All about unilateral contracts

Rachit Garg

1 year ago

This article is written by Sushree Surekha Choudhury from KIIT School of Law, Bhubaneswar. The article talks about unilateral contracts from the perspective of US laws. It also explains the elements, types, and revocation of unilateral contracts.

It has been published by Rachit Garg.

Introduction

Let us begin this learning experience with a story this time, shall we? I once had a neighbor who had a fluffy little puppy. His name was Bruno. They lived like a happy little family until one day, when Bruno was lost. We woke up to screams and tensions in the neighborhood, and upon asking, we got to know that Bruno had gone missing. But they could not just let go, right? They had to do something. So, they came up with ads and posters that made an offer to whoever found Bruno, to be rewarded with a sum of $2,000. So, what followed this was people trying to find Bruno to get rewarded. People took it as a competition and started looking for Bruno. One fine day, Bruno was found and the happy neighbors fulfilled their promise by rewarding Mr. X with the said $2,000. This may seem like just another day in life, but in the legal world, we call it a unilateral contract. In this case, an offer was made by my neighbors to find Bruno. Mr. X accepted the offer and fulfilled the obligation. In return, the offeror fulfilled his promise by rewarding Mr. X with $2,000. This is a classic unilateral contract where one party makes an offer and the other accepts it by fulfilling the obligation, for a promised consideration.

In this article, we shall learn more about unilateral contracts and their application in the US.

Understanding unilateral contracts

Contracts are a part of the everyday lives of individuals. Most of us believe that only big companies, institutions, or the government enter into contracts significantly. But that is not true. Individuals and companies, too, enter into contracts more often than we realize. Contracts are used regularly for running businesses, keeping up with supply chains, etc. Contracts are of two types: unilateral contracts and bilateral contracts. They differ from one another in the way they are executed and the elements they possess. A typical bilateral contract involves an offer, acceptance, and a promise for consideration, and both parties are obligated to perform their part of the contract.

Unilateral contracts are different from bilateral contracts in this way, that it does not create an obligation on another party to perform. A unilateral contract is an offer made by one party with a fixed consideration that would be received by the individual who performs the obligation. In a unilateral contract, the typical exchange of promise between a promisor and a promisee for the performance of an obligation is absent. A promise in a unilateral contract is that when a person performs the obligation established by the contract, consideration is promised for such performance.

How do unilateral contracts work?

Unilateral contracts function differently from bilateral contracts. A unilateral contract contains the following elements:

Contracting parties are those to which one person or organization makes an offer unilaterally. This offer could be to the whole world or to another specific party/individual.
The other party is not obligated to perform the obligation set out in the contract.
Unilateral contracts are not made on the basis of a promise. When an offer is made, an individual can further become the offeree to perform the obligation. This will establish an offeror-offeree relationship between the parties. Even so, the offeree is not obligated to fulfill the obligation.
The consideration in the contract is contingent on the performance or non-performance of the obligations in the contract.
If the obligation is performed by an individual, the offeror is obligated to perform his part of the contract in the form of consideration or promised performance.

For instance, the owner of a watch whose watch is lost makes an ad to the public stating an amount to be paid as a reward. In this situation, the good’s owner has made an offer to the whole world. The promise is to pay the reward to whoever fulfills the obligation of finding the lost watch. This offer can be accepted to fulfill the obligation by an individual who would be called the offeree. Even though the offeree has accepted the offer in exchange for the reward, he is not obligated to find the watch. However, the offeror is obligated to pay the reward if the offeree fulfills his obligation and the unilateral contract is said to have been performed. Thus, the contract is contingent on the offeree finding the lost watch, and the reward is paid as soon as the obligation is fulfilled. In this instance, even if one offeree shows a willingness to perform the obligation, another offeree can fulfill the obligation prior, and avail himself of the reward. This is possible since unilateral contracts are made around the world and they differ from bilateral contracts when it comes to performance.

Acceptance of a unilateral contract

In unilateral contracts, acceptance is said to have been made when the offeree completes his obligation, as has been mentioned in the unilateral contract. Beginning or partial completion of the performance does not amount to acceptance. In unilateral contracts, two or more individuals or parties can simultaneously begin to perform the obligation. In this situation, whoever first completes the obligation fully is regarded to have accepted the offer and performed the obligation.

Thus, complete performance of the obligation is the only way in which an acceptance of a unilateral contract is accepted. Once a party has fulfilled the obligation, it is the duty of the offeror to fulfill his part of the performance by fulfilling the promise of the unilateral contract.

