Mutuality in Contracts
Parties to a contract must mutually agree to exchange promises between them. For that reason, mutuality is always required in a valid contract. Mutuality is an unequivocal agreement that there is a consideration for each promise. It exists when the parties are bound each to all the promises of the contract and at the pleasure of each party the duties and obligations of both may be enforced. This must exist at the time the contract is made. A contract lacking mutuality of obligation lacks consideration. When promises are dependent upon each other mutuality exists. When one promise is given and accepted and the other is reasonably harmed or benefited, there is sufficient consideration for the promise so that the promisee is bound. Where the performance of a promise may be given for another’s performance, it is not enough that the performance of the promise is uncertain. The performance must be capable of being rendered within the performance of the promise because it is dependent upon the form of promise made .
If by the terms of the contract one party may, at any time and without cause, render the entire contract abortive, such contract is lacking in the requisite mutuality. A contract which may be canceled at the will of the promisor, before performance has been fully rendered, lacks mutuality. If a contract provides for a renewal at the request of either party "and under such terms and conditions as may be satisfactory to both parties," such contract lacks mutuality. A contract which permits either party to terminate it at any time lacks mutuality. An option is mutual where both parties have obligations therein. When an option is given which may be terminated by either party at any time, so long as it has not been exercised, it lacks mutuality. In order for a contract to be enforceable, it is essential that the rights and duties of the parties should be mutual, reciprocal and correlative to each other within the contract as expressed in the language thereof, otherwise the contract will be void for want of mutuality.
The Importance of Mutuality in Legally Binding Contracts
Mutuality is a fundamental component of a valid contract. The failure of mutuality may be enough to prevent a court from enforcing an agreement. Mutuality is the promise, expressed or implied, that whatever one party is bound to do, the other party is bound to do as well.
In an agreement lacking mutuality, consideration is essentially nonexistent because the so-called promises of both parties could therefore be illusory. For example, consider this situation: you are planning on opening an Italian restaurant and are negotiating with a landlord for a nearby property. After several months of negotiation, you and the landlord finally orally agree on the price, the terms, the deadline, and the use of the property. Then, out of the blue, the landlord tells you that he just cannot rent you the property, despite your previous agreement. Could you force the landlord to rent you the building?
In most jurisdictions, the answer is likely to be no. Mere "puffery"—an invitation to buy—will not make a binding agreement. A promise to give away a product or service, without a request for something in return, is an illusory promise. For example, in Lucy v. Zehmer, the plaintiffs and defendants agreed to sell a farm for $50,000 to be paid in installments over a period of time. The offer was sealed with "sealed bids". Shortly after the sale, the defendants backed out. The court found the defendants "were bound". The court explained: "Without consideration, there can be no binding contract. But the mere fact that there may be an withholdable condition precedent does not make an agreement unenforceable." In other words, it is fine if a contract is conditioned on an event—that is the nature of mutuality—but if neither party is legally bound by any promises, then the contract may fail due to lack of consideration.
In some cases, modern courts will find that a lack of mutuality—even if it is illusory—does not preclude the enforcement of an agreement. For example, in In re Disciplinary Hearing Concerning Davis, the defendant attorney agreed to represent the plaintiff law firm in their claim against the IRS. The agreement stated that the attorney, if hired, "will honor the terms and conditions to be negotiated with [the plaintiff’s clients]" and that the decision to hire the attorney was dependent on the clients’ agreement. Because the client never agreed to the terms negotiated by the attorney, the court found no contract between attorney and plaintiff law firm. However, if an attorney signs an engagement letter, promising services, courts look at the "whole" engagement to determine if the attorney will be held in contempt. Even if an express contract does not exist, parties may nevertheless be found to have a contract by implication.
Key Legal Cases Illustrating Mutuality
A foundational precedent for the concept of mutuality in contracts is the 1905 Massachusetts Supreme Court case of H.L. Stevens & Co. v. Molloy. This case involved a dispute over an agreement between H.L. Stevens, a manufacturer of a type of wooden mop named "The Prestige," and Molloy, who was to distribute the mop. The agreement included a clause that the distributor would not sell any competitive products for the term of assigned sales and for two years thereafter. However, the court held this provision was invalid, as the manufacturer never fulfilled its promise to supply the product to the distributor, thus causing the contract to lack mutuality. In ruling against the manufacturer, the court referenced the rule of law that a promise cannot be enforced if the promisor does not provide and exert good faith to ensure his or her own performance.
