There are promises made in every contract that you sign. The terms and conditions which make up a contract amount to a promise made by one party to another. However, contracts or clauses can be made void through a number of different ways, including through illusory promises. An illusory promise is something within a contract that a court will not enforce. Understanding when a promise is illusory or not is very important to parties within a contract. This article explains when a promise is considered illusory and the consequences on contracts you have signed.
Unfettered Discretion
If one party to a contract has ‘unfettered discretion’ over a term of the contract, that promise becomes illusory. This means they have total control as to whether or how they perform a promise. For example, if a clause or term within a contract stipulates that a party will pay for services at a rate that they will decide upon later – it is considered illusory. Such a promise gives too much discretion to a party to decide on how they will pay for a service. Per Placer Development v Commonwealth (1969) when discretion is left up to only one of the parties to a contract it becomes an unenforceable promise.
There are two exceptions to this rule. First, a contractual provision that confers discretion onto one party will not render that party’s consideration illusory if the discretion relates to the fulfilment of a condition on which the performance of the contract depends. Second, if a party uses discretion according to an objective criteria it becomes enforceable.
Exemption Clauses
Another way in which a clause or term of a contract will be considered illusory is if an overly sweeping exemption clause. If an exemption clause within a contract is so comprehensive in its effect that it effectively deprives the promise of any force. For example, a contract may allow a party to cancel a booking or service without incurring any liability. Such a promise would become illusory. An illusory promise in this instance does not constitute good consideration for the counter-promise made by another party. Exemption clauses are extremely common in contracts and often can be illusory if not properly constructed. This may leave you open to serious liabilities or unable to claim any compensation for damages.
Contractual Consequences
A contract containing an illusory promise may be incomplete. Whether it is an incomplete contract or not depends on the nature of the promise in question. An illusory promise may relate to an essential term of the contract such as the payment rate or quantity of goods. This would mean it is likely the whole contract becomes unenforceable. If the promise relates to a less important term within the contract, then that clause or part of the contract may be severed from the rest of the contract.
When entering into a contract as a business owner it is important to familiarise yourself with the terms within it. Entering into an unenforceable contract can lead to problems for any deals that you make. Deals such as this can make or break your business. To make sure you do not experience such problems we recommend that you consult a contract lawyer to help you navigate through your contractual dealings.
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