Illusory Contract: Everything You Need to Know
An illusory contract is between two parties with one party promising a consideration that is so insubstantial no obligations are imposed. Such an insubstantial promise results in the contract being unenforceable. 3 min read
2. Terminology Used with an Illusory Promise
An illusory contract is between two parties with one party promising a consideration that is so insubstantial no obligations are imposed. Such an insubstantial promise results in the contract being unenforceable. This is due to its lack of mutuality and indefiniteness where only one party is bound to perform.
Overview of an Illusory Contract
When an illusory contract is promised, the statement made appears to assure the other party that there will be a mutual performance by both parties. In actuality, the person making the promise is under no obligation to fulfill the promise.
An illusory contract stands out from other contracts in that the language in it is unclear and indefinite. This leads to uncertainty in regard to the performance status of the promising party even if they are being paid by the other party.
An example of an illusory contract would be when the speaker makes a statement such as "the seller agrees to sell all of a particular product he wants" to a buyer. Upon closer inspection of what was stated, the speaker (seller) of the promise has the choice to perform or not perform. This means the speaker has not legally bound themselves to perform the act.
When the provisions of the promise are at the discretion or control of the person making the promise, then nothing is absolutely promised and it is therefore illusory. Another example would be if the board of directors promised to purchase as many goods as the board wanted to order from a local business. That does not form a binding contract. It is illusory.
Valid contracts contain a promise from one party to perform by providing goods or services, and the other party promises to pay a specific sum or provide other consideration in return for the goods or services. In contrast, an illusory contract, whether it is in written form or an oral promise, is only an illusion of a contract.
Terminology Used with an Illusory Promise
Unilateral and Bilateral
In a legal context, a promise is linked to a contract. This means a contract is defined as being an enforceable promise or set of promises under the law.
In a contract where one party promises something in exchange for a performance by the other party, this is a unilateral contract. When both parties exchange promises, it is considered a bilateral contract.
When one party involved with a contract has the unilateral right to modify the terms and conditions of the contract without the other party's consent or without giving notice, it is an illusory promise. In this situation, the contract is declared null and void.
In a contract, consideration is defined as a right, profit, benefit, or interest to one party, or a loss or detriment or responsibility undertaken, given, or suffered by the other.
For a contract to be valid, it must have some kind of consideration that has value. A consideration can be:
- An act.
- A promise.
- An object.
Mutual Obligation Rule
For there to be a mutual obligation in a contract, the promises made by both parties must be supportive of each other, and the promises must be real and meaningful.
Obligation, Performance and, Consideration
For a contract to be deemed enforceable, it must contain mutual obligations, which include performance, valid consideration, and something of value provided.
When only one party is obliged to perform and there is nothing of value being promised in return, the contract is illusory.
Intent and Good Faith
When a contract is disputed, the court generally takes into consideration the parties' intent when the contract was created. If the parties had the intent of creating a valid or enforceable contract but due to non-specific language failed to do so, the court may attempt to determine what the parties were trying to accomplish with the contract.
Although there may be a lack of specific language in the contract, if it is shown that the party made a reasonable effort to fulfill the promise, it is not considered illusory.
Implied Good Faith Terms
When some contracts contain a clause that releases a party from their obligation to pay if they're not satisfied with the provided goods or services, this creates an illusory contract.
Courts are inclined to take the actual intent of the contract into consideration and require the act of "good faith" by the paying party.
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