely.
Explanation
A unilateral contract is an essential tool in the world of finance, providing a means to facilitate trust and encourage certain actions without necessitating a balanced, two-way agreement. Its purpose is to create an obligation for only one party, sometimes as an incentive, other times as a hedge or security.
For instance, insurance contracts are often unilateral contracts, where the insurer promises to pay the insured in the event of a specific situation. The insured party does not have a reciprocal obligation to the insurer, and the contract thereby serves to lessen financial risks for the insured party.
The unilateral contracts can also be used as effective tools in business transactions and marketing. One common use is in reward programs or promises of a reward for lost property, where the offer indicates that performance (like buying certain products or returning lost property) will lead to the reward.
The party that offers the reward is obligated to fulfill their promise upon the performance of the specified action, initiating motivation and positive actions without requiring an obligation from the other part until the task is complete.
Examples of Unilateral Contract
Insurance Policies: An insurance policy is a typical example of a unilateral contract. The insurance company promises to pay the insured person a specific amount of money in case of a particular event such as a car accident, property damage, or loss of life. The insured person will pay the premium, but is not obliged to do anything else. If that specified event occurs, the insurance company is obliged to pay out according to the terms of the contract.
Reward Offers: Let’s say a person has lost a pet and offers a reward to anyone who finds and returns the pet. This is a unilateral contract as the person is promising to pay the reward if someone fulfills the requirement, which is finding and returning the pet. However, nobody is under any obligation to look for the pet.
Real Estate Open Listings: In real estate, an open listing can also qualify as a unilateral contract. A homeowner agrees to pay a commission to any real estate agent who brings a buyer for the property. However, the homeowner may also choose to sell the property on his own and owes nothing to any real estate agent in that case. The real estate agent, on the other hand, is under no obligation to actively seek out a buyer. If they do and complete the sale, the homeowner is obligated to pay the agreed commission.
FAQs for Unilateral Contract
What is a Unilateral Contract?
A unilateral contract is a type of contract in which only one party is legally obligated to perform an action. The offeror promises to pay or provide a certain value in return for the offeree’s performance or action.
What are the elements of a Unilateral Contract?
A valid unilateral contract must have an offer, acceptance through performance or action, consideration, mutuality of obligation, and competency and capacity. In other words, the offeror must make a clear and definitive offer that can be accepted only through a specific performance or action.
Can a Unilateral Contract be revoked?
An offeror can typically revoke the contract any time before the offeree completes the performance, but there may be some exceptions depending on the details of the agreement as well as the jurisdiction.
What is an example of a Unilateral Contract?
An example of a unilateral contract might be an insurer offering a reward for information leading to the recovery of lost property. In this case, the insurer is obliged to pay the reward if the specified action is completed, but no one else is legally obligated to undertake the action.
What is the difference between a Unilateral Contract and a Bilateral Contract?
In a unilateral contract, only one party makes a promise and is legally obligated to fulfill it if the other party performs a certain action. In a bilateral contract, both parties make promises and are legally obligated to fulfill them.
Related Entrepreneurship Terms
- Offeror: The party in a contract that makes the offer, initiating the unilateral contract.
- Offeree: The party that has the choice to accept the offer from the offeror in a unilateral contract.
- Consideration: The act that must be completed in order to fulfill the terms of a unilateral contract.
- Fulfillment: The completion or performance of the act stipulated in the unilateral contract by the offeree.
- Breach of contract: Failure to fulfill the act stipulated in the unilateral contract, which can result in legal consequences.
Sources for More Information
- Investopedia: This comprehensive, online financial dictionary provides detailed information about a wide range of financial and investment terms, including ‘Unilateral Contract’.
- Legal Information Institute – Cornell Law School: A trusted source for information about various legal terms and concepts, such as the ‘Unilateral Contract’.
- Lawyers.com: This website provides law-related content generated by legal professionals, making it another great source for understanding complex legal and financial terms.
- The Balance: Offers a vast array of personal finance information, including topics such as ‘Unilateral Contract’.
