Exceptions to the Mutuality Rule

Terms:

Limited Promise:
A contractual promise where one party’s consideration is worth significantly less than the other party’s consideration.

Voidable Contract:
A contract that can be affirmed or rejected at the option of one of the parties.

Alternative Promise:
A contractual promise, made by the promisor, to do one of two or more things, any one of which can satisfy the promisee for the action or promise he gave in return for the initial promise.

Implied Promise:

A promise that is never actually expressed by the promisor but is created by law so as to render a person liable on a contract in order to avoid fraud or unjust enrichment.

Requirement Contract:
A contract in which the seller promises to supply all the goods or services that a buyer needs during a specific period and at a set price.

Output Contract:
A contract in which a buyer promises to buy all of the goods or services that a seller can supply during a specified period and at a set price.

The rule that a contract must be supported by mutual consideration (consideration from each party), sometimes known as the "mutuality" rule, does have exceptions.

The first exception is for unilateral contracts.

Mutuality of obligation is required only for bilateral contracts, that is, contracts in which a promise is exchanged for another promise. A unilateral contract, where a promise is exchanged for an act, does not require mutuality. For example:

Ben promises to pay Jerry $20 if Jerry mows Ben’s lawn. Ben makes it clear to Jerry that Ben is trading his promise of $20 for Jerry’s actual mowing of the lawn and not just a promise to mow the lawn. This is a classic unilateral contract. Notice, however, that only one party, Ben, is bound by this agreement. Ben is bound by the contract to pay $20 if Jerry mows the lawn. Jerry, on the other hand, is not bound by the agreement because, since he never promised to mow the lawn, he doesn’t have to do it if he doesn’t want to. However, because the mutuality of obligation rule does not apply to unilateral contracts, if Jerry mows the lawn and then Ben refuses to pay him, Jerry will have a viable cause of action and Ben will not be able to argue that Jerry was never bound by the contract.

The difference between a unilateral contract and an illusory promise is that when a bilateral contract has an illusory promise in it, one party is bound by his promise while the other party has made an empty promise which does not bind him. That being said, the party who is bound is required to perform an action or provide a service, while getting nothing back in return. In a unilateral contract, while Ben has made a promise and Jerry has not, Ben receives a benefit if Jerry actually mows the lawn. If Jerry does not mow the lawn, Ben doesn’t have to pay the $20.

The second exception to the mutuality rule is made for limited promises.

If a real promise is made, no matter how limited the promise is, lack of mutuality is not a defense to breach of the contract. See Lindner v. Mid Continent Oil Corp 252 S.W.2d 631 (Ark. 1952). For Example:

The Boston Red Sox give Ramon Garcia a three year contract and also give Garcia an option to renew the contract for 2 more years. Thus, the Red Sox are bound for up to five years on the contract. However, the contract also gives Garcia the right to terminate the contract at any time with 30 days notice. During the first month of the season, Garcia does not play well and the Red Sox try to terminate the contract claiming lack of mutuality as a defense. In such a situation the Red Sox will lose, because Garcia is actually bound by the contract for a minimum of 30 days. Thus, this is a real promise, and because it is a real promise, lack of mutuality will not serve as a defense, even though the Red Sox are bound for up to five years while Garcia can get out of the contract after only 30 days.

The third exception to the mutuality rule is for voidable contracts.

A voidable contract is a contract in which one party is bound while the other party can render the contract void at any time. In this situation, the party that can void the contract can enforce the contract against the other party but the other party cannot enforce the contract against him. For example:

The Boston Red Sox offer Ramon Garcia a five year $20 million contract to play baseball for them. Garcia signs the contract, but, at the time, he is only 17 years old. This contract is voidable by Garcia on the grounds of infancy. Therefore, while Garcia can enforce the contract against the Red Sox, the Red Sox cannot enforce the contract against Garcia. That being the case, Garcia can render the contract void and not be bound by its terms if he so chooses. Thus, even though there is no mutuality, the contract is valid so long as Garcia wants it to be.

There are several grounds for making a contract voidable. One of them is if one of the parties is below the age of majority, that is, 18 years old.

The difference between a void contract and a voidable contract is that a void contract is a contract that never had any legal effect, while a voidable contract is a valid contract that can be rendered void by one party if that party so chooses.

The fourth exception to the mutuality rule is for conditional promises.