Similarly, the New York Court of Appeals ruled in favor of a finding of a lack of mutuality in Twin Properties, v. Landmark, Realty Corp. This 1991 case concerned a real estate contract. However, the Court was faced with a similar dilemma: how to enforce a contract which provides for only one party to remain obligated to create and grant an option. Although the Court obliged, it did so with reluctance, ultimately holding that even a unilateral obligation must be backed by consideration, or the pseudo-obligation will not serve as an adequate promise upon which the other party can rely.
In both instances, the Courts’ rulings seem to within reason. However, the issues encountered when enforcement leads to loss are noteworthy. As illustrated in H.L. Stevens, above, when examining unilateral obligations, Courts may be wary of offending the "oath of good faith," conflating this with mutuality. However, a more complete understanding of mutuality would support an alternative finding: when unilateral obligations will produce a loss, those at risk should be able to claim on their promises.
A more recent case (2005 NC) analyzed an agreement made between Wake Forest University and a professor. The agreement contained an obligation to pay an annual bonus to Wake Forest University if the professor were to pass away before the end of the year. To resolve the dispute, the North Carolina Court of Appeals determined that the agreement lacked mutuality, as performance was never intended to be compelled by either party, so that the contract could never be breached by either. Nor was it possible that one party would suffer any loss.
On the other hand, although a promise must have some loss to support enforcement, a promise is nonetheless not enforceable unless it appears that the amount of loss is fairly definite. A noteworthy example of this type is Johnston v. Leslie (1913), in which the promisee sought specific enforcement for sale of sand and gravel by landowner to merchant. The Court in this instance found difficulty with the definiteness of promises made by the promisee in contrast to the imposition of legal loss, rather than assessment of an additional monetary award based on loss. The promisee’s action in obtaining gravel from the landowner had been indefinite (only covering land owned by the landowner), but would not be enforceable unless the merchant had provided a counter-promise. In this instance, the Court observed that because the merchant took gravel from land in which he did not have any ownership interest, his promise then had to be construed to be charged with a condition that the conveyance to the promisee be made only when that land was owned by the promisee, at the time of the conveyance. However, because the Court could not assume that the promisee would possess no other land which could be verifiably identified as that of the promisee, it was unable to determine the landowner’s obligation.
Although called to enforce an otherwise defective contract, the Court held that the promisee must have a promise to return gravel only from land owned by that promisee, at the time of the conveyance to the promisee. Because the contract was improper, the Court was also able to hold the seller’s promise as void.
Assessing an Agreement for Mutuality
There are two questions you must ask when testing for mutuality: is the agreement supported by consideration and does the consideration provided by the promissor benefit him in some way.
The first question is relatively straightforward. For a contract to be enforceable, something must exchange hands. It need not be $10,000 worth of goods or services; merely a deferred privilege – even one contained within the intangible consideration of a promise not to sue – will suffice.
The second question is invariably more difficult because it requires consideration of the exact nature of the return performance. On first glance, it would seem that the promissor derives no benefit from a promise to refrain from suing for a certain period of time, because he only gives the promise with the expectation that he will be able to sue successfully after the agreed-upon period is over. But, the promissor is, in fact, benefiting by saving the time, money and effort inherent in litigation.
The real test of the second question, then, is whether the promissor has gained at least a slight edge over his original position on both counts, with no possibility of being worse off than he would have been if he had never made the promise at all.
A good way to determine whether a proposed agreement meets both prongs is to consider whether a reasonable person, if faced with the option of either negotiating the proposed contract or simply remaining silent, would make the promise regardless. If the promisee would have made the promise regardless, then he has received adequate consideration, regardless of how incidental the promised benefit might be.
This system of tests works best when convenience is relatively low. In simpler transactions, it is easier to conduct background research into potential harm. The extent of the harm, however, is only one of a whole list of factors to be considered when analyzing the circumstances. For example, it is difficult to gauge the extent of party A’s potential harm if he fails to receive the specified consideration under Party B’s proposal, but easy to determine whether A would be better off under the proposal or had even little incentive to make the promise regardless of the presentation, given an understanding of the localized culture and pricing of general goods. Thus, the foregoing system is only a starting point on a path to investigating adequately a proposal.
Exceptions to the Rule of Mutuality
While most valid contracts require mutuality—meaning that each party has an obligation to perform as required by its terms—certain exceptions make a contract enforceable when it generally would not be.
Unilateral Contract
The existence of mutuality is not a prerequisite of a unilateral contract. In such a contract, one party may have a duty to perform, while the other party does not. One example of a unilateral contract would be an agreement to make a gift. Exceptionally, a unilateral contract is enforceable pursuant to the Restatement (Second) of Contracts, which states:
"(1) A promise which the promisor does not, in fact, intend to perform or which a reasonable person in the position of the promisee, knowing what the promisor knows, would not reasonably expect to be performed, is not enforceable.
