Bilateral contracts bind both parties on an exchange of promises; unilateral contracts bind only the promisor, and only once the other party performs. Here's how to tell them apart.
Most contracts are classified by who is obligated to do what, which puts nearly every agreement into one of two buckets: bilateral or unilateral. The distinction determines the exact moment a promise becomes legally binding.
In a bilateral contract, both parties exchange promises and both are bound the moment the agreement is formed. A purchase agreement is bilateral: the seller promises to deliver and the buyer promises to pay, and each promise is the consideration for the other. The large majority of business contracts are bilateral.
In a unilateral contract, only one party makes a promise, and it becomes binding only when the other party completes a specific act. A reward offer is the classic case: "I'll pay $500 to whoever returns my lost dog." No one is obligated to look, but once someone performs the act, the promise must be honored. Contests and many insurance payouts work the same way.
Ask one question: does the other side become obligated to do something the moment they agree? If yes, it's bilateral. If they remain free to act or not, and only earn the promised reward by performing, it's unilateral.
The classification affects when either side can sue for breach. In a bilateral contract, failing to perform a promised obligation is a breach. In a unilateral contract, the promisor generally can't be in breach until the other party has performed the requested act, and the offer can often be revoked before performance begins.
Both are valid contract types. For the full taxonomy and how these fit alongside express, implied, executed, and executory contracts, see our guide to types of contracts.
Is an employment contract bilateral or unilateral?
Most employment agreements are bilateral: the employer promises to pay and provide work, and the employee promises to perform duties. Some incentive structures, like a bonus for hitting a specific target, can function as unilateral contracts.
Is an insurance policy a unilateral contract?
Largely, yes. The insurer promises to pay if a covered event occurs, while the policyholder isn't obligated to do much beyond paying premiums, making it a classic unilateral (and aleatory) contract.