What is Mutuality of Contracts?
Mutuality of contracts refers to the existence of reciprocal binding obligations in each party’s execution of the contract. Not surprisingly, it is a necessity for an enforceable contract.
Contracts in their basic form, require an offer to be made by one party, which the other party accepts. However, unconscionable, vague, unreasonable, or unclear offers and acceptances will oftentimes lead to problems down the road with the enforcement of contracts .
Mutuality of contracts requires that each of the parties to the contract be legally bound to doing something, which means that the agreement must not be ambiguous or uncertain, and all possible conditions must clearly and adequately be able to be fulfilled.
Essentially what this means is that in order for a contract to be enforceable, there must be a clear subject matter in the agreement within the abilities of the parties. The parties must have the capacity to fulfill the terms of the agreement, and the parties must have properly accepted the obligations of the contract.
Legal Rules Regarding Mutuality
Contractual obligations depend on the formation of an agreement including a mutuality of obligation. The parties must agree on the performance of contractual obligations in order for the contract to be enforceable. There are legal requirements for mutuality of obligation as well as conceptual requirements.
The legal requirements for mutuality of obligation include:
(i.) equivalent values are exchanged;
(ii.) the parties have equal rights under the contract; and
(iii.) the parties will be bound by the same obligations.
In most cases, the parties pay a price, or provide a service, and receive value in return for that service or price. A more complicated contract may involve the exchange of obligations instead. Because mutuality of obligation is so important, the cardinal principle is that you can’t share a bargain with someone else without their approval or consent.
In general, a contract must involve a mutual assumption of continuing obligations for the agreement to be enforceable. The rights that are reserved, or the obligations that will persist, are what binds the parties to the agreement. Mutuality of obligation requires both parties to have an agreement that they will be bound by the terms of the contract. In addition, if a contract has conditions that are not satisfactory to the party required to perform the obligations under the contract, that party can choose to perform the obligations despite the unsatisfactory conditions.
Mutuality of obligation and the bilateral nature of contracts can be best understood in the context of legally enforceable unilateral and bilateral contracts and the resulting rights and obligations between contracting parties.
Examples of Mutuality in Contracts
When entering into any contract, mutuality of obligation is essential for the contract to be enforceable. In essence, mutuality of obligations means that both parties need to be required to perform their obligations to each other. Failure by one party to perform an obligation does not excuse performance by the other party.
Whether a binding contract has been formed depends on whether the obligation to perform has been imposed on the parties. It is helpful to consider a few examples below.
The facts of the case were that the defendant advertised in a national newspaper to sell a vintage Ferrari for £1. A total of 47 people accepted the offer to buy the car for the stated £1. The owner of the car responded by letter to each individual accepting their offer to buy the car, however instead also stating that the successful purchaser would also be required to pay VAT of 62,000. It was deemed that the defendant’s initial advertising, as a unilateral offer, was capable of being accepted by payment of the £1 into a bank account within seven days. Acceptance would have to be complete and correspond with the terms set out in the advertisement. The defendant’s letters were not offers but were mere invitations to treat and did not form contractual relationships.
The facts of the case were that the employer and the employee agreed that the employee was entitled to a month’s salary in exchange for one month’s notice. The offer by the employer was made and corresponded precisely with the agreement between the two parties as stated above but a counter-offer was made by the employee saying that he would only accept the monthly salary in return for two months’ salary. The employee was claiming that they had a variation of the original agreement. However, because the employee did not perform his side of the agreement by giving a full month’s notice, the clause could not be enforced.
The case involved the sale of land whereby it was agreed at a handshake that the seller would not sell the land to his neighbour but only to the claimant. The claimant believed there to be a binding contract and attempted to take legal action against the seller for breach of contract and an injunction in specific performance. The seller was found to be under no obligation to proceed with the conveyance of land at a future date because there was no acceptance of the offer by any act that required that the offer should be kept open and so the parties were free to bargain for an alternative price or to withdraw from negotiations.
The facts of the case were that a telephone conversation led to an agreement whereby one party agreed to supply equipment to the other for a certain price. Despite the discussion being recorded by employees of the supplier, the disclosure of the tape was regarded as being no more than that of a transcript of privacy. The requirement for the protection of records such as these were set out under the Data Protection Act 1998 however in this case there was no mutuality of obligation and so the contract could not be enforced.