A conditional promise is a promise that the promisor must perform but only if a specified condition occurs. This is considered a real promise because, if the condition does occur, the promisor must perform his promise and has thus limited his future options. For example:

Ben promises to buy Jerry dinner if the Red Sox win the World Series. This is a conditional promise because Ben only has to fulfill his promise if a specific condition occurs. However, even though there is no mutuality of obligation, this is a real promise because if the Red Sox actually win the World Series, Ben must buy Jerry dinner.

Conditional promises are valid even if the fulfillment or frustration of the specified condition is within the promisor’s control. For example:

Ben promises Jerry that, if Ben ever buys an ice cream corporation, Ben will make Jerry the general manager. This is a conditional promise, because Ben only has to fulfill his promise if he actually buys an ice cream corporation. However, in this case, the fulfillment or frustration of the condition is completely within Ben’s control because he can choose not to buy an ice cream corporation. Despite this fact, this is considered a valid contract.

The fifth exception to the mutuality rule is for alternative promises.

An alternative promise is a promise in which the promisor can fulfill the promise by choosing between two or more alternatives. For example, Ben promises that if Jerry baby sits Ben’s kids, Ben will either paint Jerry’s house or wash Jerry’s car. The general rule concerning alternative promises is that they will only be considered valid if each alternative that the promisor can choose from would have been adequate consideration had it been the only option the promisor could have used to fulfill his promise. For example:

Ben promises Jerry that if Jerry babysits Ben’s children, Ben will either wash Jerry’s car or paint Jerry’s house. This is a valid alternative promise because both of Ben’s choices, either washing Jerry’s car or painting Jerry’s house would have been valid consideration had they been bargained for on their own. In other words, there would have been a valid contract had Ben promised to paint Jerry’s house if Jerry watched Ben’s kids and there also would have been a valid contract had Ben promised to wash Jerry’s car if Jerry watched Ben’s kids. Therefore, each of Ben’s options is valid on its own. Thus, if you put them together so that Ben promises to either wash the car or paint the house if Jerry babysits Ben’s kids, both options are valid consideration and the contract is enforceable.

However, if any one of the promisor’s options is not valid consideration, the whole contract is void. For example:

Ben promises Jerry that if Jerry watches Ben’s children, Ben will either paint Jerry’s house or he will break into the local memorabilia shop and steal the Jackie Robinson baseball card that Jerry has always wanted. In this case, Ben has one valid option for consideration and one invalid option for consideration (illegal activities can never serve as the basis for valid consideration). However, because one of Ben’s options is invalid consideration, the whole contract is considered invalid even though Ben has a valid option available to him.

Thus, either all of the promisor’s options are valid consideration or none of them are valid consideration. Even if Ben had one hundred options to choose from for fulfilling his promise, if one of them was considered invalid as consideration the contract will fail despite the fact that all other ninety-nine options would ordinarily have been valid.

However, this rule only applies where the promisor has the choice of options. However, where the promisee has the option of choosing how the promise will be fulfilled, an alternative contract will be considered valid as long as at least one of the options is valid consideration. For example:

Ben tells Jerry that if Jerry watches Ben’s kids, Ben will either paint Jerry’s house, wash Jerry’s car, or break into the local memorabilia shop and steal the Jackie Robinson baseball card that Jerry has always wanted. Under the terms of the contract, Jerry can choose which option he wants as repayment. In this case, because Jerry, the promisee, has the option of choosing how Ben’s promises will be fulfilled, this contract will be valid because, when the promisee has the option of choosing from a number of alternatives, the contract will be valid as long as at least one of the alternatives is valid for consideration.

The sixth exception to the mutuality rule is for agreements which allow one party to determine a material term of the contract.

Sometimes agreements leave open certain terms like price or quantity and allow one of the parties to determine that term. For example:

Sunshine Orange Groves and Squeeze Me Juice Co. enter a contract in which Squeeze Me agrees to buy 5,000 bushels of oranges a week from Sunshine. However, the price is left out of the contract and the contract allows for Squeeze Me to determine a price at some point in the future.

Under common law a promise was considered illusory if a material term was left out.

However, modern law has made some exceptions to the common law here.

(1) If one party has the power to determine a material term but must determine that term in relation to an objective measure (ex: market price) then the contract will be held valid. Therefore, if Squeeze Me is allowed to determine what price they will pay for the oranges, but they have to use the market price of oranges as a guide to determining the contract price, this contract will be considered valid.

