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It's the Law: A Contract is Unenforceable Without Mutual Obligation

Question: I made an offer to buy a bank owned property. The bank sent back the contract with a lengthy addendum. The addendum includes a clause that says the bank can accept other offers and can terminate my contract at any time by sending me back my deposit. I found another property I like better and want to cancel my contract. Shouldn't I be able to cancel if the bank can?

Answer: A contract is created by an offer and acceptance supported by consideration. Consideration means something of value or something to be provided by one party to the other. It must evidence a meeting of the mind as to all essential terms. In addition, there must be mutuality of obligation between the parties.

Mutuality of obligation means both parties are required to perform in accordance with their agreement. If one party reserves the option to cancel, the purported contract lacks mutuality. Absent mutuality of obligation, there is no contract. That means either party can call off what appears to be a contract.

Florida case law has many examples of courts finding contracts do not exist in the absence of mutuality of obligation. In the recent case of Law-Yue v. Miami River, L.L.C., the court found that buyers properly terminated a "contract" and were entitled to return of their deposit. The contract provided that the developer would build a condominium "in substantial accordance (in sellers opinion)" with the plans and specifications kept in sellers office. But, the contract went on to include the following provisions:

a. "Seller may make such changes in the plans and specifications that it deems appropriate at any time..."

b. "Without limiting Seller's general right to make changes, Purchaser specifically agrees that the changes described above and changes in the dimensions of rooms, patios and balconies and the location of windows, doors, walls, partitions... and in the general layout of the Unit and Condominium may be made by seller in its discretion..."

c. "The Unit and the Condominium may not be constructed in accordance with the plans and specifications on file with applicable governmental authorities."

d. "Purchaser agrees that the actual construction shall prevail and to accept the unit and building as actually constructed (in lieu of what is set forth on the plans)."

The court found that the developer had absolute discretion as to what not to build and therefore there was no mutuality of obligation. The purchaser would not know what to enforce. The purchaser could cancel and get the deposit.

Where a contract provides that the buyer's sole remedy for breach by the seller is return of the buyer's deposit, mutuality of obligation is lacking. In effect, the seller does not have to do anything but give the buyer the deposit if the seller changes his mind. Rather than throw the contract out, courts merely declare that provision unenforceable and allow the buyer to pursue all available contract remedies such as damages or an action for specific performance to require the seller to sell.

Mutuality of obligation can also be lacking where a contract is unconscionable. An unconscionable contract must be both procedurally and substantively unconscionable.

Procedural unconscionability involves the manner in which the contract was created. It considers relative bargaining power of the parties and their ability to understand contractual terms.

Substantive unconscionability means that the contract itself is so one-sided as to be shocking. In other words, no one in his or her right mind would enter the contract and no honest and fair man would accept its terms.

Substantive unconscionability is usually clear on face of the agreement. Indicators of procedural unconscionability include absence of meaningful choice on the part of one party and that important terms are buried in a maze of fine print.

In your case, the bank may think it is holding all the cards. It can keep you on the hook, while looking for other buyers. However, you can slip off the hook because the contract appears to lack mutuality of obligation. Just as the bank can kick your agreement to the curb and take another one, you can tell the bank you are out and get your deposit back.

That does not mean the bank will let you go easily. The bank may claim you have a binding contract and only the bank can terminate it. For that reason, you should retain an experienced attorney promptly and get the attorney to write the letter of termination demanding release of deposit.

By: William G. Morris, Esquire

William G. Morris is an attorney with offices at 247 North Collier Boulevard on Marco Island, Florida. His practice covers a broad range of subjects, including civil litigation, real estate, business and corporate law, estate planning and probate, domestic relations and contracts. He writes this column periodically with respect to legal matters that frequently affect non-lawyers. The information contained in this column is not intended as legal advice and, of necessity, is generalized. For questions about specific circumstances, the reader should consult a qualified attorney.

Categories: Business Law