Mutuality of Obligation in Contracts: Everything You Need to Know
Mutuality of obligation in contracts refers to the requirement that all parties involved in a contract agree to the same terms.3 min read
2. Legal Ramifications of Mutuality of Obligation
3. Exceptions to the Mutuality Rule: Unilateral Contracts
Mutuality of obligation in contracts refers to the requirement that all parties involved in a contract agree to the same terms.
What Is Mutuality of Obligation?
Also referred to as a "meeting of the minds," mutuality of obligation requires that everyone signing a contract agree to the specifics outlined in its terms. Demonstration of mutuality of obligation happens when one party makes an offer and the other party accepts that offer.
Mutuality of obligation is closely related to the idea of consideration. Under the rule of consideration, both parties in a contractual agreement must perform the obligations outlined. If either party fails to meet its obligations, the law treats the agreement as invalid, which means neither party must perform the duties.
When someone making an offer and someone accepting an offer each make promises to handle certain obligations, neither can have the unlimited option to void the contract. When this option is available, one party tends to perform the obligations at their leisure, without any changes to the other party's obligations to perform their duties.
Legal Ramifications of Mutuality of Obligation
In a court, a contract with an option to fail to perform the listed obligations will typically be voided due to lack of mutuality of obligation. The lack of consideration to both parties is another reason that this type of contract would be voided. If one party has the power to cancel or void a contract, no legal repercussions exist for failing to deliver on the promises made.
When drafting and signing a contract, all involved parties must limit the discretion to not perform on the agreed-upon terms or cancel the contract to prevent it from being invalidated. A court will typically find the existence of mutuality of obligation when the terms to cancel the contract depend on an event or condition outside the control of the party seeking to cancel.
For example, if a farmer has a contract with a third-party watering service, he might have a legal right to cancel one instance of that service if the contract included conditions based on rainfall in the area. Since the amount of rainfall is outside the control of the farmer, including this reason to cancel could still be considered mutuality of obligation. However, if the contract outlined the farmer's right to cancel service for any reason before the term of the contract was up, this would not be considered mutuality of obligation.
When two parties sign a contract, this action represents a mutual obligation to one another. Without the obligation, a court will not consider a contract to be a legally binding agreement. However, there are several exceptions to the requirement for mutuality.
Exceptions to the Mutuality Rule: Unilateral Contracts
The requirement of mutuality of obligation only exists on bilateral contracts, or contracts that involve two or more parties making promises to one another. When a contract is unilateral or outlines a promise in exchange for an act, mutuality is not required.
In one example, John promises a payment of $30 to Bryan in exchange for mowing the lawn. When John makes this promise to Bryan, he makes it clear that the payment of $30 is in exchange for the act of mowing the lawn, not just a promise to mow the grass. This example of a unilateral contract binds both parties, but they are not making a promise in exchange for another promise. Only John is bound by the agreement because he is the only one making a promise.
If Bryan chooses not to mow the lawn, he will not receive the $30. Bryan isn't bound by the agreement because it is up to him whether he wants to mow the lawn or not. However, John is bound to pay the $30 if Bryan fulfills his end of the agreement by mowing the lawn. Since this is a unilateral contract example, mutuality of obligation doesn't have to exist. However, it can still be a legally binding contract, so if Bryan does mow the lawn and John doesn't pay him, Bryan could take legal action.
The main difference between an illusory promise and a unilateral contract is the legal binding between the parties. If a bilateral contract contains an illusory promise, only one party is bound while the other party made a promise that isn't binding.
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