The Requirement of Mutuality of Consideration

Mutuality of Consideration

            Consideration comes in numerous forms. An adequate form of consideration may be a promise or a performance. There is adequate consideration even if the deal is not “fair” or the exchange is not for fair market value. However, the general rule is that unless both parties to a contract are bound to perform, neither party is bound.[1] That is, there must be mutuality of consideration or the contract is unenforceable for lack of consideration. A contract is “illusory,” and thus unenforceable, when only a single party is bound by it. For example, a promise to purchase all of the goods that the promissor “wants” from a promisee is illusory because the promissor is not bound to purchase anything unless she wants them.

            There are many exceptions to the mutuality doctrine. Some of these are actual exceptions, while others only appear to be exceptions at first glance. We will go through several of these, in turn.

Exception #1: Requirements and Output Contracts

            A requirements contract is a promise from seller to a buyer that the seller will provide all the specified goods or services that the buyer requires. For example, if dairy farmer Ben agrees to provide Doug, who owns a small grocery store, with all the yogurt Doug needs for his supermarket for the next 12 months at a specified rate, this is a requirements contract, because Ben is agreeing to provide Doug with sufficient goods to meet his requirements.

An output contract is a comparable circumstance, but is the other side of the coin. Here, the buyer agrees to purchase everything that the seller can produce at a given rate. If, instead of owning a small grocery store, Doug owned a chain of major grocery stores, and his need for Ben’s yogurt was greater than what Ben court produce, he might agree to purchase all the yogurt than Ben could produce at a given rate. This is an output contract, because Doug is agreeing to purchase Ben’s entire output.

Both types of contracts could be considered illusory because the agreements only bind one party. In the requirements contract example, only Ben is bound. Theoretically, Doug could fail to demand a single order. In the output contract example, only Doug is bound. Again, theoretically, Ben could fail to produce any yogurt.

Nevertheless, these contracts are considered enforceable. It should be noted as well, that in either of the above examples, courts may infer the responsibility of the “non-bound” party to produce (or consume, as the case may be) a reasonable amount is required by “good faith.” Good faith, as we’ll see, is an implicit responsibility inherent on every party to an agreement.

Exception #2: Conditional Promises

            A conditional promise is a promise subject to the occurrence of a specific event before the promisor is obligated to perform. A conditional contract is enforceable as long as the party subject to the condition does not have a complete control over whether the condition is fulfilled.

            If Cindy, for example, agrees to give Bobby an umbrella “only if it rains on Tuesday” in exchange for five dollars today, this agreement is enforceable. Well it’s possible that Cindy will not have to perform under the agreement, the condition is beyond her control. Most insurance contracts work and similar manners. A life insurance company is required to pay out only if the insured dies. The insurance contract is nevertheless supported by mutuality of consideration, because the insurance company does not have control over whether the insured dies.

            On the other hand, assume that Cindy had agreed to give Bobby an umbrella “only if I remember to bring it on Tuesday” in exchange for five dollars today. Here, the occurrence of the condition is entirely within Cindy’s control. She can decide whether to “remember” to bring the umbrella on Tuesday. Therefore, she is not bound by anything outside of her control. Her promises therefore illusory in the contract is unenforceable due to lack of mutuality of consideration.

Exception #3: Right to Cancel or Withdraw

            A contract lacks consideration if there is a right to cancel or withdraw from the contract at any time. But, valid consideration exists if the right to cancel or withdraw is in any way restricted.

            For example: Ryan has the right to cancel or withdraw from his contract to purchase computer programs from Intel only if he provides Intel with a sixty-day written notice. This contract contains valid consideration. If Ryan had the right to cancel at any time and for any reason, then his promise would be illusory and the contract would be unenforceable.

            This is only an apparent exception to the mutuality rule. Because there is a requirement of notice or some other requirement, the party with the right to cancel is bound by the agreement. Therefore, there is mutuality of consideration.

Exception #4: Best Efforts Implied Promise

            A promise can be implied even if it’s not expressed. A classic example occurs in the case of the implied requirement to give best efforts inherent in a marketing agreement.

            For example: Wood and Gordon agreed that Wood shall market Gordon’s clothing line in exchange for one-half of the net profit from sales. Gordon later wants to dissolve the contract and claims that the contract was never supported by consideration because Wood was not bound by the agreement. He had the option to simply not engage in any marketing activities and, while he may fail to collect sales revenue, he would not have any liability to Gordon.

            The court, however, rules that although unstated, Wood had an implied responsibility to use his good faith best efforts to market Gordon’s clothing line. If he failed to do so, he could be sued for breach of contract.[2] Because Wood owed this implied duty of good faith, he was bound under the agreement. As such, Gordon’s promise of the 50% of the net profits was supported by consideration and was enforceable.[3]

            This is another scenario of an apparent exception to the mutuality rule only. Because the duty to use best efforts is implied and is enforceable, both parties are bound by the agreement and there is mutuality of consideration.

Exception #5: Voidable Promises

            A voidable contract is a contract that is unenforceable due to some operation of law. For example, most contracts between adults and minors under the age of 18 cannot be enforced by the adult against the minor. The contract is voidable. Because the minor is not bound, the promise has the effect of being illusory. Nevertheless, the contract can be enforced by the minor against the adult even though the minor is, due to applicable law, not bound by the agreement. This is an exception to the rule of mutuality of consideration.

Exception #6: Unilateral Contracts

            The unilateral contract is a promise in exchange for performance. The most common example of the unilateral promise is a reward offer. A promise to give a reward of $100 to anybody who finds a lost pet does not anticipate a promise in exchange. Instead, whoever achieves the performance is entitled to the reward. There is no mutuality of consideration, because there’s only one promise and only one party that is binding. Nevertheless, unilateral contracts are exceptions to the rule mutuality of consideration and are enforceable.

Exception #7: Right to Choose Among Alternative Promises

            The right to choose among alternative promises is a promise which allows the promisor to satisfy the promise by choosing from one of several alternatives.

            For example: Jack promises Jill that if Jill fetches him water, Jack will either pay Jill $50 or take Jill to a movie, at Jack’s option. Because both options constitute consideration, even though Jack will get to choose which one he fulfills, there is mutuality of consideration and the contract is enforceable.

            While this presentation did demonstrate certain scenarios in which mutuality of consideration is not necessary, typically, mutuality of consideration is necessary for an agreement to be enforceable. Mutuality is not always apparent and may be implied by the circumstances or applicable rules, but as a key mechanism by which to ensure that the fundamental contract elements of consideration is there to make the contract enforceable.