What differentiates a bilateral contract from a unilateral contract?

A bilateral contract is characterized by the mutual exchange of promises between two parties, where each party is obligated to fulfill their part of the agreement. This means that both parties have performance obligations that are clearly defined; for example, one party promises to deliver goods, while the other party promises to pay for those goods.

In contrast, a unilateral contract involves only a single promise made by one party, where that party becomes obligated to fulfill their promise once the other party performs a specific action. A common example is a reward offer where the offeror promises to pay a reward upon the completion of a certain task, such as finding a lost dog.

Understanding the distinction in performance obligations highlights the essence of these contracts: bilateral contracts require reciprocal commitments, while unilateral contracts hinge on a single promise activated by an action. This is why choice regarding performance obligations of the parties is the correct differentiation between bilateral and unilateral contracts.