Illusory Promise: Everything You Need to Know
An illusory promise is one that is unenforceable. This is due to a lack of mutuality or indefiniteness where only one party is bound to perform.3 min read
An illusory promise is one that is unenforceable. This is due to a lack of mutuality or indefiniteness where only one party is bound to perform. An illusory promise is based on deception or parameters that are indefinite, making it unclear what must be done or if performance is optional.
Overview of Illusory Promise
When a contract contains a statement by the promisor that requires no actual obligation on the part of that person to fulfill, the promise is an illusory promise. This is also referred to as an illusory contract. An example of an illusory contract would be if a seller agrees to sell "all the goods he wants to" to a buyer. In this case, the promisor has no actual obligation clearly stated.
The language used in this type of agreement makes it unclear whether the promising party must perform due to the lack of clarity in the language used. Even if the party is compensated, the language does not make that clear. Because the agreement does not clearly outline the performance required by one party and appears to bind the other only to pay or perform, the agreement is unenforceable in a court of law.
An example would be a situation where one person states that he or she "may" sell you an item if you pay a specified amount of money. The seller's use of the word "may" allows them to perform or not perform, meaning they may or may not sell you the item. This type of promise is illusory.
Conditions for an Illusory Contract
A valid contract contains a promise for one party to perform services or provide goods. The other party must pay a specified sum for these goods or services or provide another form of compensation in return. An illusory contract, however, only contains the illusion of a promise. This holds true whether it is an oral or written agreement.
For a contract to be considered enforceable, it must cover obligation, performance, and consideration.
Obligation and Performance
The contract must specify mutual obligations to perform and valid consideration. This means performance is required by all parties and something of value must be offered in return.
The definition of consideration in this context means it is a benefit, profit, or interest to one party of a contract or a loss or detriment that is undertaken or suffered by the other party. A consideration can be a:
In contract law, consideration is more important and carries a higher legal value than monetary value. In unilateral contracts, consideration is the promise provided by one party and performed by the other party. In bilateral contracts, both parties make promises that constitute consideration. An illusory promise is the exception and does not apply to mutual obligation in bilateral agreements.
Intent and Good Faith
A promise made by a party that has the ability/capability to fulfill is not considered illusory if it is shown the party tried to fulfill the promise through reasonable effort. In general, a court will take into consideration the intent of the parties when they drew up their contract.
Implied Good Faith Terms
A contract may contain a clause that releases a party from their obligation to pay if not satisfied with provided goods or services. This, in effect, creates an illusory contract because there is no obligation on the part of the paying party to pay.
Fraud and Bad Faith
It is not uncommon for illusory contracts to be created due to misunderstandings and errors by laypeople creating contracts. However, it is possible for someone to deliberately create a vague contract regarding their performance with the intention of defrauding the other party.
Courts may enforce an illusory promise as being a valid contract by invoking the doctrine of promissory estoppel. The doctrine comes into play when a promise is made to a promisee who relies on the promise to his or her detriment.
Types of Illusory Promises
There are three types of illusory promises:
- Personal satisfaction clause.
- Exclusive dealing contracts.
- Requirements and outputs contracts.
Courts generally follow the premise that the parties involved in creating a contract had the intention of making it valid. Because of this, courts lean toward not interpreting contracts as illusory promises.
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