What Constitutes an Illusory Promise?
An illusory promise is a type of promise made in a contract lacking a substantial degree of commitment to either party’s performance and which thus does not constitute an enforceable duty. A contract that is void due to a unilateral mistake or fraud does not require performance due to its lack of consideration. An illusory promise is similar in that the promisor has agreed to perform, but in reality, has actually retained the ability to withdraw from the agreement at any time at no cost to themselves. Because an illusory promise lacks the essences of a bargain, both parties are ultimately free, either by express or purely practical means, to withdraw from the terms without penalty.
An illusory promise goes beyond the idea of a mere uncertainty within a contract, implying a complete lack of obligation . Provisions for performance that illusorily bind one party constitute an unenforceable "tinman" obligation, while binding the other party to all the terms of the contract. In practice, an illusory promise is a condition precedent that upon the happening of which an obligation proceeds further into fully recognizing the terms of a bargain.
The frequent example of an illusory promise is a reward contract such as "to return my lost dog, I will give you $20." Such a contract effectively obligates the promisor to compensate anyone who attempts fulfillment with no substantial obligation on the part of the reward seeker to assess the "reasonableness" of the performance. Requirement contracts, where the onus for ordering and accepting goods is placed entirely in the hands of the buyer, and output contracts, where a seller commits to supply the entirety of its production to a single buyer, serve as more complex examples of this concept.
Legal Effects of Illusory Promises
It’s crucial to understand that an illusory promise or a promise made without consideration is a legally unenforceable promise. When no consideration is present, the promise itself has no value and an illusory promise is therefore unenforceable on the grounds that there is no "value" to the promisor offering up the promise. This makes the legal implications of illusory promises clear and simple—they’re basically unenforceable as contracts on the grounds that you’ve really made no offer or promise because they’re lacking the consideration aspect.
The problem with illusory promises is that they are technically still enforceable and convertible into a contract if one party decides to treat it as such. This has led to several court decisions in the past where an illusory promise is treated as binding based on the treatment of one or more parties. In these cases, even though one party may not be in violation of any contracts, the party who initially treated the void promise as a legal contract may have legal recourse to obtain damages.
Our experienced legal attorneys are available to represent you if you’ve been a victim of an illusory promise and have been the defendant in a breach of contract action based on a promise that had no consideration.
Determining the Difference Between Illusory and Enforceable Promises
In distinguishing between illusory promises and valid and binding promises, courts typically analyze "whether the nature of the promise is such that it must be supported by additional consideration." In this regard, courts look at the intent of the parties, "[t]hus to determine whether the parties intended to create a binding agreement, the [c]ourt looks for an adequate consideration . . . ." To this end, among the factors that courts examine to determine whether a promise is illusory include: (i) whether the promisor retained the ability or absolute discretion to perform or to choose . . . ." Notably, however, the "mere fact that some future act or condition is one of several alternatives upon which a contractual performance may be conditioned [does] not render [the] promise illusory."
Most importantly, "the test of whether a future act or a contingency provides consideration . . . is not whether the act or contingency may be done or brought about at the will of one of the parties." Rather, "the test is whether the act or contingency is solely at the mercy or fault of the promisee. If so, the promise is illusory." Further, "[t]he reason for this rule is that it is usually the promisee, and not the promisor, who will render performance pointless if the promise is not kept, but there is no possibility of performance on the promisor’s part."
Courts also consider the context in which the promise was made, including, "the structure of the bargain in its entirety." Such considerations include "’whether a reasonable person would be justified in understanding from the whole agreement that what is anticipated shall be performed.’"
For instance, where the promises of one party are expressly conditioned on other events that will happen in the future, such promises may not be deemed illusory. By contrast, where promises are "regarded as a series of distinct promises within the contract" that may "begin to fall when one fails," where both parties have the ability to terminate the contract, and where although the party sought to be bound was required to first provide a notice of intent to terminate pursuant to the contract, the other party was not able to terminate, which includes the ability to stop or withhold orders.
Similarly, where a distributor of an "award winning ice cream product" was subjected to a series of licensing agreements that were ultimately rejected, and a licensing agreement was not finalized for several months, the court held that the distributor lacked any enforceable rights under the agreement. In reaching this conclusion, the court noted that the distributor had knowledge of the scrutiny faced by the product and that the parties’ agreement did not require that the license be approved according to any particular time frame. Thus, despite the award winning nature of the product, the distributor had no remedy because "no valid contract ever came to fruition."
