What is an Illusory Promise ?
A legal contract requires an agreement between parties with all of the essential elements present. An agreement or promise must involve a "bargain" or exchange in which both parties agree to give up something to obtain something else. If either party has no obligation under the contract, then there is no agreement or bargain to support the contract or promise. An illusory promise contracts does not actually bind a party to anything which means that the promise is not enforceable in court. These promises cannot be the basis of a contract.
An illusory promise can occur when a promise requires that the promisor perform "if" something happens, but the event has not yet happened. This may mislead the other party into thinking that the promise is binding on the promisor. An illusory promise also occurs when consideration for a promise is too vague or indefinite to provide a return exchange to the promisor. In order to be enforceable, a contract must be supported by consideration or a return exchange. The return exchange need only be a "detriment" to the promisor. This means, however, that the promise must actually impose a burden or detriment upon a party to create an enforceable contract. When a return promise is not actually a detriment to the promisor, the promise may be illusory.
An example of an illusory promise which can occur during delayed performance, nonperformance, or termination of a contract, may occur when A promises to pay $100 to B , but A has no obligation to pay unless A decides to pay. Because A does not actually have an obligation to pay B anything as part of the contract, the promise or agreement given to B is illusory because nothing would be lost or given up by A if A were to decide not to follow through on A’s promise to pay B $100. It is important to understand that just because a contract provides that one party may cancel the agreement at any time results in an illusory promise. As long as both parties to the contract can cancel the contract equally, the contract is not illusory. For example, A and B may enter into a contract which provides that either party may cancel the contract at any time for any reason. Although this parties are free to cancel the contract, this does not make the contract illusory because it is not clear whether A or B will be the party that cancels the contract. Another distinction is that when one party has the sole interest to cancel the contract at any time, the promise would be illusory. Another example of an illusory promise which is not enforceable as a contract is when A promises to pay B if A decides to move to Texas, or moves to Texas within a certain time after the agreement is written. Because A’s performance under the contract requires that A actually move to a new state, nonperformance of the contract does not require a breach of the contract because A has not done anything in violation of the agreement. A simply may not be able to perform the contract because A did not, in fact, move to Texas.
Legal Definition and Characteristics of Illusory Promises
In order to determine whether a promise is illusory, it is often necessary to examine the legal characteristics of the promise because a promise is illusory if, considering the promises between the parties, that the promisor is under no obligation to perform. In other words, if the promisor has no obligation at all, the promise is illusory. Thus, the lack of mutuality makes the promise illusory. More succinctly, if a promise is non-binding, it is illusory. The promise is not binding because there is no consideration for the promise. Generally, a promise can be illusory where it deals with some subject matter that is incorporated in the contract. If the subject matter of the promise is determined solely by the promisor, then the promise made is illusory. It is not binding on the promisor to perform.
Examples of an Illusory Promise in a Contract
Contract practitioners know that the law of illusory promises is a tangled mess. To summarize:
But even Excalibur was a bit of a mess. So it’s no surprise that illusory promise contract law is a mess. The best way to understand illusory promises is to review a few hypothetical examples.
Some Facts
Freeland Painting, Ltd ("FPL") contracts with a church to paint the rafters of the church’s sanctuary. The contract states that the purchase price shall be five dollars per rafter, with payment to be made by the church upon completion of "whatever number" of rafters FPL chose to paint. The question is whether this contract is enforceable.
Analysis
This contract is doomed from the start. Under Texas law, the father of illusory promise analysis, Columbia Nitrogen Corp. v. Aetna Cas. & Sur. Co., 634 S.W.2d 615, 619 (Tex. App.—Houston [14th Dist.] 1982, writ ref’d n.r.e.), a promise is illusory when it "confers no binding contractual obligation on the promisor and leaves the performance of the promise to the will of the promisor." Id. Here, the church’s promise to pay FPL is tied completely to FPL’s wish to paint rafters. FPL can choose to paint none, all, or some god-knows-what number of rafters and still escape any liability under the contract. The church, on the other hand, is locked into the contract and is without remedy unless FPL chooses to paint rafters.
