Property and Casualty Insurance Practice Exam

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What characterizes a unilateral contract?

Both parties have obligations to fulfill
Only one party is legally bound to perform
It requires mutual agreement from both parties
Contracts are modifiable by either party

The correct answer is: Only one party is legally bound to perform

A unilateral contract is characterized by the fact that only one party is legally bound to perform a specific obligation. In this type of contract, one party makes a promise in exchange for an act or a performance by the other party. The classic example of a unilateral contract is a reward offer; if someone offers a reward for lost property, they are obligated to pay the reward only if the lost property is found and returned, while the person who finds the property is not bound by any obligation to search for it. The other options do not reflect the nature of a unilateral contract. In some types of contracts, the obligations are mutual, meaning both parties are bound to perform certain tasks or actions. Additionally, mutual agreement is essential in all contracts, but in a unilateral contract, it is the performance of an act that creates the enforceable obligation for the party who made the promise. Lastly, not all contracts are modifiable by either party; modifications generally require mutual consent. This reinforces the unique nature of unilateral contracts, where only one party's actions create binding obligations.