What are Unilateral Contracts?

In common understanding, a contract is often associated with negotiation, documentation and signatures of two parties. However, the law of contracts is wider and more flexible. A contract may arise even when only one party makes a promise and the other party accepts it not through words, but through action. Such arrangements are known as unilateral contracts.

Unilateral contracts occupy an important position in contract law, especially in situations involving rewards, advertisements, competitions and insurance. Although the Indian Contract Act, 1872 does not expressly define the term “unilateral contract,” the concept has long been recognised and applied by courts in India and abroad.

This article explains the meaning, nature, performance and revocation of unilateral contracts, along with important judicial decisions that have shaped the doctrine.

Meaning of Unilateral Contract

A unilateral contract is a one-sided agreement in which only one party makes a promise, and the other party accepts the offer by performing a specified act. The offeror promises to do something, usually to pay money or provide a benefit, if a certain act is completed.

The Supreme Court of India, in Alka Bose v. Paramatma Devi and Ors. (2008), referred to unilateral contracts as situations where only one party makes a promise without any return promise. The acceptance is not by a counter-promise but by performance.

Professor Melvin Eisenberg explains that when an offer calls for acceptance through performance of an act, it is an offer for a unilateral contract. Similarly, CJ Hamson described consideration in such contracts as an act done at the request of the offeror in response to the promise.

In simple terms, a unilateral contract involves a promise in exchange for an act, not a promise in exchange for another promise.

Unilateral Contracts and Bilateral Contracts

Contracts can broadly be classified into unilateral and bilateral contracts based on the nature of obligations undertaken by the parties.

In a bilateral contract, both parties exchange promises. Each party is bound to perform certain obligations. The contract becomes binding as soon as there is agreement and mutual consent.

In contrast, in a unilateral contract, only one party undertakes an obligation at the time of making the offer. The other party is not bound to perform. The contract becomes binding only when the act required by the offeror is completed.

For example:

• If a company hires a designer through a formal agreement, both parties exchange promises. This is a bilateral contract.
• If a company announces a logo design competition and promises a reward for the best design, the offer becomes binding only when a participant submits a design meeting the conditions. This is a unilateral contract.

Thus, the essential difference lies in the exchange: bilateral contracts involve promise for promise, while unilateral contracts involve promise for act.

Parties to a Unilateral Contract

The parties to a unilateral contract are similar to those in any other contract:

• Offeror (Promisor) – The person who makes the promise and undertakes to pay or perform upon completion of the act.
• Offeree (Promisee) – The person who performs the required act and becomes entitled to the promised reward.

However, unlike bilateral contracts, the offeree is not under any legal obligation to perform the act. Only upon completion of the act does the offeree acquire the right to enforce the promise.

Nature of Unilateral Contracts

Unilateral contracts are generally executory in nature. This means that the obligations are to be performed in the future. The offeror promises to pay or provide a benefit once the act is completed.

The distinctive feature is that the contract is formed only after performance of the required act. Mere intention or partial preparation does not automatically create a binding obligation.

A landmark case in this context is Carlill v. Carbolic Smoke Ball Company (1893). The company advertised that it would pay £100 to anyone who used its product as directed and still contracted influenza. The Court of Appeal held that the advertisement was a unilateral offer to the world at large. When Mrs. Carlill used the product as prescribed and still fell ill, she had performed the required act. Therefore, a binding contract arose, and the company was liable to pay.

This case established that advertisements promising rewards can amount to unilateral offers, enforceable upon performance.

Types of Unilateral Contracts

Unilateral contracts can broadly be classified into the following categories:

Open Requests

These are general offers made to the public. The offeror promises a reward upon fulfilment of specified conditions. Anyone who performs the act as per the conditions becomes entitled to the reward.

Examples include reward notices for lost property or information about criminals.

Insurance Contracts

Insurance contracts are classic examples of unilateral contracts. The insurer promises to compensate the insured if a specified event occurs, such as an accident or fire. The insured is not required to cause the event; the insurer’s obligation arises only if the insured event happens.

Insurance contracts may also be contingent contracts, as their performance depends upon uncertain future events.

Unilateral Contracts and Contingent Contracts

Although unilateral contracts and contingent contracts may appear similar, they are not identical.

Under the Indian Contract Act, 1872, a contingent contract is a contract to do or not to do something if a collateral event happens or does not happen. Its performance depends on an uncertain future event.