Some Facts
A jewelry designer and a metalsmith form a joint venture to create a line of jewelry. They agree to share equally the costs and profits for the project. Thereafter, one of the joint venturers spends $1,000 on supplies for the project. Almost immediately, the other joint venturer starts and then finishes the project, expending another $1,000 on its supplies. The non-performing joint venture then refuses to reimburse the performing joint venturer. The question is whether there is an enforceable contract for the second joint venture’s reimbursement?
Analysis
Here, the non-performing joint venture’s promise to reimburse was too indefinite to be enforceable. In General Steel Domestic Sales, LLC v. Steel, 234 S.W.3d 704 (Tex. App. – 2007), the court looked to the exchanges between the parties in order to determine whether some binding contractual agreement existed. In this case, there was no offer, no acceptance, and no consideration for the promise to reimburse. See Altai, Inc. v. Crum & Forster Specialty Ins. Co., 298 S.W.3d 774, 778 (Tex. 2009) (affirming the court’s rejection of an illusory promise where a company offered to issue a policy to an entity for a premium that would be determined in the future. Because the insurance company had not accepted the insured’s offer and the risk of liability did not pass to the insurance company until the premium contract was entered into, the contract would never be binding by its own terms).
Some Facts
A landowner and a builder enter into a contract for home construction. The contract contains pictures of the house to be built as well as a list of materials to be used throughout the house. Before the contract is formally closed, the landowner makes material changes to the location of one of the rooms, as well as a material change to the type of material to be used on the cabinets. The builder protests to the changes, but the landowner demands that the changes be implemented. The builder now refuses to build under the contract. The landowner damages the builder for delays and for lost profit. At trial, the builder claims the delays were caused by ensuing disputes over the scope of the project and because the landowner failed to timely pay for materials purchased by the builder. The question of the trial court is whether to consider the type of materials in determining whether the builder’s fire-related damages were reasonably foreseeable. The builder argues further that the changing of the scope of the project constituted an illusory promise.
Analysis
The builder’s claim fails as a matter of law. Because the contract contained an express allowance for change, the changes were not illusory promises. JFK Holdings, LLC v. 1-O-8, LLC, No. 03-13-00530-CV, 2014 Tex. App. LEXIS 10393, at *3 (Tex. App.—Austin Sept. 10, 2014). Even if the changes did constitute an illusory promise, the builder cannot be heard to complain. Under the prevailing Texas law, the builder, as the alleged defaulter, may not seek to excuse his own non-performance of the contract because some aspect of the promise was illusory. Primrose Operating Co. v. Nat’l Am. Ins. Co., 382 S.W.3d 899, 924 (Tex. App.—Texarkana 2012, no pet.) See also Chicago Bridge & Iron Co. v. M.S. McKee & Co., 250 S.W.3d 305, 317-18 (Tex. App.—Houston [1st Dist.] 2007, no pet.).
How an Illusory Promise Affects Contract Validity or Enforceability
If the contract contains an illusory promise, then the contract is unenforceable and neither party has a claim against the other for breach of contract. Any promises made by the offeror in the contract cannot be breached because they do not even exist. For example, in Martin v. Camp, 173 N.W.2d 61 (Iowa 1969), the Iowa Supreme Court determined that a contract was unenforceable when it contained an illusory promise. The Court held that an offeror could not offer a benefit to the offeree while retaining the right to withdraw that benefit at any time in the future.
If a promise in the contract is illusory, then the party whose performance of the promise is illusory may be able to exercise its ability to withdraw the promise without breaching the contract. Should the party waive its right to withdraw the illusory promise, then the contract would be enforceable.
Some courts have also held that an illusory promise to "consider" providing a benefit to the promisee or "use best efforts" to provide a benefit to the promisee is not sufficient consideration to support the promise and the promise is not binding on the promisor. Under these circumstances, the contract is voidable at the option of the promisee. See, e.g., Rest. 2d of Contracts, § 37 cmt. a (1981). However, as with most circumstances, an illusory promise may be able to be converted to a real promise when the promisee has provided consideration beyond that illusory promise.
When is an Illusory Promise Binding or Enforceable?
