What Is Bilateral Contract Explained | Key Steps & Best Practices (2025)

May 5, 2025
11:08 pm

6 min read

When two parties come together, both bringing something valuable to the table, a bilateral contract is what keeps everything clear, fair, and secure. However, without a solid contracts in place, misunderstandings and disputes are common.

It is easy for one side to feel short-changed when expectations are not fully aligned, leading to complications that could have been avoided.

Whether you’re entering a partnership, signing an employment agreement, or making a purchase, and this contract serves as a safeguard, providing legal protection and clarity.

In this blog, we will dive into the key aspects of bilateral contract, their importance in making sure mutual responsibility.

What Is Bilateral Contract

Itis a written agreement where two parties promise to carry out specific duties or actions in return for something valuable from the other side.

These contracts are a vital component of many business dealings, providing clarity and structure to agreements.

In business and personal transactions, these type of contracts create a clear framework of expectations, making sure both parties are aligned in their commitments.

For example,

Let us consider an example in the IT industry where a company needs to upgrade its internal software system. The company enters a bilateral agreements with an IT service provider to handle the software upgrade.

Company’s Promise: The company agrees to pay the IT service provider a set fee (e.g., $50,000) for the successful upgrade of their internal software system and provide all necessary access to existing systems.

Service Provider’s Promise: The IT provider agrees to complete the software upgrade, ensuring that the new system is fully functional, meets the company’s requirements, and is completed within a specified timeline (e.g., six weeks).

Key Characteristics of a Bilateral Contract

Bilateral agreements are common in the business world, yet they all share these key characteristics. Here are some key characteristics to consider,

1) Mutual Promises

At the core of every bilateral agreements lies the concept of mutual promises. In simple terms, both parties make commitments to do something for the other.

This exchange of promises creates a balance of obligation, where one party’s promise to act or provide something is exchanged for the other party’s corresponding promise.

For instance, in a agreement between a supplier and a retailer, the supplier commits to deliver goods, and the retailer promises to pay for those goods.

These mutual promises are what transform a casual contract into a enforceable contract.

2) Offer and Acceptance

It begins with an offer from one party, and this offer must be accepted by the other party in a clear manner.

The offer outlines the terms and conditions of the agreement, and the acceptance justifies the agreement. This phase is crucial because, without clear acceptance, no agreement can exist.

If the acceptance is conditional or contains any modifications to the original offer, this could lead to a counteroffer rather than an acceptance, potentially altering the terms of the contract.

3) Capacity to Contract

For a bilateral agreement to be legally valid, both parties must have the capacity to enter an contract. This means that the individuals or entities involved must possess the legal ability to understand and fulfil their contractual obligations.

Both parties should enter the agreement with a clear mind and full willingness, as genuine consent helps keep the contract fair and valid.

Similarly, minors or individuals with certain mental impairments may not have the legal capacity to enter a binding contract.

This principle helps create fairness and protects everyone involved. It builds trust between both parties and helps avoid confusion or unfair treatment in the agreement.

4) Enforceability

This means the contract must meet all the key legal standards to be recognized as valid and binding if reviewed by a court. An enforceable contract is one where both parties intend to create legal obligations and are willing to hold each other accountable.

If either party fails to uphold their promise, the other party has the right to seek legal recourse.

Enforceability often depends on the contract meeting specific criteria, such as clarity of terms, legality of purpose, and the mutual consent of all parties. If the agreement includes unlawful terms or goes against public policy, it could be considered invalid.

This principle helps protect the interests of both parties, giving them confidence that their rights under the contract will be upheld in any legal situation.

5) Consideration

Consideration is one of the most crucial elements of a bilateral agreements. It refers to the value exchanged between the two parties. Consideration can take many forms, such as money, goods, services, or even a promise to act (or refrain from acting) in a certain way.

Without consideration, neither party would have a reason to fulfill their obligations, as there would be no value provided in return.

The concept of consideration make sure that both parties have something to gain or lose from the agreement, making the contract fair and balanced.