If parties intend to bind themselves, a mere intent to "agree in the future" is insufficient to create an enforceable contract; rather, actual commitment to the contract terms must be found. Thus, if they have not "assume[d] definite and binding obligations, whether or not the obligations might be subject to a condition subsequent, [parties] cannot be said to have made a contract." In particular, where an agreement does not "contain conditions or contingencies" where a "guaranty of delivery" is required or "where the price of a sale of goods is not to exceed a certain amount," the promise is illusory.
It should be noted that some courts will also consider the adequacy of consideration to determine whether promises are illusory.
In applied to contracts entered into by sophisticated parties, courts will still consider the circumstances surrounding the agreement and the meaning, "not readily apparent to the ordinary reader," of particular words. Thus, a "reasonably intelligent person reading the language in the contacts in which it is employed affords it a meaning which gives it effect." Therefore, "while a promise is illusory if an offer leaves open the option to the offeree to enter into the proposed agreement by accepting performance by the other party only if he or she chooses to do so, the same offer may be binding and enforceable when it is understood by both parties that it was intended by them to be binding and to impose an obligation on the offeree, regardless of the fact that performance is not possible."
Further, a promise to continue to allow a contractor, who had, in fact, been doing business with the promisor for several years, to collect a percentage of the sales price during the year is not illusory, contrary to findings of the trial court. Specifically, "although [the promisor] was under no obligation to sell a given percentage of its production to [the contractor], a reasonable person would understand that it was bound to sell some amount."
Examples and Case Studies
Illusory contracts are not uncommon in the context of business and personal relationships. The law regarding whether an agreement satisfies the legal requirements to be enforceable against a party is not defined by bright lines and is not absolute. There are, however, circumstances in which courts have ruled that a purportedly binding agreement is not actually bound by objective and subjective indicators of contractual intent.
In Pezold v. Hu, a Delaware trial judge ruled that the plaintiff had offered to sell the defendant an entire business for the pre-agreed price of $2 million. The defendant in part justified his refusal to consummate the transaction by saying he was no longer interested, thereby arguably indicating the offer had lapsed. He later claimed an agreement did not exist because the plaintiff clear was no longer willing to sell the entire business, which was not true. The plaintiff sought specific performance of the agreement.
The Court denied the relief requested , in deference to clear evidence that the seller had changed his mind and was no longer willing to sell the entire business. The Court said it appeared that the "the seller of a valuable asset may have struck the bargain of a lifetime, only to have a buyer change his mind after the fact." However, the Court also stated the agreement ultimately failed of its essential terms not because, in the words of the Funeral Services case, it was not supported by consideration, but "because of the seller’s failure voluntarily to perform it." In other words, there was no breach of contract, because there was nothing to breach.
Pezold is an example of the reality that in some cases, such factors as part performance and the failure of a party to voluntarily perform an agreement may created a binding agreement that may be enforced in a way that permits an otherwise defunct contract to be enforced.
How to Avoid Illusory Promises in Agreements
To ensure that your promises are legally binding, when drafting a contract, create clear measures and methodologies to demonstrate that the offer is not one-sided. A common way to demonstrate this useful for all circumstances is to consider the consideration the offering party will receive under the contract, which should be proportionate to the promise made. Additionally, when drafting a contract, ensure that the relevant terms and conditions are specific to the nature of the contract.
Consideration is essentially a two-way street where the offeror makes a promise, and the offeree makes a substantial contribution to the deal. When considering the viability of relevant terms and conditions, determine whether a promise is being requested from you in return for your offer to ensure there is something in exchange for your rights and obligations under the contract. If there is no obligation attributable to the party requesting payment through an illusory promise, there will be no contract.
To ensure that each party is providing value or equivalent consideration for the contract terms, every part of the agreement should have a corresponding measure for how it will be upheld. For example, the parties require provision of monthly reports (a promise) under the contract. This promise is supported by an obligation to provide payments of a specific sum (the consideration). Without a measure or methodology to ensure this promise is fulfilled, the contract has become illusory in its entirety.
Importance of Clarity in Contract Law
The next time you’re drafting an agreement, remember that to avoid an illusory promise issue, the contract must create an obligation that is capable of being measured in some way. An obligation that is completely open-ended cannot be legally enforced , as the terms of the promise are too vague. Taking the time to ensure your contract is clear and without ambiguity will help foster strong, stable business relationships.