For instance, in the example cited above, A makes a unilateral contract in which he offers to pay a sum of $200 as a reward to whoever finds his watch. Both B and C want to get the $200 reward and, thus, begin looking for the lost watch. Both B and C are currently performing as offerees. It is important to note that even now, B or C are not obligated to find the watch, and if they do not find the watch, it would not amount to a breach of the unilateral contract. Now, C found the watch. B alleges that he should get the reward since he started looking for it even before C did; hence, he is in the position of the offeree. In this situation, A is not obligated to reward B even though he was the first offeree. This proves that acceptance of a unilateral contract is complete only on completion of performance. Accordingly, C is entitled to the reward, and A now must perform his part of the contract by rewarding C. A cannot deny rewarding C at this stage. If A denies performance, it can be legally challenged by C as a breach of the unilateral contract.

Revocation of a unilateral contract

Earlier, courts allowed an offeror to revoke a contract at any time before its performance. However, under the current common law system and the commercial statute governing contracts in the US, a unilateral contract can be revoked at any time before an offeree begins performance. A unilateral contract cannot be revoked by the offeror once the offeree has begun performing the obligation. Although this is the general rule, there are exceptions.

Types of unilateral contracts

Unilateral contracts are of two types. The first type of unilateral contract is one that is performance-specific and contingent. For instance, the offeror makes an offer which states that whoever can run the marathon and win shall receive an amount of $20,000 as the winning prize. In this type of unilateral contract, the offeror cannot revoke the offer once the marathon competition has begun. He can only do so before the offerees, or the participants in the marathon, begin running. Thus, a unilateral contract that is contingent on the performance of a specific task can only be revoked before the performance has begun.

The other type of unilateral contract is based on a reward. The dog owner’s offer, or the lost watch, for instance. The dog owner has the liberty to take off the offer even if some individuals have begun performing (looking for the dog). In this case, the offeror has the liberty to revoke the contract until the offeree has completed his performance. Once the obligation has been fully performed, the offeror cannot revoke the contract.

When an offeror decides to revoke or revokes a unilateral contract, the revocation must be made expressly, clearly, and concisely. The revocation must be understood and known to the offeree(s). Performance of the obligation by the offeree due to a lack of clarity or communication on the part of the offeror is legally challengeable.

Contract laws in the US

A contract is defined as an agreement between two or more parties that creates a mutual agreement between those parties. This agreement, when enforceable by law, is a contract. An agreement is legally enforceable or is a contract when it possesses the following elements:

Mutual assent by both parties,
Valid offer and acceptance,
A lawful and adequate consideration,
Capacity of the parties to contract,
Legal capacity and legality of the contract.

Breach of contract in the US attracts penalties or damages in the following manner:

General damages,
Consequential damages,
Reliance damages, and
Specific performance.

In the US, contracts are regarded as promises that are legally enforceable. The common law system governs contracts in the US. Even so, states can make varying laws governing contracts and contractual obligations in their respective states. Thus, contracts are governed by state-statutory laws, common (judge-made) laws, or by private agreements between parties. Private agreements and the rules governing those agreements supersede and override state laws and common law. The Statute of Fraud establishes certain rules and regulations governing contracts in the US. Contracts must be made pursuant to these rules. For instance, the Statute of Fraud states that contracts must be in writing to be legally enforceable. However, states differ in their opinion in this context. For instance, the Virginia Supreme Court ruled in Lucy v. Zehmer (1954) that in the presence of mutual consent and valid consideration by competent parties, even an agreement made on a napkin is legally valid and enforceable.

Restatement of the law (second) contracts

Principles of common law contracts are codified and derived from the Restatement of the Law (Second) Contracts. Chapter 1, divided into 14 sections, talks about contracts in the US.

Salient features of the law

Mentioned below are the salient features of the Restatement of the Law:

Restatement of the Law is a series of treatises in the US that talks about different aspects of the law governing the states, like contract laws, torts, etc.
The series of treatises are based on the common law system in the US.
One treatise from the series, is the Restatement of the Law (Second) Contracts. This treatise specifically deals with contract laws in the US.
The judges and lawyers refer to this treatise to understand the common law principles relevant to contracts.

Understanding the sections from the treatise dealing with contracts:

Section 1

Section 1 defines a contract. A contract is a promise or set of promises. Contract law prescribes remedies for the breach of a contract. The performance of a contractual obligation is regarded as a duty.

Section 2

Section 2 defines a promise. A promise is made for the future occurrence or non-occurrence of a contractual obligation. It is an undertaking by both the parties to the contract, in exchange for consideration.