Difference Between Bilateral Contract Vs Unilateral Contract

According to article by Law school, bilateral contracts where both parties exchange mutual promises—are the most common type of legally binding agreement in business. Two common types of contracts are bilateral and unilateral contracts. While both involve legal promises, they work in slightly different

ways.

Point of Comparison	Bilateral Contract	Unilateral Contracts
What It Means	Both people and groups agree to do something for each other.	One person or group promises something, but the other must act first.
Who Is Responsible	Both sides must keep their promises.	Only one side is required to do something after the task is done.
When It Becomes a Deal	When both sides agree to the terms.	When the other person finishes the job or task.
Where It is Used	Common in jobs, sales, and service contracts.	Often used in offers that involve rewards or contests.

Example Of Bilateral Contract

Bilateral agreements are at the heart of many business transactions, where two parties agree to carry out specific responsibilities in exchange for mutual benefits. Below are some everyday examples that show how these agreements work in real business settings.

1) Sales Contracts

A sales contract is a legally binding agreement between a seller and a buyer, outlining the terms for the exchange of goods or services in exchange for payment.

The contract outlines the agreed-upon price for the product or service, helping avoid confusion about the cost of the goods.

It specifies the delivery method, delivery date, and quality expectations to ensure both parties are on the same page.

The contract includes terms that protect both buyer and seller from misunderstandings regarding refunds, returns, or damaged goods.

A common sales agreement might involve a supplier and a retailer, where the supplier commits to delivering a specific quantity of goods, and the retailer agrees to pay the pre-established price. Using a reliable contract management software all this contracts can be handled efficiently.

2) Service Contracts

A service contract is an agreement between a service provider and a client, where the provider promises to deliver a particular service in return for payment.

The contract outlines how much the service provider will be paid.

It includes terms on the quality of the service and the time frame for its completion to avoid disputes regarding delays or unsatisfactory performance.

The contract outlines the specific services to be provided and establishes clear expectations for both parties involved.

For instance, a consulting firm might sign a service contract with a company to help with market research, outlining the exact tasks, payment terms, and deadlines for delivering reports. Through this the parties can negotiate the contracts better.

3) Employment Contracts

Employment agreements establish a formal relationship between an employer and an employee. These agreements clearly define the employee’s responsibilities, the salary or benefits offered, and other terms of employment.

The contract clearly specifies the job position, duties, and expectations.

It outlines the salary, benefits (like health insurance), and any bonuses the employee is entitled to.

The agreement outlines the terms and procedures for terminating the employment or for the employee to resign.

In an employment contract, an employee might agree to work for a company as a software developer, while the employer agrees to pay a certain salary and provide benefits such as vacation time and healthcare.

4) Lease Agreements

Lease agreements are used in real estate transactions, whether residential or commercial, where one party rents a property to another in exchange for regular payments.

The lease agreement specifies the rent amount and due dates, ensuring both parties are clear on payment obligations.

The lease will outline who is responsible for maintenance and how the property can be used by the tenant.

It includes the length of the lease, options for renewal process, and the process for terminating the agreement.

For example, a landlord and a tenant might enter into a lease agreement for an apartment, where the tenant agrees to pay monthly rent and the landlord agrees to maintain the property and ensure it is habitable.

5) Licensing Agreements

Licensing agreements allow one party (the licensor) to grant another party (the licensee) permission to use their intellectual property in exchange for compensation.

The agreement specifies the intellectual property being licensed, such as trademarks, patents, or copyrights, and the scope of usage rights granted to the licensee.

It includes terms on how much the licensee will pay for the rights, including any upfront fees, royalties, or ongoing payments.

The agreement may define the duration of the license and territorial restrictions, ensuring the licensee knows where and for how long they can use the property.

For example, a software company may grant another business the rights to use its program for a certain period, with both parties agreeing on the license fee and usage terms.

6) Purchase and Sale Agreements

A purchase and sale agreement is commonly used when buying or selling a business or its assets. This contract specifies the clauses of the sale between the buyer and the seller.