Similarities

• In both cases, performance may take place in the future.
• The promisor’s obligation arises only upon fulfilment of certain conditions.
• The promisee is not compelled to bring about the event.

Differences

• In a unilateral contract, the consideration is an act performed at the request of the offeror.
• In a contingent contract, performance depends upon the occurrence of an uncertain event collateral to the contract.
• Not all unilateral contracts depend on uncertain events.

For instance, a motor insurance policy is both unilateral and contingent because payment depends upon an uncertain accident. However, ordering food with payment promised after delivery is unilateral but not contingent, as delivery is reasonably certain and not dependent on an uncertain event.

Thus, while all contingent contracts may involve unilateral promises, not all unilateral contracts are contingent.

Performance of Unilateral Contracts

Performance as Acceptance

In unilateral contracts, performance serves a dual function. It constitutes both acceptance and consideration.

Unlike bilateral contracts where acceptance is communicated through words or conduct signifying agreement, in unilateral contracts, acceptance is complete only when the required act is performed.

For example, if a reward is announced for finding a lost dog, acceptance takes place when the dog is found and returned. Until that point, there is no binding contract.

Completion of Performance

The performer can claim the reward only after full completion of the act. Partial performance does not entitle the performer to claim the promised benefit unless otherwise specified.

In Masum Ali and Ors. v. Abdul Aziz and Ors. (1914), a promise was made to contribute money for rebuilding a mosque. Since no work had begun, the Court held that the promise was not enforceable. The essential condition for formation of a unilateral contract was not fulfilled.

Similarly, in Jamuna Das v. Ram Kumar Ji and Ors. (1937), a promise to contribute to a charitable institution was held unenforceable due to absence of consideration.

These cases highlight that performance is central to the enforceability of unilateral contracts.

Obligations of the Performer

One important feature of unilateral contracts is that the performer is under no obligation to begin or complete the act. The offer is voluntary in nature.

If the performer starts but later discontinues the act, there is generally no liability unless performance has reached a stage that affects revocation rights.

The performer is also not bound to claim the reward even after completing the act. The entitlement arises upon performance, but claiming it remains optional.

This distinguishes unilateral contracts from bilateral contracts, where both parties are bound from the moment of agreement.

Revocation of Unilateral Contracts

Revocation in unilateral contracts presents complex issues. The general rule is that an offer can be revoked before acceptance. Since acceptance in unilateral contracts occurs upon performance, revocation is possible before performance begins.

However, once performance has commenced, courts have placed restrictions on revocation.

In Errington v. Errington and Woods (1951), a father promised his son and daughter-in-law that if they paid the mortgage instalments, the house would be transferred to them. After they began paying instalments, he attempted to revoke the promise. The Court held that once performance had begun, the offer could not be revoked.

This decision reflects the need to balance fairness. If revocation were freely allowed after commencement of performance, it would unjustly disadvantage the performer.

However, in Morrison Steamship Co. Ltd. v. Crown (1924), it was clarified that commencement of performance does not convert the unilateral contract into a fully binding bilateral agreement. The restriction applies mainly to revocation of the offer.

Professor Eisenberg also observed that even if acceptance is communicated, the offer remains revocable until performance begins.

Thus, the legal position can be summarised as follows:

• Revocation is possible before performance begins.
• Once performance has commenced, revocation may be restricted.
• Full binding obligation arises upon completion of performance.

Key Characteristics of Unilateral Contracts

From the above discussion, the essential characteristics of unilateral contracts may be summarised:

• One party makes a promise.
• Acceptance is by performance, not by counter-promise.
• The offeree is not legally bound to perform.
• Consideration consists of the act performed.
• Contract is formed only upon completion of performance.
• Revocation is generally allowed before performance begins.
• Commonly found in reward notices, advertisements and insurance.

Conclusion

A unilateral contract is a legally recognised form of agreement in which a promise is made in exchange for performance of an act. It differs from bilateral contracts in that only one party is bound at the time of making the offer. The contract becomes enforceable only when the required act is fully performed.

Judicial decisions such as Carlill v. Carbolic Smoke Ball Company, Alka Bose v. Paramatma Devi, Errington v. Errington and Woods, and others have clarified the principles governing formation, performance and revocation of unilateral contracts.

Performance constitutes both acceptance and consideration. The performer is not obligated to act, but once the act is completed, the promisor becomes legally bound to fulfil the promise.