Illusory Contracts

Illusory Contracts

  • Illusory contracts arise when parties appear to agree on essential terms with sufficient clarity, but the promisor doesn't actually commit to performing anything of value.
  • Essentially, the promise is deemed illusory because it lacks genuine obligation.

Placer Development and the Commonwealth Case

  • This case is a leading example of illusory contracts.
  • Background:
    • On May 20, 1952, Placer Development entered a contract with the Commonwealth government.
    • Placer agreed to establish a company in Papua New Guinea for wood product production and import these products into Australia.
  • Clause 14:
    • If customs duty was paid on imported wood products and not remitted, the Commonwealth would pay the timber company a subsidy.
    • The subsidy amount or rate would be determined by the Commonwealth from time to time.
    • The subsidy paid could not exceed the customs duty paid and not remitted.
  • Events:
    • Placer established the timber company and imported wood products between 1959 and 1963.
    • Customs duty was paid on these imports but not remitted.
    • The Commonwealth never paid any subsidy to Placer.
  • Legal Action:
    • Placer sued the Commonwealth for payment of the subsidy.
    • The Commonwealth argued that Clause 14 was illusory and unenforceable because it retained discretion over the subsidy amount or rate.
  • High Court Decision:
    • The High Court agreed with the Commonwealth.
  • Justice Quito's Reasoning:
    • If words constitute a promise but are accompanied by other words showing the promisor has discretion on whether to fulfill the promise, no enforceable contract exists.
  • Justices Taylor and Owen's Reasoning:
    • A promise to pay an unspecified amount is unenforceable if the amount rests in the promisor's discretion, and there's no subsequent provision fixing the amount.
    • Such promises are considered illusory rather than merely vague.
  • Majority Finding:
    • The Commonwealth's promise was illusory because it had total discretion to decide whether to pay a subsidy and how much, subject to the limit in Clause 14.
  • Justice Quito's Conclusion:
    • The Commonwealth's promise was essentially to pay a subsidy, if any, as decided by the Commonwealth parliament.
    • This did not create a contractual obligation.
    • A government subsidy promise is meaningless without specifying an amount or calculation basis.
    • There's no general standard of reasonableness for a subsidy's quantum.
  • Overlap of Concepts:
    • Justice Quito described the word subsidy as meaningless without further agreement, highlighting how the concepts of uncertainty and illusory promises can overlap.
    • The court couldn't refer to an external standard to resolve the issue because none existed.

Biotechnology and Pace Case

  • In a previous video on certainty, it was mentioned that Biotechnology argued that the promise to establish a senior staff equity sharing scheme was both uncertain and illusory.
  • Both the President of the Court of Appeal and Justice McHugh agreed that the promise was also illusory.
  • Justice McHugh's Question:
    • Did Biotech's promise that Dr. Pace could participate in the scheme imply a further promise to actually create the scheme?
    • Was Dr. Pace to participate only if and when a scheme was formulated, or was there a promise that a scheme would be formulated?
  • Conclusion:
    • Biotechnology neither expressly nor impliedly promised to actually implement the scheme.
    • Whether or not Biotechnology established the scheme was entirely up to Biotechnology's discretion.
    • Therefore, the promise was illusory.

Illusory Promise Definition

  • An illusory promise gives the promisor complete discretion on whether to perform.

Meehan and Jones Case

  • Sometimes, courts find implied obligations which rescue a term from being declared illusory.
  • Background:
    • The Joneses owned land with an oil refinery and entered a contract on March 14, 1979, to sell the land to Meehan.
  • Special Condition One:
    • The contract was subject to:
      • A. Meehan entering into a satisfactory agreement with Ampol Petroleum Limited for crude oil supply until Meehan received government approval for a 500-barrel-per-day crude oil allocation.
      • B. Meehan receiving approval for finance on satisfactory terms to complete the purchase.
    • If either condition wasn't satisfied by July 1979, the contract would be void, and monies refunded.
  • Events:
    • On July 13, 1979, the Joneses rescinded the contract, arguing that the word satisfactory in both subclauses was too uncertain and rendered the promises illusory.
  • High Court Decision:
    • The High Court construed the word satisfactory in context and found that it wasn't too uncertain.
  • Reasoning:
    • Special condition one was inserted for Meehan's benefit.
    • The word satisfactory meant subjective satisfaction.
    • Meehan had to be personally or subjectively satisfied with any supply agreement with Ampol and any finance obtained.
    • Whether Meehan was honestly satisfied was a question of fact the court could decide.
  • Illusory Argument:
    • If the contract depended on Meehan's personal satisfaction, didn't that mean the promises were illusory?
    • Wasn't it left to Meehan's discretion whether he bothered to find finance and negotiate a supply agreement?
  • Court's Response:
    • The requirement of Meehan's personal satisfaction did not make the contract illusory.
    • Special condition one impliedly obligated Meehan to honestly (and maybe reasonably) attempt to find finance and a supply agreement.
    • Meehan was also obligated to honestly (and maybe reasonably) assess whether they were satisfactory.
  • Justice Mason's Point:
    • The implication of obligations to act honestly (and maybe reasonably) took special condition one out of the realms of illusory.
    • It obligated Meehan to do something before he could decide to enter the contract.
    • Meehan's judgment on what constitutes satisfactory finance is not an unfettered discretion, but must be reached honestly (or honestly and reasonably).
    • A court could decide whether Meehan properly discharged those implied obligations.
  • Outcome:
    • The High Court found that special condition one and the contract weren't illusory and allowed Meehan to sue for specific performance.

Rescuing Illusory Promises

  • A term that appears to confer unfettered discretion on a party to perform may be rescued by express or implied obligations.
  • Examples include:
    • An obligation to act honestly or reasonably.
    • An obligation to do something before declaring a contract ended or unenforceable.
  • Whether a court finds such supplementary obligations will depend on the contract itself and the outcome of applying the rules of construction and implied terms.
  • As Chief Justice Gibbs held, every such case depends on the particular words of the contract in question, and it is not profitable to compare cases decided on different contractual provisions.
  • Finding implied obligations may rescue an apparently illusory promise, but it's not guaranteed.