The agreement includes the purchase price of the business or assets and the payment terms.

It specifies the assets or shares being sold and ensures that both parties agree on what is included in the transaction.

The agreement often includes clauses for handling disputes, warranties, and conditions under which the deal can be finalized or terminated.

In this type of contract, a business owner selling their company would agree to transfer ownership and assets to the buyer in exchange for an agreed price, with both parties ensuring they meet the agreed-upon conditions.

7) Supply Contracts

Supply contracts are used when one party agrees to provide goods or services to another over a specific period of time.

The contract details the quantity and quality of the goods to be supplied, setting clear expectations.

It includes the pricing structure, including any discounts, payment schedules, and terms of delivery.

The agreement often covers the duration of the contract, with terms regarding renewal or cancellation depending on performance.

For example, a supplier may enter into a contract with a manufacturer to supply raw materials regularly at a fixed price, helping both parties plan their operations accordingly.

8) Construction Contracts

Construction contracts are used in the building and construction industry when one party (the contractor) agrees to build or remodel a property for another party (the owner).

The agreement outlines the scope of the work, including design, materials, and specific milestones to be met during the project.

It specifies the timeline for completion, ensuring both parties agree on when the project should be finished.

The contract includes the total cost of the construction and how payment will be made, often broken down by phase or milestone.

In this case, a contractor might agree to build a house for a homeowner, with both agreeing on the project’s scope, deadlines, and payments.

9) Non-Disclosure Agreements (NDAs)

Non-disclosure agreements are used when two parties need to share confidential information but want to protect it from being disclosed to others.

The NDA defines what information is considered confidential and sets boundaries around its use.

It specifies the duration of confidentiality, ensuring both parties understand how long the information must be kept private.

The agreement includes penalties or consequences for breaching the terms of confidentiality, providing legal protection to both parties.

For example, a startup might sign an NDA with a potential investor, ensuring that any sensitive financial data shared remains confidential throughout the negotiation process.

10) Loan Agreements

Loan agreements are legally binding contracts where one party (the lender) agrees to provide money or assets to another party (the borrower) with the expectation of repayment under specified conditions.

The agreement outlines the loan amount, interest rate, repayment schedule, and duration of the loan.

It includes any collateral or security interests required by the lender to ensure the loan is repaid.

The agreement specifies the consequences for failing to meet repayment terms, including penalties or legal actions.

For example, a bank might provide a loan to a small business, and the loan agreement would define the repayment plan, interest rates, and any conditions regarding late payments.

Why a Bilateral Contract Matters in Business

It lays the foundation for trust, fairness, and clarity in both business and personal agreements. It clearly sets out what each party agrees to do, helping everyone stay on the same page from the start. Here is why it plays such an crucial role.

1) Builds Mutual Trust and Responsibility

It is based on promises from both sides. Each party agrees to do something valuable for the other whether that is delivering a product, offering a service, or making a payment.

This balance of give-and-take builds trust. When both sides have something to gain and something to lose, they are more likely to stay committed and follow through on their word.

2) Brings Clarity to Roles

One of the strongest benefits of a bilateral contract is the clarity it offers. The agreement spells out who is responsible for what, when tasks must be completed, and what happens if things do not go as planned.

This helps avoid confusion and gives both sides a shared understanding of what they are agreeing to. It removes assumptions and creates a clear path forward.

3) Prevents Misunderstandings

Verbal promises can be easily forgotten or misunderstood, especially when the stakes are high. A written bilateral contract protects both parties by documenting the exact terms of the agreement.

If there is ever a disagreement, the contract can be used to review what was originally agreed upon, making it easier to resolve issues.

4) Provides Legal Protection When Needed

It is legally binding. That means if one party fails to meet their side of the agreement, the other party can use the contract to seek fair treatment through legal support.

This kind of protection is important in both small deals and larger business transactions because it gives people confidence that their interests are safeguarded.

