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.