Key Takeaways

  • Mutuality of obligation means both parties to a contract must be bound to perform; otherwise, the contract may be unenforceable.
  • Courts often look at employment disputes (e.g., unfair dismissal of casual or gig workers) to determine whether mutuality exists.
  • Case law highlights how courts interpret mutuality differently depending on the facts—particularly in employment, independent contractor, and unilateral contract scenarios.
  • Exceptions exist, including unilateral, conditional, alternative, and requirement/output contracts that do not require mutuality.
  • Lack of mutuality can make a contract illusory, but doctrines like implied promises or promissory estoppel may preserve enforceability.
  • Understanding these principles helps employers, contractors, and businesses avoid unenforceable agreements.

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.

Case Law on Mutuality of Obligation

Courts frequently examine mutuality of obligation in employment disputes and contract enforcement cases. Some leading examples include:

  • Ready Mixed Concrete Ltd v Minister of Pensions (1968): This case set out the test for employment contracts in the UK. One key element was whether mutuality of obligation existed—specifically, whether the employer was obliged to provide work and the worker obliged to accept it.
  • Carmichael v National Power plc (1999): Casual workers argued they were employees, but the court found no mutuality because the employer was not required to offer work and the workers were not required to accept it.
  • Nethermere (St Neots) Ltd v Gardiner (1984): The court found home workers were employees because, over time, the pattern of offering and accepting work created sufficient mutuality of obligation.
  • US case law (e.g., Apfel v. Prudential-Bache Securities, New York): Courts emphasize that both parties must be bound to perform; otherwise, the promise may be considered illusory.

These cases show that the presence—or absence—of mutuality often determines whether a worker is classified as an employee or independent contractor, and whether a contract is enforceable at all.

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.

Mutuality of Obligation vs. Consideration

Although related, mutuality of obligation and consideration are distinct doctrines.

  • Mutuality of obligation asks whether both parties are legally bound to perform promises.
  • Consideration requires that something of value be exchanged between the parties.

A contract may fail for lack of mutuality if one party’s promise is too indefinite or discretionary. However, courts may uphold it if consideration is otherwise present, such as when an implied promise creates enforceable duties.

For example, in requirement and output contracts, the promise to buy “as needed” might seem one-sided. But courts often enforce them if good faith obligations exist, because consideration flows through the exclusivity of the arrangement.

Practical Implications in Employment and Business

Mutuality of obligation has major implications for:

  • Employers: If mutuality exists, workers may gain employment rights such as redundancy pay, holiday leave, or protection against unfair dismissal.
  • Contractors and freelancers: Without mutuality, agreements are often categorized as independent contracts, limiting tax obligations but also reducing employment protections.
  • Business agreements: In commercial deals, ensuring each party is bound prevents disputes over unenforceable “illusory” promises.

Employers and businesses should ensure contracts clearly set out reciprocal duties. Vague or optional obligations can undermine enforceability and create legal risk.

Doctrines Supporting Enforceability

Even where mutuality of obligation appears weak, courts sometimes enforce agreements using related doctrines:

  • Implied promises: Courts may read obligations into contracts to avoid unjust enrichment or fraud.
  • Promissory estoppel: If one party reasonably relies on another’s promise, courts may enforce the agreement despite lack of mutuality.
  • Partial performance: In some cases, beginning performance can make an otherwise nonbinding promise enforceable.

These doctrines show that while mutuality is a core principle, courts balance fairness and reliance when deciding enforceability.

Frequently Asked Questions

  1. What does mutuality of obligation mean in contract law?
    It means both parties must be legally bound to perform their promises. If only one party is bound, the contract may be unenforceable.
  2. Is mutuality of obligation required in every contract?
    No. Exceptions include unilateral, requirement, and output contracts, as well as situations where implied promises or reliance support enforceability.
  3. How does mutuality of obligation affect employment contracts?
    It determines whether a worker is considered an employee. If an employer must offer work and the worker must accept, mutuality likely exists, supporting employee status.
  4. Can a contract without mutuality still be enforced?
    Sometimes. Courts may enforce it under doctrines like promissory estoppel, implied promises, or if one party has partly performed.
  5. What happens if a contract lacks mutuality?
    It may be considered illusory and unenforceable, leaving parties without legal recourse if obligations are not met.

If you need help with mutuality of obligation, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.