Contracts 101 – Unilateral v. Bilateral and why you need to know
By James L. Goldsmith, Esq.
I know you have heard these terms. Maybe you read about them when studying for your license exam or while you were dozing in the back of a room in a continuing education class, perhaps taught by a soporific lawyer (there’s one to look up). And even if you are at a loss to come up with a definition, you do know about these things.
Unilateral and bilateral are terms used to described contracts, more specifically, how the contract was formed. You don’t have to go far to find examples. A listing agreement between a seller and broker is a bilateral contract. The “bi” of bilateral refers to the two parties who establish the contract. These two parties come together from their various locations in the world and, together, agree upon terms. The fact that the broker refused to budge on the commission or term of the listing, or any other provision, is of no consequence. The fact is, the contract was only formed by virtue of the assent to its terms by both parties.
An agreement of sale is also a bilateral contract. Yes, the agreement of sale is a bilateral contract even if one party may (get ready) unilaterally terminate it! Interesting . . . a bilateral contract may be unilaterally terminated!
The “uni” in unilateral refers to one. And before describing a unilateral contract let me make clearer what I meant by a party having the unilateral right to terminate the bilateral agreement of sale. The agreement of sale was bilateral because it took two parties to make it. Contingencies in the agreement are triggered by events that unusually give rise to the right of termination by a single (uni) party. The home inspection reveals conditions that are unsatisfactory to the buyer. The buyer has the unilateral right to terminate this bilateral contract. Even though both parties, buyer and seller, have unilateral rights to terminate, the death of the contract is usually triggered by one party, hence it was a unilateral termination.
If our bilateral agreement of sale has no contingencies or there is no event that triggers a unilateral right to terminate by one of the parties, then termination can only occur by breach (not a good way to terminate an agreement and one that may require a party to pay damages to the other) or by mutual agreement of the parties (bilateral agreement to terminate).
Now, it gets a little confusing. Unilateral contracts are contracts between two parties or maybe more! Yes I remember telling you that “uni” means one. Let’s explore through example. One broker’s commitment to compensate another for selling the first broker’s listing is an example of a unilateral contract. It is a unilateral contract by virtue of how it came to be. Broker One posts a listing in the MLS promising to pay any other broker who produces a ready, willing and able buyer, at list price, a commission split for doing so. Broker One’s listing is an offer to all other brokers, hence it is a blanket offer. It includes all of the brokers who are a member of the multi-list. The offer to sell Broker One’s listing for a commission is accepted how? By producing a buyer. Broker Two is not required to call Broker One before initiating efforts to find a buyer (as would be the case if the property were not published in the MLS). Rather, Broker Two’s doing what the unilateral offer called for (producing the buyer) formed the contract and Broker Two is entitled to payment.
Complicate it further, you say. How about the listing agreement? Is a listing agreement a unilateral offer by the seller to sell to the buyer who makes a full-price offer during the term of the listing? No! This is not like the broker’s unilateral offer to all other brokers. The listing agreement is a marketing contract between the seller and the broker. It is not the unilateral offer of a seller to the buyers of the world. And therefore a seller is not obligated to sell the listed property to a buyer who makes a full-price offer even when that offer includes no contingencies. Yes, by virtue of the listing agreement between the seller and broker, the seller will be obligated to pay a commission to the broker. And yes, by virtue of the blanket unilateral offer that the broker made to all other brokers, the selling broker may be entitled to a commission split.
If you have gotten this far (I hope some of you are still with me) you may be asking who cares, what’s your point! I agree that it is not essential to your business to be able to utter cogent definitions for these types of contracts. It is of course essential to know when contracts are binding, how they may be terminated and how they are accepted. The last issue I touched upon, whether a seller’s listing contract obligates the seller to sell the property, is indeed one of the questions we get frequently on the Hotline.
With unilateral thanksgiving greetings to all – Jim Goldsmith
Copyright © James L. Goldsmith, Esquire, CALDWELL & KEARNS, P.C., 2014
All Rights Reserved
Jim Goldsmith is an attorney with Caldwell & Kearns and serves as general counsel to PAR. A substantial portion of his practice is dedicated to providing advice and counsel to real estate licensees. He and his firm represent and defend real estate salespersons and brokers in civil lawsuits and licensing claims across the Commonwealth. Jim also defends REALTORS® in disciplinary hearings conducted by the Real Estate Commission. He routinely counsels employers on employee relations issues and is one of the voices of the PAR Legal Hotline. He may be reached at www.caldwellkearns.com.