What Constitutes Mutuality of Obligation?

An obligation legally requires a person to do something specific in the future. An individual or business can opt to do work without being under a legal obligation to do so. For example, if one party promises to pay another party if work is done by the latter, no legal obligation exists. If the party does do the work, however, the other party is obligated to provide payment as agreed. This type of arrangement is called a unilateral contract.

In general, the following statements apply to mutuality of obligation:

  • An employment contract (contract of service) cannot exist without mutuality of obligation.
  • Both a one-time contract for a project that will take a few hours and an ongoing contract for employment fulfill mutuality of obligation and thus can be considered employment contracts depending on other factors including:
    • The opportunity to profit
    • Whether the relationship is continuous
    • Whether the worker contracts with one or many businesses
  • Usually, if a worker has one long contract, it is more likely to be considered an employment contract than if he or she has many contracts for one-off projects with the same employer.
  • However, many one-time projects for the same employer is more likely to be considered contracts of service than many such projects for different employers.

An employee should not necessarily assume that a one-off contract is not an employment contract under any circumstances. However, it's important to establish whether or not a contract of services exists because of the tax obligations of this type of agreement.

Lawsuits involving unfair dismissal of casual workers often hinge on the concept of mutuality of obligation. With this type of arrangement, the worker is on call and is willing to accept or decline the work offered on a given day. Neither party is obligated to the other. However, if the company stops offering employment to that worker, he or she may attempt to sue for unfair dismissal.

In order to succeed in this type of case, the worker in question typically has to be employed for at least a year continuously by the company. However, in most instances, the court finds in favor of the company because no mutuality of obligation exists.

Exceptions to the Mutuality Rule

Various exceptions to the mutuality rule are recognized by the court. In understanding these exceptions, it's important to know the following terms:

  • A voidable contract is one in which one party has the option to affirm or reject.
  • A limited promise exists when one party offers significantly less consideration than the other party.
  • An implied promise is one that is never expressly stated but is created legally to create liability to prevent unjust enrichment or fraud.
  • An alternative promise is one in which an individual promises to do one of several things, any of which will satisfy the contract once completed.
  • A requirement contract exists when the seller promises to provide the buyer with all of its necessary goods and services at a set price for a specific time period.
  • With an output contract, a buyer promises to buy whatever goods or services are provided by a seller during a specific time period at an agreed-upon price.

Exceptions for mutuality of obligation include:

  • Unilateral contracts, as described above, do not require mutuality.
  • Limited promises also constitute an exception.
  • Voidable contracts are not subject to mutuality. With this type of contract, one of the parties can opt to void it at any time. This occurs if one of the parties to the agreement is younger than age 18. While a void contract is invalid, a voidable contract is legally enforceable as long as both parties opt to abide by it.
  • A conditional promise is one that must be performed only if specific conditions exist.
  • Alternative promises are not subject to mutuality. However, if any of the options do not constitute consideration, the contract is not valid.

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