Section 3

Section 3 defines an agreement. An agreement is made between two or more persons, on a mutually agreed basis.

Section 4

Section 4 defines a ‘bargain’ between two parties. A bargain is an agreement between two or more parties to exchange promises for performance.

Section 5

Section 5 prescribes the procedure which is followed in making a ‘promise.’ A promise is made:

In words, written or oral,
Must be inferred from the promise, wholly or partly,
Intention to make the promise must be clearly communicated.

Section 6

Section 6 speaks about the categories of contracts in the US as:

Formal and informal,
Unilateral and bilateral.

Section 7

Section 7 states that the following are formal contracts:

Contracts under seal,
Recognizances,
Negotiable instruments.

Section 8

Section 8 defines a ‘contract under seal’ as a contract that is made in writing, sealed, and delivered by a promisor.

Section 9

Section 9 defines ‘recognizance.’ It is a form of contract in which the recognizer makes an acknowledgment in the court that he/she is bound to make payments unless a specific condition is performed.

Section 10

Section 10 defines negotiable instruments as:

Bills of exchange, promissory notes, or bonds,
Payable to their bearer, or his order.

Section 11

Section 11 describes informal contracts as those which have been excluded from the ambit of formal contracts under Section 7.

Section 12

Section 12 defines a unilateral contract in which a promisor does not receive a promise for his consideration, whereas there exists an exchange of promises between both parties to a bilateral contract.

Section 13

Section 13 describes a voidable contract as a contract that can be legally terminated at the option of either or both of the parties.

Section 14

Section 14 defines ‘unenforceable contracts’ as a contract that cannot be legally enforced or recognized.

Uniform Commercial Code (UCC)

The Uniform Commercial Code (UCC) further governs contracts in the US and its provisions governing contracts have been adopted by almost all states in the US. Articles 1, 2, and 9 of the UCC primarily govern contracts in the US.

Article 1 (general provisions) defines and prescribes governing rules for all forms of contractual transactions, such as the sale of goods, negotiable instruments, credit transactions, etc. Article 2 deals specifically with contracts that are in the form of sales. Sales and transactions between individuals, farmers, consumers, or other buyers are governed by the provisions of Article 2 of the UCC. UCC is formulated in a manner that provides a remedy in most situations by prescribing an alternate way in which a transaction between parties can be validated. Article 9 of the UCC speaks about ‘secured transactions.’ A secured transaction can be entered into between a lender and a borrower of money where the borrower puts his assets as a security interest. A security interest in something that secures payment or performance of an obligation. All these provisions are mentioned in the UCC that governs contracts in the US.

Unilateral contracts and bilateral contracts: differences

Contracts are of two types- unilateral contracts and bilateral contracts. They differ in terms of implementation and obligation. The basic differences between the two can be seen as:

Basis of difference	Unilateral contracts	Bilateral contracts
Promise	In unilateral contracts, the obligation to fulfill the promise is only on the offeror. The offeree is not obligated to promise or to fulfill the obligation. It is the choice of the offeree to fulfill the obligation.	In bilateral contracts, both parties must fulfill the obligation as promised. The offeror makes an offer, which the offeree accepts. This becomes a promise for the fulfillment of the obligation in exchange for consideration. Thus, bilateral contracts bind both parties to the obligations of the contract.
Offer	An offeror makes an offer in the form of open offers or as offers to the whole world. Whosoever performs the obligation is treated as having accepted the offer. There is no obligation on the part of the offeree to perform a unilateral contract.	An offer in a bilateral contract is not made to the whole world or as an open offer. It is party specific where one party makes an offer to another specific party. They enter into the bilateral contract, which is binding on both parties.
Specificity	Unilateral contracts are offered to the whole world. Any individual can complete the specified task and become the offeree. This makes unilateral contracts less specific and low in clarity as compared to bilateral contracts.	Bilateral contracts are specific and concise. These contracts are entered into between two individuals or parties. They are not made to the whole world but to a specific party who is obligated to fulfill the promise, for consideration.
Time	In unilateral contracts, it is the offeror who decides the time period for which the contract is valid. He also determines the period within which the task has to be completed for it to be valid.	In bilateral contracts, the time period is determined and fixed by both parties to the contract. It cannot be decided by one party without the consent of the other party.
Terms and conditions	The terms and conditions of a unilateral contract are determined by the offeror. The offeree has no say in determining the terms and conditions. The offeree has to take the offer as it has been determined by the offeror and complete the specified task.	Terms and conditions are determined by mutual agreement and consent of both parties. They are not predetermined by the offeror.

