Certified Residential Appraiser Practice Exam

What characterizes a bilateral contract?

1. Only one party is obligated to perform

2. Only verbal agreements are accepted

3. Both parties have made promises to each other

4. A contract that is always executed

The correct answer is: Both parties have made promises to each other

A bilateral contract is characterized by the exchange of promises between two parties, where both sides are obligated to fulfill their respective promises. This mutual obligation establishes a clear framework in which each party agrees to perform an act or provide something of value in return for the other party's performance. In this type of contract, the promise by one party is contingent upon the promise of the other, creating a reciprocal relationship. For example, in a real estate transaction, one party may agree to sell property while the other agrees to pay a certain amount of money. This simultaneous obligation is what fundamentally distinguishes bilateral contracts from unilateral contracts, where only one party is bound to perform. Verbal agreements are not exclusive to bilateral contracts; while they can be valid, written contracts are often preferred for clarity and enforceability. Additionally, the idea that a bilateral contract is always executed is misleading, as many bilateral agreements may be executory, meaning they have not yet been fully performed by either party. Thus, the defining feature of a bilateral contract is the mutual exchange of promises, which is accurately captured in the correct answer.