"(2) A reasonable person in the position of the promisee would not so expect a performance unless the circumstances justify a belief that the promisor will perform."
For example, the court in Kingston v. Preppy Corp., 874 P.2d 803 (Utah 1994), held that the fact that the defendant did not know he was making an offer did not preclude enforcement. There , the defendant handed the plaintiff checks for two different amounts and told the accountant, "There’s your money." The court found that there was an enforceable agreement for each check.
Mutuality Without Consideration
The existence of mutuality is not a prerequisite when there is consideration other than a promise on one side in exchange for a promise on the other. Section 71(3) of the Restatement provides:
"(3) A promise or apparent promise which the promisor does not intend to induce action or forbearance and the promisee does not in fact induce action or forbearance is not within the Statute of Frauds and the rights of the promisee are governed by the provisions of the Restatement of Contracts, § 90, and not by those of this section."
A common example of this scenario occurs in options contracts, where the consideration for the sale of the option is the actual payment. The party taking the option has no ongoing obligation to purchase any property and will only benefit if the option is exercised.
Mutuality Becoming Immaterial
In some cases, a contract that originally lacked mutuality can be modified such that it becomes enforceable. For example, a lessor/lessee agreement may become mutual through ratification or waiver.
Mutuality and Contract Amendments
The concepts of mutuality and interdependence arise again when it comes to contract modifications. Generally, a modification of a contract should be supported by consideration as with the contract itself; that is, there must be a quid pro quo, something of value exchanged as part of the bargain. In the case of an existing contract, unless the agreement specifically permits a unilateral change by one party, a modification is often effective only upon mutual assent of both parties to the contract. A unilateral attempt to modify an existing agreement can cause problems for a contracting party. Assume that after signing an agreement, I find a better deal with an important supplier, one that will save me a considerable amount of money over the course of a long-term deal. I am free to pursue that option, of course, but if I try to effect a change in the existing contract to obtain that revised deal, I may be opening myself up to a breach of contract claim even if the modification is in my interest. While this may seem counter intuitive – especially where the underlying purpose of the change is beneficial to both parties – there is a simple reason for this. If the agreement between the parties does not give one of the parties power to unilaterally change the terms of the contract, such changes require new contractual consideration, and that consideration must be agreed by the other party. If I breach the original agreement as a result of trying to effect the change, my counterpart may be able to sue me for monetary damages. It is critical to understand the terms of the original agreement when attempting to seek a modification. The contract must be reviewed closely to determine if any right to change the terms unilaterally is granted.
Guidelines for Guaranteeing Mutuality
When it comes to ensuring mutuality in contracts, there are a number of strategies that can be implemented at both the drafting and reviewing stages. Below are some practical tips for best practices for lawyers and laypersons alike.
First and foremost, one should review the applicable law and confirm that the jurisdiction does not enforce a one-sided or illusory contract. Then, before executing any agreement, both the drafter and the reviewing party should take a step back and assess whether the agreement includes mutual obligations.
In contract law, it is not unusual for parties to have uneven obligations because of the nature of the agreement. For example, in a purchase agreement, the seller’s obligations are often more significant than the purchaser’s. The most crucial aspect to address is that the obligations (or an equivalent exchange) of each party are sufficiently specific so as to bind each party. For example, the agreement should clearly explain what is being bargained for and ensure that both parties are bound to the agreement in a way that neither party can terminate the contract without the consent of the other party. In contrast, a contract that gives a third party the right to terminate the agreement for any reason, or no reason at all, would probably be unenforceable (and lacking proper consideration).
Additionally, when entering into an ongoing relationship with another party , be sure to identify and outline what the expectations of the parties are for the duration of the relationship. When drafting such an agreement, be sure to include relevant price lists, time frames, obligations, or other contingencies so that expectations are clear and adhered to. The drafter should also ensure that the obligations of each party are mutually binding, meaning that neither party can unilaterally withdraw from the agreement.
Finally, when reviewing an agreement more generally, be sure to look for any language that suggests a lack of mutuality or binds only one party. For instance, phrases such as "[party] shall have the right to terminate this agreement" or "[party] may [insert action]." Often, these types of contract clauses indicate that what appears to be a contract is actually an illusory contract, or that it was not sufficiently mutual in its obligations and is therefore legally unenforceable.
In sum, be sure to always review the law on mutuality when redrafting or reviewing a contract for enforceable terms, and clearly establish what the expectations of the parties are for the entire length of the term. Additionally, requiring that all agreements be bilateral will help to protect you and your clients and/or your company against illusory or unenforceable contracts that might otherwise result in significant losses.