(2) Where material terms are set in the contract but one party has the power to either alter or modify the material terms, the contract will still be valid as long as the modifications are made in good faith.
Thus, where Squeeze Me and Sunshine have established a price of $3 per bushel and Squeeze Me has the power to alter or modify the terms of the agreement, it is understood that they will modify the terms in good faith (so they may change the price from $3 to $2.90 a bushel but not from $3 to $.60 a bushel).

(3) Where material terms are left out of the contract and neither party is given the right to determine those material terms, the contract is nevertheless considered valid because the court will fill in the missing material terms if the contract is not too indefinite to enforce.
Thus, if Squeeze Me and Sunshine do not agree on a price, but neither Squeeze Me nor Sunshine has the right to determine price on their own, the court will fill in the price.

The seventh exception to the mutuality rule is made for implied promises.

An implied promise is a promise that is never actually expressed by the promisor, but can be implied based on what the promisor and the promisee have contracted for.

This typically comes up in what is called “best effort” cases. For example, where one company agrees to market another company’s product, the implied promise is that the company will use its best efforts to market the product. For example:

The Moo Juice Dairy Company has hired Add It Up Advertising Incorporated to market Moo Juice’s new brand of chocolate milk. The contract gives Add It Up the exclusive right to market Moo Juice’s chocolate milk. In this situation although the contract does not specifically require Add It Up to use its best efforts to market the chocolate milk, there is an implied promise in the contract that Add It Up will use its best efforts to market Moo Juice’s milk. Therefore, in the event that Moo Juice sues Add it Up for not using its best efforts, Add It Up cannot claim as a defense that there was nothing in the contract requiring them to do so. See Wood v. Lucy Lady Duff Gordon 222 NY.88 (1917). Also see UCC Sec. 2-306 (2)

The eighth and final exception to the mutuality rule is for requirement and output contracts.

In a requirement contract, the buyer agrees to buy all of what he needs of a certain product from the seller.

For example: A contract in which Squeeze Me Juice Co promises to buy all of the oranges it needs from Sunshine Orange Groves is a requirement contract.

In an output contract, the seller agrees to sell all of his production of a specific product to the buyer.

For example: A contract in which Sunshine promises to sell all of the oranges it grows to Squeeze Me is an output contract.

Under the common law, requirement and output contracts were invalid as illusory.

In a requirement contract where the buyer promises to buy all that he needs from the seller, there is no requirement that he need any of the product. Similarly, in an output contract where the seller promises to sell all that he makes to the buyer, there is no requirement that he make anything. Thus, under the common law, there was no adequate consideration.

Today, requirement and output contracts are enforceable because the parties to the contracts do, in fact, limit their options. If the buyer in a requirement contract wants to buy any of the product in the contract, he must buy it from the seller.

Thus, while Squeeze Me does not have to buy oranges under the contract, if they choose to buy oranges they must buy them from Sunshine. Conversely, in an output contract where the seller is not required to make any of the product, if he does make any of the product he must sell it to the buyer. Thus, while Sunshine is not required to grow any oranges they must sell whatever they do grow to Squeeze Me.

According to the U.C.C. 2-306 (1), output and requirement contracts are enforceable. However, the U.C.C. does lay out three major rules that govern these contracts.

(1) The U.C.C. sets down an obligation of good faith which requires the party who has the right to determine the quantity under a requirements or output contract to do so in good faith and according to commercial standards of fair dealing in that particular area of business.

(2) Where one party has the right to set the quantity in a requirement or output contract, the U.C.C. says that the quantity offered under the contract cannot be unreasonably disproportionate to any estimate that has been made, and, where estimates have not been made, the output or requirement cannot be unreasonably disproportionate to any comparable previous requirement or output contract.

In other words, where Squeeze Me and Sunshine enter into a requirement or output contract where the quantity is not set, but the parties estimate that Squeeze Me will need roughly 1,000 bushels of oranges per week, the party that fills in the term for quantity has to base itself on the estimate so that a quantitative term of 1,100 bushels a week might be okay, but a quantitative term of 2,000 bushels per week would be unreasonable.

(3) The U.C.C. establishes that, where parties enter an output or requirements contract, there is an implied promise that the party who is bound by the contract will remain in business. However self defeating it might sound, it is always possibly that a buyer will try to get out of a requirements contract or a seller will try to get out of an output contract by simply going out of business. The U.C.C. establishes that if a buyer or seller goes out of business specifically to avoid their requirements under an output or requirements contract they are in breach of the contract. However, if the party goes out of business for reasons that have nothing to do with the particular output or requirements contract they made, they are not in breach.

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