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Understanding the Term 'Illusory Promise' With Appropriate Examples

Understanding the Term 'Illusory Promise' with Examples
While some promises are legally enforceable, some others are not. Illusory promises fall under the latter category. Here is a brief overview of such promises and their enforceability.
Sonia Nair
Last Updated: Mar 19, 2018
If a party to a contract has a unilateral right to modify the terms and conditions, without giving notice to the other, or without the latter's consent; the contract can be declared null and void, as it is considered as an illusory promise.
In legal context, promises are linked to contracts. In simple terms, a contract is defined as a legally enforceable promise/set of promises. If a party to a contract promises something in exchange for the performance of the other, it is a unilateral contract; and if the parties exchange promises, it is a bilateral contract. A valid contract must have some kind of consideration, which has some value that can be determined.

Consideration is defined as some right, interest, profit or benefit accruing to one party of a contract, or some forbearance, detriment, loss or responsibility given, suffered or undertaken by the other. Consideration can be an act, an object, or a promise. When it comes to contract law, the legal value of consideration is far more important than the monetary value. In unilateral contracts, the promise from one party and the performance of the other constitute consideration. In bilateral contracts, the promises made by both parties constitute consideration.

A permits B to use his garage, provided B drives A to work every day. In this case, mutual promises constitute consideration. In bilateral contracts, mutuality of obligation is an important requirement. In other words, both parties are bound by obligations created by the contract.
Mutual Obligation Rule
In case of a unilateral agreement, only one party is bound by his promise. A promises to pay B $500 if B cleans A's garage. Only A is bound by his promise, while B may or may not perform the task of cleaning. If B does not clean the garage, A is not bound to pay B.

A promises B to pay $5000 if B sells his car to A. In this case, both A and B are bound by the contract. A is legally bound to pay the amount, if B sells his car to A. On the other hand, B is bound to sell the car, if A pays him $5000. So, mutuality of obligation exists in bilateral agreements, wherein consideration consists of mutual agreements.

According to the rule of mutual obligation, the promises made by both parties to the contract, must be supportive of each other. Such promises must be real and meaningful. However, in some cases, a party to a bilateral contract may not be bound by the contract. One such instance is illusory promise, which allows the promisor to escape his obligation.
Illusory Promise
Partnership breakup
So, an illusory promise is an exception to the rule of mutual obligation in bilateral agreements. In other words, a person who makes an illusory promise can choose to perform or not perform his obligation. For example, A tells B, "I may sell my car to you, if you pay me $3000." In this case, A has left a loophole to escape the obligation of his promise through the words, "I may." He can choose to perform or not perform the obligation. Such a promise is called an illusory promise.
Definition: According to Black's Law Dictionary, an illusory promise is defined as a promise that appears to be binding but in fact it is not. Such a promise is so indefinite and vague, because performance of one party is optional. An illusory promise does not amount to consideration, and fails to create a contract. Hence, it is not enforceable.
  • A asks B to paint A's house for $1000. B replies, "I will paint your house if I have time." This statement amounts to an illusory promise wherein the promisor has the choice of not doing the task. He is not bound by any obligation, as he may or may not paint the house.
  • A requests B for a pay rise. B replies, "I will raise your salary if I find your work satisfactory." In this case, there is no clear-cut definition for the word 'satisfactory'. The promisor may or may not find the work (of the promisee) satisfactory. The promisor has ample scope to backtrack from his statement.
  • A offers to sell his house to B for $10000. B replies, "I may buy your house if I win a jackpot." Here also, nothing is definite. The promisor may or may not win a jackpot. Even if he wins a jackpot, he may or may not buy the house of the promisee.
  • A offers to buy B's bike for $400. B replies, "I may sell you my bike if I wish to." In this example, B has a choice to sell or not sell the bike. It is his discretion to honor the promise.
  • A is a company that makes fruit jam. A enters into a contract with B, an orchard owner that it will buy all the fruits it needs from B. In return, B promises to sell all the fruits it wants to A. This is considered as an illusory promise, as A is bound to buy fruits from B only; whereas, B has to sell fruits to A, only if he 'wants' to.

In an illusory promise, the promisor may retain the right to change his mind, as shown in example 4. The promise can be vague as in example 2. The promisor is not clear about what he meant by the word 'satisfactory'. In some contracts, the promisor may retain the right to terminate or modify the contract as and when he wishes to. This is also an illusory promise, as the party can rescind or modify the contract at any stage. In that case, if there is another clause that requires a reasonable notification (for at least 30 to 60 days), the contract becomes valid and enforceable.
Case Law on Illusory Promise
In general, courts follow the view that the parties to a contract had the intention of creating a valid contract. So, courts tend to avoid interpreting contracts as illusory promises. The doctrines of good faith and promissory estoppel are used by courts to construe illusory promises as enforceable contracts.

Good Faith: There are numerous cases, wherein courts have applied the doctrine of good faith to construe illusory promises as valid contracts. The court may interpret the terms of the contract and the actions of the parties in such a way that it becomes a valid contract. For example, contracts with the satisfaction clause are usually considered as illusory promises. However, courts have ruled against this trend, by invoking the doctrine of good faith. So, the promisor must back out of the contract only if he is genuinely dissatisfied.

Promissory Estoppel: Some courts may invoke the doctrine of promissory estoppel to enforce an illusory promise as a valid contract. Promissory estoppel is defined as the legal principle that a promise is enforceable by law when the promisor makes a promise to the promisee who relies on it to his or her detriment. For example, if the promise made by A is illusory, but B made a real promise in return. B suffered/or would suffer some losses, as he acted in reliance of A's promise. The court may use the doctrine of promissory estoppel and rule the contract valid and binding.

In Wood v. Lucy, Lady Duff-Gordon, 222 N.Y. 88, 118 N.E. 214 (1917), the defendant was hired by the plaintiff, a fashion designer. The defendant granted the exclusive right to market and license the designs to the plaintiff, on the condition that half of the income generated would go to the plaintiff. The defendant placed endorsements on others' designs without the knowledge of the plaintiff. The plaintiff sued the defendant, who filed a motion for demurrer (objection to opponent's pleadings), which was rejected.

The defendant appealed and the appellate court ruled that the contract is not enforceable, as there is no mutuality of obligation. It was held that there was no promise from the side of the plaintiff regarding his performance. The plaintiff appealed to the Court of Appeals of New York. The court ruled that, "A promise may be lacking, and yet the whole writing may be 'instinct with an obligation,' imperfectly expressed. The acceptance of the exclusive agency was an assumption of its duties. The law has outgrown its primitive stage of formalism when the precise word was the sovereign talisman... it takes a broader view today."
To conclude, an illusory promise may sound like a valid contract, but it is not. It cannot be enforced in a court of law, for lack of mutual obligation, which constitute the consideration in bilateral contracts. However, nowadays, courts take a different view and try to interpret facts as well as laws to bring illusory promises within the ambit of enforceable contracts. This is done in cases, where justice is denied to the aggrieved. If you find yourself involved in such a case, consult an expert attorney who can guide you in this matter.