What type of contract requires both parties to perform in an exchange of promises?

A bilateral contract is defined by the exchange of promises between two parties, where each party commits to fulfilling their part of the agreement. This mutual obligation forms the basis of the contract, creating legally binding duties for both sides. For example, if one party agrees to sell a car and the other agrees to pay a specified amount, both parties have made promises that are dependent on each other’s actions, which is the essence of a bilateral contract.

In contrast, a unilateral contract involves a promise in exchange for a specific action, where only one party is bound to act if the other party performs. An executory contract refers to agreements where something remains to be performed, which doesn't necessarily emphasize the exchange of promises. A collateral contract involves a secondary agreement that supplements the main contract, but again, it doesn't address the direct exchange of promises that characterizes bilateral contracts. This emphasis on mutual performance is what distinctly defines a bilateral contract, making it the correct choice in this context.