An illusory promise may not bind the promisor unless it affirms the promise as part of a new bargain. The performance of a promise in an existing contract, express or implied, may make binding an otherwise illusory promise that would have been a nullity standing alone.
In a somewhat older case, A Delta Air Lines, Inc. employee alleged that the airline and its retirement plan had promised him benefits, and the District Court agreed. But the Eleventh Circuit Court of Appeals reversed on seemingly technical grounds. It held that the promise was illusory because of the employer’s right to terminate either the plan or the employee’s unvested retirement benefits at any time. The Court stated that the employee was free to quit at any time , while the terms of the promise freed Delta from any obligation to pay any benefits to him. Miller v. American Airlines, Inc., 632 F. 2d 586, 591 (5th Cir. 1980).
Despite language in Delta’s agreement that stated the employer’s promise to contribute to the retirement plan was binding, case law had long made clear that such language alone does not demonstrate a contractual obligation. Rather, additional contractual language such as listed in the Restatement (Second) of Contracts § 2(4) would be required to signify a binding promise. Id.
A promise to be bound may also turn an illusory promise into an enforceable promise if the promisor indicates what elements will be required for acceptance.
How Courts Address Illusory Promises
Disputes involving illusory promise contracts are relatively rare. But when they do appear, courts typically divide between two approaches in assessing whether a contract suffers from an illusory promise. The first approach, often called "immateriality," looks to the underlying purpose of the contract by assessing the value of the consideration, and in particular whether it is "real and substantial." In many cases, courts employing this approach have found that an illusory promise that lacks discretion or apparent value is nevertheless "material" if it is "within the contemplation of the parties as a core element of their bargain." The second approach, often adopted where the allegedly illusory promise is in an option or renewal clause, assesses an illusory promise by looking to whether it is "unconscionable or illusory." Instead of focusing on the underlying value of the consideration exchanged, courts adjudicating a case under this rubric may look to whether or not a promise is illusory based on grounds related to the "totality" of the agreement, such as where the exercise of the right simply "has no other effect than to relieve [the promisor] from the performance of a legal duty." In their relatively rare forays into addressing illusory promise contracts, courts have also cited Restatement (Second) of Contracts § 84(c), which enumerates several categories of considerations that are deemed binding in the absence of a valid binding commitment to purchase or buy. Those categories include, among others, "an exclusive dealings agreement; a requirements contract; an output contract; a contract requiring satisfaction of a standard that is other than a consumer’s satisfaction; a conditional gift; a conditional promise to transfer; a conditional promise to deliver; [and] a conditional promise to perform other acts in exchange for a return promise." Courts have also sometimes turned to Restatement (Second) of Contracts § 77, which holds that "[a] promise which by its terms is conditional but which actually allows no option and is not supported by consideration is not enforceable despite the form of the language employed."
How to Avoid Illusory Promises in a Contract
When creating contracts, it is important to avoid illusory promises even if the doctrine of illusory promises is of uncertain benefit for plaintiffs. However, trial judges have the discretion to decide whether or not a contract creates a binding obligation per Morrison v. Anderson and it may be because of their skepticism about public policy that virtually every appellate opinion relating to the issue has involved a contract between a consumer and a business. The way to avoid the problem of having a contract classified with the aptly named "lip service" contracts is to ensure that a promise under a contract has an exchange in return. A contract in which a promise is made only by one party and for which there is nothing from the other side in exchange is undoubtedly vulnerable to being determined to be an illusory promise and therefore not binding . A promise can either be created expressly, such as writing that someone promises or guarantees something, or, following oxygen being air, impliedly. Common phrases used to express promise include, but are not limited to: "I will;" "I can;" "I shall;" "I must;" "I do," "I guarantee" etc. An illusory promise can undermine the entire agreement or contract. The implication is that the defendant was not really promising anything at all and only appearing to put his word out there. In other cases, like all contracts, an illusory promise will only undermine a part or specific promissory provision of an agreement rather than the whole thing. For example if the plaintiff agreed to pay $10 in exchange and the defendant offered to sell apples for that amount, there is binding contract because of the mutual consideration, but if the defendant were only required to deliver the apples if deciding to, then the promise was illusory and the contract is not enforced.