What is an illusory contract?
How do you legally define it?
What are the important elements you should know!
In this article, we will break down the legal definition of an illusory contract, so you know all there is to know about it!
Keep reading as we have gathered exactly the information that you need!
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What is an illusory contract
An illusory contract (or illusory agreement) is a contract entered into between two parties where one party appears to have promised consideration to the other, while in reality, there is nearly no consideration at all.
In other words, the contract benefits one party while the other party entered into the contract on the perception of getting consideration, while in reality, there was little to no consideration.
In contract law, illusory contracts are not enforceable.
Illusory contract definition
How do you define an illusory contract?
An illusory contract is a contract that appears to be validly formed but does not provide consideration to both parties.
In essence, one party benefits from entering into the contract while the other party’s consideration is illusory.
Elements of an illusory contract
How can you tell if a contract is illusory?
What constitutes an illusory contract in law?
Declaring a contract as illusory requires that a court evaluate the circumstances surrounding the conclusion of the contract, the intention of the parties and the consideration expected by the parties when signing a contract.
As a result, a contract may be declared illusory but valid and enforceable in another case.
Let’s see what elements are present in an illusory agreement.
One of the first elements to consider is the lack of consideration for a party to the contract.
When a party is legally obligated to another while the other has insubstantial consideration, you may be in the presence of an illusory contract.
If a party does not get any consideration from a contract but is bound to perform obligations, the illusory consideration may make the contract unenforceable.
Lack of mutuality
Mutuality in contracts is the “meeting of the minds”.
Without mutuality or the meeting of the minds, a contract is not legally formed.
In essence, when there is mutuality, both parties to the contract are bound by legal obligations.
Generally, if any obligation does not bind one party whereas the other one is, then you should have no contract.
Lack of certainty
Another way to recognize an illusory contract is the lack of clear legal obligations for one party and rather clear obligations for the other.
For example, a party may state in a contract that the other party has the right to purchase as many goods as desired.
This can be illusory as it’s not clear how many goods must be purchased.
The obligation lacks certainty.
Another way to identify an illusory obligation is when a party makes a contractual commitment that depends on its own discretion.
For example, Company A shall provide the services when it is ready to render such services.
Evidently, Company A’s obligations are illusory as they fully depend on Company A’s discretion to perform the services or not.
The other contracting party will not have the ability to enforce such a legal obligation where the consideration remains fully under Company A’s control.
Elements of a valid contract
For a contract to be valid and legally binding, you must observe certain formation elements, such as:
- Offer and acceptance
Both parties to the contract bind themselves to legal obligations in light of the consideration they will benefit from.
The consideration must be meaningful to both parties justifying why both parties entered into a contract.
Consideration is something of value exchanged by the parties.
For example, if you agree to pay $1,000 for a laptop, you expect to receive a laptop.
That’s a fair consideration.
However, if you pay $1,000 and you are promised that when the seller so chooses, it will deliver a laptop to you, you will not be happy about that.
The contracting party must have the legal capacity to enter into a contract, and the object of the contract must be legal.
Once these elements are present, you have a valid and enforceable contract.
Where an illusory contract is different is that the element of consideration is missing for one party.
As such, without “consideration” for both contracting parties, the law cannot recognize the contract to be valid and legally binding.
Every case will be assessed based on its own merits and the particular set of circumstances established in court.
One aspect the court will be particularly interested in evaluating is the parties’ intention when entering a contract.
If the parties entered into a contract in good faith but failed to draft the contract properly or did not include certain terms to clarify their obligations, the court may look at the pre-contractual context to assess the intention of the parties.
In such a case, the court will maintain the contract’s validity but will use interpretation rules to decipher the parties’ true intent.
On the other hand, if a party deliberately drafted the contract in vague terms, uncertain obligations or without consideration for the other, the court may declare the agreement to be an illusory one.
Example of illusory obligations
What are some examples of illusory obligations?
Let’s look at a few examples so we can better understand the basics of illusory agreements.
Example 1: Termination clause
If parties enter into a contract where a party has the right to terminate the contract for any convenience and demand from the other party full contract value, that may be considered an illusory contract.
In essence, a party commits to an obligation in exchange for payment but retains full discretion to terminate the contract at-will and demand full price from the other party without executing any of its obligations.
Example 2: Performance of an obligation
If a party enters into a contract but has full discretion to perform the obligations outlined in the contract while the other party is bound to perform, you may have an illusory contract.
In this example, the obligations of one party are legally enforceable and due while the other party’s obligations are optional.
Regardless of whether the party has an option to actually perform its obligations or not, the other party is bound to execute.
This clearly lacks mutuality and cannot be enforced in law.
So what is the legal definition of an illusory agreement?
An illusory contract is a type of contract that is not enforceable due to its indefiniteness or lack of mutuality.
The courts indicate that when a party has the option to perform an obligation or not, then no contract can be formed and neither side can be bound to its terms.
Let’s look at a summary of our findings.
If you enjoyed this article on illusory contracts, we recommend you look into the following legal terms and concepts. Enjoy!
Related legal terms
Contract consideration law
Contract of adhesion