5) Supports Long-Term Business

It does not just help in the short term it also supports long-term planning. When expectations are clearly set and both sides trust the agreement, businesses can focus on future goals.

This makes it easier to execute contracts, manage teams, and build steady partnerships that lead to real progress.

6) Encourages Professionalism

Having this kind of contract in place shows that both sides are serious about the agreement. It sets a professional tone and helps avoid misunderstandings that often come from casual or unclear arrangements.

When people know their responsibilities are written down and acknowledged, they’re more likely to act with care and respect toward each other.

When to Utilize to Use a Bilateral Contract?

It becomes highly valuable when two parties plan to exchange goods, services, or commitments and want that agreement to be fair, clear, and reliable. Whether you are entering a business deal, a partnership, or a professional service agreement, knowing when to rely on a bilateral contract can help you avoid misunderstandings and build trust.

1) When the Work or Agreement Has Clear Terms

If both parties know exactly what is expected like delivering a product or completing a project using a bilateral agreements creates a clear understanding. It puts the terms in writing, leaving little room for confusion.

For example, in an IT company, if a client agrees to pay for building a website, and the agency agrees to deliver the website with specific features, both sides need clarity. A bilateral contract confirms the price, delivery time, and what happens if things go off-track.

Why it helps:

Keeps both parties aligned from day one

Reduces the chance of disputes over scope or deliverables

Provides a written record of commitments made

For Long-Term Business Relationships

When businesses or professionals work together over time such as ongoing software support, consulting, or managing vendor contracts a bilateral contract helps define the relationship. It outlines responsibilities, timelines, payments, and other important details.

Let’s say a managed IT service provider signs a one-year support deal with a small business. The bilateral contract spells out what support includes, response times, and how often the company will be billed.

Why it helps:

Builds trust with consistent communication

Reduces guesswork by setting expectations early

Offers structure for handling changes or renewals

When There Is a Major Financial Transaction

Larger financial commitments like business purchases, investments, or equipment leasing need more than just a handshake. This type of contract protects both sides by clearly stating how much is to be paid, when, and under what terms.

Why it helps:

Offers legal protection for big-ticket items

Prevents misunderstandings about pricing or payment terms

Helps avoid financial losses from unclear deals

When Confidential Information Is Being Shared

Some business deals require the sharing of private data, like customer records, product plans, or internal tools. A bilateral contract can include a confidentiality clause to protect both sides from data leaks or misuse.

Why it helps:

Safeguards intellectual property and sensitive data

Promotes trust when dealing with new partners

Adds a layer of security in case things

When There Is a Risk of Disagreement or Delays

Not all deals go smoothly and that is where a bilateral contract becomes crucial. If one party does not deliver what they promised, a contract gives the other side legal grounds to resolve the issue.

Why it helps:

Creates a path for resolving conflicts professionally

Protects both sides from missed deadlines or poor quality

Reinforces accountability throughout the project

Common Challenges in Bilateral Contract

While these type of contracts are essential in establishing clear agreements, they often come with their own set of challenges that both parties must navigate to ensure a successful and enforceable outcome.

1) Unclear or Vague Terms

One of the most common pitfalls in bilateral contracts is unclear terms. When the language used to describe the rights, duties, or responsibilities of each party is not clear, it opens the door for confusion and misinterpretation.

This lack of clarity can lead breach of contract claims. To avoid this, both parties should ensure every term is well-defined.

This will not only help to create a smoother path toward fulfilling the contract.

2) Failure to Meet Obligations

At the core of every agreement is a mutual exchange of promises. But what happens when one business fails to live up to their obligations? This is a scenario that can cause significant disruption, especially when the stakes are high.

Clear deadlines, detailed deliverables, and a well-structured timeline can provide accountability and a sense of responsibility for each party involved. Regular communication and monitoring of contract progress can also be helpful to avoid falling into a situation where obligations are left unmet.