Similarities between unilateral and bilateral contracts

The unilateral and bilateral contracts possess the following similarities:

Both contain essentials of a contract, like an offer, acceptance, promise, and revocation even though the manner of execution is different.
The rules governing contracts in the USA govern both unilateral, as well as bilateral contracts.
Both unilateral and bilateral contracts are legally binding, enforceable, and recognizable in the USA if they are validly entered into.
Competency of parties to contract is an essential feature in both unilateral, and bilateral contracts. A contract entered into between parties who are legally ineligible to contract is a void contract.
Breach of a contract is legally challengable in the US courts, whether unilateral or bilateral.

Case laws

Mentioned below are a few case laws that will help to understand contracts in the US in a better manner.

Nebraska Beef, Ltd. v. Wells Fargo Busi (2006)

In this case, Nebraska Beef had established a $30,000,000 line of credit with Wells Fargo. This arrangement was reduced to a written credit agreement. This agreement contained details about the amount that can be borrowed by Nebraska Beef and also the circumstances under which this limit could be further expanded. The credit agreement stated that Nebraska Beef was liable to pay fees for each exceeded borrowing limit. Wells Fargo amended this agreement thrice and increased fees on advanced payments to a limit that was unacceptable to Nebraska Beef. Despite opposition from Nebraska Beef, Wells Fargo did not participate in any negotiations and continued to deduct higher fees from Nebraska Beef’s account. Nebraska Beef filed a lawsuit against Wells Fargo to recover amounts deducted from their account. Nebraska Beef argued that Wells Fargo treated the agreement as a unilateral agreement, which was not the case.

Nebraska Beef argued that unilateral contracts under Minnesota laws contain four essential elements – offer, communication of offer, acceptance, and consideration. However, the agreement between Nebraska Beef and Wells Fargo was in the absence of an ‘offer’ in the right manner. Thus, the agreement can not be treated as a unilateral contract. However, this argument was rejected by the District Court, which ruled in favor of Wells Fargo. The Court stated that there existed a unilateral contract between the parties as the elements of a unilateral contract were fulfilled by this agreement. Thus, Wells Fargo has the liberty to increase fees for advance payments.

Boswell v. Panera Bread Co. (2018)

In this case, the Panera group of restaurants came up with a special scheme for hiring managers that promised a higher one-time bonus to qualifying managers. After hiring these managers, employees were required to sign an employment agreement, which stated that the bonus would be payable after 5 years of service to the managers who would qualify. Qualifying managers were to be selected on the basis of their performance and contribution to the business’s profit. Additionally, they must retain their position as a manager on the day on which the bonus is payable.

In 2010, Panera set a cap of $100,000 for bonuses. This was accepted by the employees, and no issues were raised for 4 years. In 2014, the employees filed a lawsuit against Panera stating that the restaurant was breaching their employment agreement by capping the one-time high bonus amount. Panera argued that the employees’ rights to complain/claim compensation had been waived since they continued to work on new terms and conditions without any complaints for four years. The District Court sided with Panera, stating that the agreement between the employees and Panera was unilateral in nature. There was an offer made by Panera on pre-determined terms and conditions, and it was accepted by the employees who worked on those terms and conditions without any complaints for at least a year. Thus, it was a form of unilateral contract between the employees and Panera, where Panera had every right to determine and alter terms and conditions at will.

Pine River State Bank v. Mettille (1983)

In this case, in 1978, Mettille secured himself a job as a loan officer at Pine River State Bank with a salary of $12,000 annually. The employment agreement was entered into orally and it did not mention granting permanent employment. However, Mettille survived his probation period and continued working as a loan officer. In the same year, the company published an employee handbook that contained details about employment, terms, provisions for employment rights, leaves, etc. Mettille was aware of this handbook and continued working on his role. In 1979, certain technical errors were found in the company’s loan documents. Mettille was found responsible for these errors. Thereafter, he was fired without any disciplinary proceedings. The provisions of the employee handbook of 1978 contained provisions for disciplinary proceedings to be conducted before firing employees. These procedures were not followed while firing Mettille, which was challenged by him in court.

Mettille argued that his dismissal was in violation of disciplinary procedural requirements and that the bank had breached his employment agreement. The Court reviewed the company’s employee handbook and found that it contained provisions for disciplinary proceedings, job security, annual performance review for employees, etc. The handbook clearly stated that no employee could be removed from his job without conducting proper proceedings by the Executing Officer. The Court stated that the nature of the employment agreement between the employee and the company was unilateral in nature since there was an offer in the form of salary and it was accepted by the employees. A similar situation applies to the employee handbook as well. The employee handbook prescribed certain guidelines in the form of an offer. As the employees were informed about this offer and continued working thereafter, this constituted the acceptance of the handbook’s offer. Thus, the employee handbook created a contractual obligation on the part of the employer to follow the rules of the handbook while managing employees. Therefore, the rules of the handbook were applicable to the loan officer even if his terms of hiring did not guarantee him a permanent job in the bank. The provisions of disciplinary proceedings and job security were applicable to the employee, and the firing of the employee without following the handbook led to a breach of the employment contract between the loan officer and the company.

