Unilateral Contracts

A unilateral contract is a legally binding agreement in which one party makes a promise to do or refrain from doing something in return for the performance of an act by another party. Unlike bilateral contracts, where both parties exchange mutual promises, unilateral contracts are distinct in obligating only one party to perform the terms of the contract once the other party completes a specified action. In the realm of finance and trading, unilateral contracts can play a significant role in various transactions, including options trading, promotions, and rewards schemes.

Characteristics of Unilateral Contracts

Promise for Act

A unilateral contract involves a promise in return for a specific act. The contract is formed not when the promise is made, but when the act required is completed. For example, a company might offer a reward for the recovery of lost property. In this situation, a contract is formed only when someone returns the lost property.

Binding Obligation

The promise in a unilateral contract becomes enforceable when the specified act is performed. Before performance, the offer can be revoked. However, once the act begins, the offeror may be bound by the terms of the contract. For instance, in the case of an options trading scenario, the contract binds the seller to honor the contract terms once the option buyer decides to perform the action by exercising the option.

Application in Trading and Finance

Options Trading

One typical example of a unilateral contract in trading is an options contract. An options contract gives the holder the right, but not the obligation, to buy or sell an asset at a predetermined price before or at the expiry date. The seller of the option (option writer) is obligated to execute the terms of the contract if the holder decides to exercise the option.

For example, a call option gives the buyer the right to purchase an asset at a specified strike price within a certain period. The buyer pays a premium upfront for this right. If the buyer chooses to exercise the option by purchasing the asset when the market price exceeds the strike price, the seller must deliver the asset at the agreed price. Here, the seller’s obligation arises only when the buyer opts to exercise the option, demonstrating the principle of a unilateral contract.

Rewards and Incentive Programs

Many companies use unilateral contracts in their promotional strategies. For example, a firm might announce a reward for customers who achieve a certain performance target, such as reaching a particular sales volume. This type of contract is only enforceable when the customer meets the required target, after which the company is obligated to fulfill the promise (e.g., providing a reward).

Consider the case of a financial institution offering a referral bonus. The institution promises to give a certain amount of money to customers who refer new clients. This contract becomes binding only when the customer successfully brings in a new client.

Insurance Policies

In some instances, insurance contracts can exhibit characteristics of unilateral contracts. For example, a life insurance policy where the insurer promises to pay a beneficiary upon the death of the insured can be viewed as unilateral. The insured pays premiums, and the insurer is only obligated to make the payment upon the occurrence of the specified event (the death of the insured). This condition highlights the performative nature characterizing unilateral contracts.

Formation and Offer

The formation of a unilateral contract hinges on the performance of the specified act. The offer must be clear and unambiguous to form a valid unilateral contract. Courts interpret such offers objectively to determine whether an offer existed and if the performance meets the criteria set forth in the contract.

Consideration and Performance

Performance serves as the consideration in a unilateral contract, making it enforceable. When the offered performance is executed, the promisor is bound by the terms of the offer. It is essential that the performance strictly adheres to the offer’s terms for the contract to be binding. Any deviation could mean the contract may not come into force.

Revocation of Offer

A crucial aspect of unilateral contracts is the offeror’s ability to revoke the offer. Generally, the offer can be revoked before the performance has commenced. However, once the offeree begins the act of performance, many jurisdictions restrict the offeror from revoking the offer, ensuring fairness and preventing any potential exploitation of the offeree’s efforts. Some legal systems recognize partial performance as creating an irrevocable offer, enforcing the contract terms once part performance has occurred.

Enforcement and Remedies

The breach of a unilateral contract, particularly when the act has been performed, entitles the aggrieved party to seek remedies. Such remedies can include specific performance, requiring the promisor to fulfill their promise, or damages compensating the offeree for any loss incurred due to the breach.

Practical Examples

Commercial and Advertising

Unilateral contracts often appear in commercial settings, particularly in advertising and marketing campaigns. For example, a retailer might advertise a limited-time promotion offering a gift card to the first 100 customers who make a purchase above a certain amount. The contract is only binding when the customers fulfill the purchase conditions, obligating the retailer to provide the promised gift card.

Competitive Challenges

Competitions and challenges frequently use unilateral contracts. A company might issue a challenge, such as solving a complex problem with a financial reward for the first person who finds the solution. The contract is formed when the participant successfully solves the problem, obligating the company to pay the reward.

Employment and Recruitment

Employers sometimes use unilateral contracts in job recruitment and retention strategies, promising bonuses or rewards on the completion of specific goals or milestones. For example, a mid-size firm may offer a signing bonus to new employees, payable after they complete a defined probation period. Upon successful completion, the contract obligates the employer to pay the promised bonus.

Conclusion

Unilateral contracts play a significant role in various financial and commercial contexts. They offer flexibility as they involve binding obligations only upon the completion of a specified act, allowing for a range of creative and strategic uses in trading, marketing, and contractual agreements. Understanding the characteristics, legal implications, and practical applications of unilateral contracts enables businesses and individuals to effectively use and navigate these agreements within the financial landscape.

For more details on specific applications or companies utilizing unilateral contracts in their business models, you can visit the following links:

These resources offer comprehensive information on options trading and other contract-based financial instruments, elucidating the principles of unilateral contracts in modern finance.