Has someone ever made a promise to you but omitted certain information or had more power over the terms, to the point where the integrity of that promise was questioned? This is the general basis for an illusory promise within a legal contract or agreement, which would make the terms and conditions unenforceable in a court of law. It is important to check that the terms of the contract you are a party to do not contain illusory or uncertain promises. This Business Kitz blog will explain what consideration must be made in a contract, when a promise is an illusory one and how to recognise when there is or isn’t mutual trust in your business relationships written down on paper.
What is an illusory promise?
An illusory promise is when terms set out in an agreement or contract are not clearly defined or give an inaccurate illusion, which renders the document void and unenforceable in court. The key difference between vague undertakings and an illusory undertaking is that the promise involves words that indicate that the party making the promise can have discretion or an option of how the terms are carried out. In other words, this means that one party to a contract has control over how and whether the promise is performed, which is referred to as unfettered discretion. Think of it as maintaining an equal playing field; no party should have an ‘upper hand’ in a contractual agreement.
What are the special rules of consideration?
An agreement or contract will involve a promise and consideration made as the price paid for that promise. Consideration may not be an essential element of a contract in some jurisdictions, but we’ve got you covered in the case that it is. Under common law it is required for the promisee/s to provide some kind of payment (consideration) for the promise, in order for an agreement to be binding. Whilst consideration can take any form that is stipulated by the promisor, it must exist and have ‘value’ to be legally enforceable. An exemption clause within a contract that does not give the promise force, such as allowing a party to cancel a service without any liability, would also not be regarded as ‘good’ consideration.
Examples of illusory
The contract involving Placer Development (HC 1969) where the promise made to pay a subsidy at a rate to be determined by the Commonwealth is an example of an illusory promise and illusory consideration, as one party had power over redefining the terms of the payment rate and the other party was ‘powerless’. It was noted that having an unspecified amount of money was illusory. In the case of Biotechnology Australia Pty Ltd v Pace (NSWCA, 1988), there was an option given as part of the contract to participate in a staff equity scheme that was not yet established, or did not in fact exist, which was held to involve illusory and uncertain terms that showed breach of this contract. If a potential business partner wants to enter into a contract on the terms of a cash amount that they will specify “later on”, it is a waving red flag of being illusory.
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If there is an illusory promise relating to essential terms in a contract, such as the amount of payment or goods being supplied, the entire contract is deemed unenforceable. Therefore it is vital, as a business owner, to make your terms as clear and detailed as possible so as to avoid this. Another surefire and simple way to avoid this and ensure that all of your business contracts are legally binding is to use the contract templates provided by Business Kitz. If you need assistance with your contract dealings, our sister company, Legal Kitz, can provide you with legal advice. You can book a free 30-minute consultation with their experienced and highly qualified team via our website now.