Impact of Deficient Mutuality
In the event of a contract void for lack of mutuality, the consequences are severe. The benefits conferred to the offending party by any service performed pursuant to said agreement must be returned. Peters v. North Coast Journal, Inc. (2016) 2 Cal. App. 5th 1183, 1188.; cf. Cal. Civil Code § 1689(b)(1); Meyer v. Napolitano (N.D. Cal 2010) 756 F. Supp. 2d 113. The offending party may not offset any benefit it received by claiming compensation for damages suffered as a direct or indirect result of the other party’s breach of it. Peters v. North Coast Journal, Inc., supra, 2 Cal. App. 5th at p. 1188. And it may even be left on the hook for the prevailing party costs of the prevailing party in an action on the agreement. See Meyer v. Napolitano, supra, 756 F. Supp. 2d at p. 120-121.
In the first case cited above, Peters v. North Coast Journal, Inc, the trial court reversed its earlier order granting unpaid invoice debt collection based exclusively on Mutuality of Contracts . Peters litigated the alleged agreement sin this action that were part of – or entirely identified by – an agreement to pay his sister’s invoices for a ny freelance work she performed at the behest of the debtor. Id. at pp. 1183-1184. The Court of Appeals found that the enforcement of the agreement as a whole was barred by the absence of mutuality. Id. at pp. 1184-1185.
Conversely, the second case cited above at 756 F. Supp. 2d 114 also addresses the enforcement of an agreement without mutuality, but permits partial enforcement of the agreement as to said offending party’s obligation and liability to defend regarding part of any indemnity claimed by said offending party’s client. Id. at p. 120-121. The court did so out of allowance for the offending party’s nonrefundable retainer fee within said offending parties’ contractual scope of mandatory care, and its exercise of discretion to refrain from forfeiting said retainer in spite of the lack of mutuality in the contracts at issue. Id. at pp. 119-120.
How to Ensure Mutuality in Contracts
Courts may interpret the failure to provide mutuality of contract against a drafter, particularly where the drafter is a non-consumer party. Even if all parties are non-consumer parties, like construction projects, courts may decide that "what the parties clearly had in mind was a contract of mutual, bilateral obligations, not a unilateral one."
For these reasons, it is important for everyone to ensure that they’re leaving no room for doubt when drafting and executing contracts. Practically, there are several things that can be done to ensure mutuality of contract:
- Use the terms "agree," "consent," "promises" or "each party agrees." Avoid using "offer," "will," "may," and "shall."
- If signatures are required, review them to ensure that the proper individuals are signing, using their correct title.
- Set forth precise terms of approval or objection to avoid the possibility of ambiguity.
- Avoid discretion or qualification that would exclude an agreement.
- Use numbered paragraphs with clear information about each parties’ specific performance obligation.
- Provide clarity in the material term of the agreement with respect to the parties’ mutual performance.
In the event that a party has acted on the performance of the contract based upon an agreement that has changed significantly from the original, there may be circumstances under which enforceability of that agreement would not be allowed.
Recent Legal Cases
While the concept of mutuality of contract is ancient, recent decisions suggest that modern courts are wrestling with the implications of the rule in light of post-formation changes to the terms of a contract or performance. In particular, where a contract requires performance under circumstances other than those contemplated at the time of contracting, modern decisions highlight a tension between the rule that all terms and conditions must be reciprocal in order for a contract to be enforceable, and the possibility of an award of damages in order to mitigate against unjust enrichment. For example, in Acoustics, Inc. v. Trevino, 610 S.W.3d 698, 708 (Tex. App. – San Antonio 2020 , no pet.), the court rejected the notion that a contract was mutually binding when a party was granted an unrestricted right to terminate the contract within six months, noting that "to allow a contract to remain mutually binding when it can be unilaterally terminated at any moment would transform it into what essentially would be an illusory promise." Similar results were reached in Natili v. ExxonMobil Corp., 447 F. Supp. 3d 473, 482 (E.D. Tex. 2020); Ulrich v. Kern County Bd. of Supervisors, 80 Cal. App. 5th 1001, 1020, review denied (Cal. 2020); and Motors Ins. Corp. v. Sisk, 2019 WL 6886927, at *2 (Tex. App. – Austin 2019, pet. denied) (applying Texas and California law).