Illusory Contracts and the Concept of Mutuality


(I host a review session in Charney 338 on Wednesdays at 5pm. Join us!)

This is a long post so:
Tldr; If your client needs you to get them out of some ass-backwards contract they stumbled into, your point of attack is to prove the contract is illusory. How? lack of  mutuality and lack of valid consideration are your best friends.

Off-topic rant: I don’t understand why we’re starting at the end of the contract formation process. Tonight I discovered that the reason why we’re all struggling with these topics is because we skipped over the most basic step to learning contracts: What the hell are they?

To understand mutuality (and consideration), we need to first understand the difference between unilateral and bilateral contracts (yes, our book doesn’t mention any of this but bear with me).

Unilateral Contracts

A ——-> B

Typically, when we think of contracts, we’re actually imagining bilateral contracts. With unilateral contracts, the obligation is one-sided; only one party is obligated. Example:  “I’ll pay you $100 if you f̶i̶n̶i̶s̶h̶ ̶m̶y̶ ̶c̶a̶s̶e̶ ̶b̶r̶i̶e̶f̶s̶ ̶f̶o̶r̶ ̶m̶e̶ ̶t̶o̶n̶i̶g̶h̶t̶  find my dog.” You are not obligated to find my dog (nor do my case briefs). But if you do find my dog, I am obligated to pay you $100.

With unilateral contracts, for now, you only need to consider the amount of parties obligated (only 1) and of course there must also exist a bargain for consideration

Bilateral Contracts

A <——-> B

Bilateral contracts require at least 2 obligated parties: A promises to do x in exchange for B’s service. Example: any time you order food at a restaurant! You’re ordering of the food obligates you to pay for it at the end and the restaurant also becomes obligated to serve you your food.

With Bilateral Contracts, this concept of mutuality becomes a huge deal.

So what is mutuality

Summed up, it’s a “meeting of the minds.” Like consideration, mutuality is a core element of contract formation. All parties must mutually agree on the exchange, services to be provided, and consideration to have mutuality. Both parties must be bound or else, neither party should be. Which makes sense because it seems rather unfair to hold a contract as enforceable if one of the parties vastly misunderstood the bargain/negotiation terms.

Where you’ll normally see mutuality issues is when there’s a contract written in a way to allow the promisor to have all the power:
I can terminate this agreement at any time 
If the contract seems totally one-sided in a bilateral agreement, you can pretty much flag it automatically as being illusory due to lack of mutuality.

And what is an illusory contract?
Well now that you (hopefully) understand mutuality, an illusory contract is “a promise that is unenforceable due to indefiniteness or lack of mutuality,  where only one side is bound to perform,” Wex Legal Dictionary.

Illusory contract is the go-to defense against agreement with consideration. If you’re trying to get your client out of a contract, you would try to argue for a lack of mutuality to prove that the contract was illusory and therefore unenforceable.

Let’s apply both concepts:

De Los Santos v Great Western Sugar Company
Plaintiff agrees to transfer beets for defendant. Defendant agrees to pay plaintiff on a per unit transfer (I’ll pay you for each transfer of beets). Key phrasing of the contract: “Such tonnage of beets as may be loaded by the Company.” Mid-way through the contract, defendant tells plaintiff he’s no longer needed for his services. Plaintiff is pissed because he thought he was going to be transferring beets for the entirety of the contract (plaintiff took on the job to make money after all!). Enforceable contract?

Answer: No; lack of mutuality. Because the parties failed to quantify the amount of beets the Plaintiff would transfer, the power to terminate at any time rests in the hands of the Defendant (and that’s exactly what he does here). No mutuality = illusory contract = unenforceable.

Wood v. Lucy, Lady Duff-Gordon
Wood and Lucy enter an exclusive rights agreement. It’s important to pause here to consult the Uniform Commercial Code (UCC):

“A lawful agreement by either the seller or the buyer for exclusive dealing in the kind of goods concerned imposes, unless otherwise agreed, an obligation by the seller to use best efforts to supply the goods and by the buyer to use the best efforts to promote their sale.” 

So whenever you see an exchange of exclusive rights or “exclusivity” you know right off the bat, mutuality will exist according to the UCC. There is an implied obligation on the parties. (arguing for illusory contract based on lack of mutuality is a bad idea here).

Lucy is a fashion designer that agrees to give exclusive rights of her brand to Wood. In return, Wood is to market her product and brand. When you give up exclusive rights, you cannot then go off and sell your brand and keep your profits to yourself (that’s exactly what Lucy does). In return for the marketing from Wood, Lucy was promised 1/2 profits. But there’s a breach: Lucy sells her stuff on the side and collects a profit, withholding from Wood. Wood (rightfully) lawyers up. Enforceable Contract?
Answer: Yes; Lucy’s counsel tries to argue that the contract was illusory based on lack of mutuality because Wood could totally just not market her stuff and not hold up his end. The courts don’t buy it due to the quoted clause above from the UCC. There is an implication that Wood will hold up his end of the deal and because that implication exists, there is mutuality and the contract is not illusory. Sorry Lucy.

Difference between this case and Los Santos: It was not clear that the Western Sugar Company was obligated to hold up their end of the deal. They had all the power to terminate (one-sided, lack of mutuality). Here, the obligation, though not explicit, is implied. Mutuality is apparent.

Weiner v. Mcgraw Hill
Weiner has an awesome job at Prentice Hill. Mcgraw reps try to poach him by offering him a cushy job + job security “we only terminate employees for just and sufficient cause.” Weiner, taking the bait, quits his job at Prentice Hill, forbears the benefits Prentice Hill tries to entice him with to stay, and takes the job with Mcgraw relying on their promises of job security. Eight years later, Mcgraw fires him claiming “employment at will.”

Employment at will essentially allows an employer to fire you at any point in time for any reason while also allowing the employee to up and quit whenever they want (no two weeks notice needed). If you’re immediately thinking of a mutuality issue here, you’re on the right track because that’s Mcgraw’s entire defense.

Mcgraw argues that because employment at will allows for either party to terminate at any time, there lacks mutuality and therefore any employment agreement should be considered illusory and unenforceable. Kind of. The problem here though is that Mcgraw, the promisor, had already started receiving valid consideration from Weiner in the form of Weiner’s forbearance (he gave up his job and benefits at Prentice for Mcgraw). This case is tricky because you have to look at all sides. Just because there’s an argument for lack of mutuality for employment at will doesn’t mean that the promise between Mcgraw and Weiner is invalid, especially since Weiner already held up his end of the agreement through forbearance. Is their employment contract enforceable?

2 thoughts on “Illusory Contracts and the Concept of Mutuality

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