Wood v. Utah Farm Bureau Insurance Co. (2001)

In this case, Wood, along with 3 other plaintiffs, Tanner, Stokes, and Syphus, were insurance agents of Utah Farm Bureau Insurance Company. Insurance agents received remuneration in the form of compensation for each insurance policy they sold. The employment relationship between the insurance company and the agents was governed by a ‘career agent contract.’ This contract made it clear that the relationship between the agents and the company was in the form of independent contractors and not an employer-employee relationship. It also contained a clause which stated that the contracts could be terminated at any time, with or without giving a cause. A few months later, Wood, Tanner, and Stokes’ contracts were terminated by the insurance company. They were not given any reason for their termination. Upon inquiry, the insurance company stated that, as per the career agent contract, they did not have to give a reason for termination. Syphus was similarly terminated in another department of the company.

The plaintiffs then filed a lawsuit against the insurance company for breach of contract, unjust enrichment, wrongful termination, breach of the implied covenant of good faith and fair dealing, interference with economic relations, and punitive damages. The Court ruled in favor of the insurance company. The Court stated that the career agent contract created an ‘at-will relationship’ between the plaintiffs and the defendant. It was clearly stated in the contract that the agency relationship could be terminated at any point in time without giving any cause for doing so. The plaintiffs’ argument that further letters determining terms of employment could be treated as a form of a unilateral contract offer was rejected by the court.

Conclusion

Contracts essentially govern everyday transactions as well as big corporate decisions in the US. Conflicts are common in contracts and contractual obligations. States make laws to govern contracts in their states in order to mitigate conflicts arising out of unfulfilled contractual obligations or breaches. Contracts are of two types, unilateral contracts and bilateral contracts. They differ from one another in the manner in which the obligation is performed in each category of contract. Bilateral contracts are entered into between two specific parties in the form of an offer and acceptance, which are binding on both parties alike. Unilateral contracts differ in this context. Unlike general bilateral contracts, unilateral contracts are made to apply to the whole world and not to any specific party. These contracts are governed by pre-determined terms and conditions that are set by the offeror. These terms and conditions are amendable or deleted at the option of the offeror. The offeror of a unilateral contract can also revoke it within a set time frame. The offeror has the liberty to perform all these functions at his will and does not need permission or consent from the offeree. This is the primary difference between unilateral and bilateral contracts. Bilateral contracts cannot be altered by one party (offeror) without the consent of the other party (offeree). In unilateral contracts, the offeree is not obligated to fulfill the obligation or perform the task. He does so at his will, and a non-performance would not be treated as a breach of the contract. Similarly, when two parties enter into a unilateral contract, the terms of this contract are amendable at the option of the offeror, and the offeree cannot sue the offeror for breach in any of these circumstances. Judicial pronouncements have set precedents and guidelines for governing unilateral contracts in the US, and the law keeps evolving with new sets of facts and circumstances that it comes across.

Frequently Asked Questions (FAQs)

How is the acceptance of a unilateral contract made and communicated?

Unilateral contracts are accepted by completion of the task/obligation. An offeree is said to have accepted the unilateral contract when he completes the task. Half-done tasks, or the mere acceptance to initiate performing the task cannot be termed as an acceptance.

How many parties are needed for a unilateral contract?

Although a unilateral contract is ultimately made and executed between two parties, an offeror and an offeree (one who completes the task), it primarily needs only one party, i.e., the offeror. A unilateral contract is an offer made by one person to the whole world for the fulfillment of an obligation.

What is a common issue with unilateral contracts and how are they breached?

Like bilateral contracts, unilateral contracts can also be breached. A unilateral contract is usually breached when, even on completion of the task by the offeree, the offeror refuses to pay the reward or fulfill his promise. This is the primary problem associated with unilateral contracts.

Can a unilateral contract be revoked?

Yes. A unilateral contract can be revoked, subject to a specific time frame. A unilateral contract can be revoked only before the performance of the obligation has begun. An exception is that a unilateral can be revoked even after the performance has begun if the obligation is not fulfilled within a reasonable time period.

References

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