A contract containing a statement that gives the person making a promise no actual obligation to fulfill the promise is considered an “illusory promise,” or “illusory contract.” The language in this type of agreement is indefinite and unclear, making it uncertain whether the promising party must perform even if paid or compensated by the other party. This type of agreement is not enforceable in court, as it does not specifically detail performance required by one party, appearing to bind only the other party to perform or pay. To explore this concept, consider the following illusory promise definition.
Definition of Illusory
- Something based on deception, or having the nature of illusion
- Something that is unreal or deceptive
Late 16th century Late Latin illusorius
When a Contract is Considered Illusory
A valid contract contains a promise from one party to perform specific services, or to provide specific goods, and for the other party to pay specific sums or provide other consideration in return. An illusory contract, whether written or oral, contains only the illusion of a contract or promise. For example, Bob and Sam enter into a contract that requires Sam to appear at Bob’s ice cream stand each day and pay $1.00, for which Bob will give Sam as much ice cream as he wants to. While this agreement binds Sam to paying $1.00 every day, Bob does not appear to be bound to do anything, as he has committed only to providing ice cream if he feels like it.
Another example in a real-world setting might be:
Frozen Treats Ice Cream Company and Tip-Top Sundae Shop enter into a contract in which Tip-Top will buy all the ice cream it needs from Frozen Treats, and Frozen Treats will sell as much ice cream as it wants to Tip-Top. This contract is illusory because Tip-Top is bound to buy all of their ice cream from Frozen Treats, while Frozen Treats is bound to nothing at all. In fact, if it so chooses, Frozen Treats does not have to sell any ice cream to Tip-Top, and can choose to sell instead to another vendor that offers more money. This contract is not enforceable.
Obligation, Performance, and Consideration
In order for a contract to be enforceable it must contain mutual obligations to perform, and valid consideration, or something of value, provided. In other words, all parties must be bound to perform something in the contract, and there must be something of value offered in return. In the above example of the agreement between Frozen Treats and Tip-Top, only one party was obliged to perform, and nothing of value was promised, therefore the contract was illusory.
Intent and Good Faith
In contract disputes, the courts generally take into consideration the parties intent when creating a contract. For instance, if the parties obviously had the intent of creating an enforceable contract, but failed to be specific enough in the language, the court may consider what exactly the parties were attempting to accomplish through the agreement. Even with a lack of specific language, a promise made that is within the party’s ability to provide is not considered illusory if it can be shown that he made a reasonable effort to fulfill the promise. Parties are also required to use good faith and honest judgment in determining whether a contractual promise has been fulfilled.
Implied Good Faith Terms
Some contracts contain clauses releasing a party from his obligation to pay if he isn’t satisfied with the service or goods provided. This creates, strictly speaking, an illusory contract, as the paying party is not actually obliged to pay if he chooses not to. The courts, however, are likely to take into consideration the actual intent of the contract, and require the paying party to act in good faith, rejecting performance only if he is truly dissatisfied. A test of “reasonableness” that may be used in a court of law would consider whether a reasonable person would be satisfied with the performance, regardless of the fact that the paying party states he is not satisfied.
Fraud and Bad Faith
Illusory contracts are often the result of error and misunderstanding when laypeople create written contracts. It is, however, possible for someone to make a contract that is purposely vague or unspecific as to their own performance, with the intent of defrauding the other party. Once again, the court is likely to take into account the intent of both parties in entering into the contract. A party making an illusory promise for the specific purpose of fraudulently harming the other party may be held liable for bad faith principles that apply to every contract made, or even for criminal fraud.
Related Legal Terms and Issues
- Performance – the act of doing that which is required by contract
- Consideration – a benefit bargained for between parties to a contract
- Intent – a resolve to perform an act for a specific purpose; a resolution to use a particular means to a specific end.