3) Legal Compliance and Regulatory Challenges

A contract becomes legally enforceable only when it meets all the required legal criteria. Unfortunately, businesses often overlook this crucial aspect. Not following the laws and rules could make the contract invalid or cause legal problems for both parties.

To safeguard against this, it is highly recommended to consult with a legal professional to ensure that the terms of the contracts comply with all relevant local, national, or industry-specific laws.

Being proactive in this area guarantees that the contract will hold up in court and protects both parties from unnecessary legal complications.

4) Changes in Circumstances or Market Conditions

The nature of business and personal agreements means that circumstances can change. A once-reasonable agreement may no longer suit the parties involved due to changes in the market, financial conditions, or external factors.

In such cases, having a built-in mechanism for adjustments or renegotiations within the contract is invaluable.

By including provisions that allow for flexibility in response to changing circumstances, both parties can navigate unforeseen events without the need to break the contract or risk a legal dispute.

5) Difficulties in Enforcing the Agreement

Even when a contracts is well-drafted, enforcing it can become a challenge if one party doesn’t uphold their side of the agreement.

This is especially true if the issues of non-compliance are not clearly stated. To avoid this, both parties should outline specific actions that will be taken in the event of a breach.

This make sure that both parties have recourse if things do not go as planned.

Best Practices for Bilateral Contract

To make sure these contracts are effective and protect both parties, it’s crucial to follow best practices. Below are some key points to keep in mind when creating a bilateral agreement.

Clearly explain what both parties need to do, so there’s no confusion about roles or responsibilities.

Always write down the agreement to make sure everything is documented and easy to refer to.

Set specific dates or timelines for when tasks need to be completed, and payments made.

Add a section on how to handle any disagreements, including where and how they’ll be resolved.

Mention how either side can end the agreement if needed, and what steps they must follow.

Include a part that protects private business information and any creative or technical work shared.

Make sure it is clear who is responsible if something goes wrong, and limit how much each side can be held accountable for.

Review the contract from time to time to keep it up to date with any changes in the business or law.

Ask legal or compliance experts to check the contract before signing, so everything is in line with regulations.

Keep all contract copies and related communications safe and organized for future use.

Why CLM 365 is Essential for Modern Businesses

CLM 365 is contract solution certified by Microsoft and built on its secure ecosystem, streamlines contract creation, centralizes contract management, automates workflows, enhances collaboration, provides real-time tracking, ensures compliance.

It offers robust data security, delivers powerful analytics, simplifies renewals, and helps businesses save costs.

It integrates with existing systems like Microsoft Teams, Azure, Outlook, and SharePoint, empowering businesses to digitally transform, scale, and maintain full transparency and accountability.

Conclusion

In conclusion, managing bilateral contracts effectively requires precision, clarity, and robust processes to ensure both parties fulfill their obligations and mitigate risks. Embrace the power of CLM 365 to take control of your contracts and foster smoother, more secure business relationships.

Frequently Asked Questions

What are the alternative to bilateral contract?

Simple Transactions: Straightforward exchanges with minimal complexity.

In a unilateral contract, one party promises something in return for the other party’s action or performance.

Highly Flexible Agreements: Agreements with room for adjustments over time.

Multiple Parties Involved: Contracts with more than two parties, each holding different obligations.

Are bilateral agreements legally binding?

Yes, Bilateral agreements hold legal weight and are enforceable by law, ensuring that both parties adhere to their agreed-upon responsibilities. In case of a breach, the affected party can take legal action to compel compliance or claim damages for any losses incurred.

Why are bilateral agreements good?

Bilateral agreements provide companies with the opportunity to expand into new markets. As demand grows, this often leads to the creation of additional job opportunities. Moreover, such agreements can result in lower prices for consumers, as certain products might be more costly without the framework provided by these agreements.

What are the four basic elements of a bilateral bilateral agreement?

A bilateral contract is important in business because it sets up responsibilities for both parties, ensuring fairness and accountability. The four main parts of a bilateral contract are an offer, acceptance, something of value exchanged, and both parties agreeing to the contract. These elements help make the structure easy to understand.