When you promise to do nothing: illusory promises.

Most of us engage in contracting almost every day. Whether it is your purchase agreement for a streaming service, a contract for sale of a house, even a cup of coffee on your way to work is a contract for the sale of goods.  Contracts in their simplest form are just an exchange of promises.  You promise to pay money, the barista in turn promises to deliver you a cup of coffee.  With this in mind, what happens when someone attempts to enter into a contract, but chooses not to promise anything at all?

What is an illusion, and how did my promise disappear?

A promise can become an illusory promise when one party attempts to contract but refuses to promise anything at all.  In essence, parties exchange promises, afterward one of the promises magically disappears.  This trick works as follows:

David, a renowned magician, wants a cup of coffee, but he does not feel like paying for it.  David approaches the counter of his local coffee shop and proposes that the Barista give him a cup of coffee, and he will pay the full price, plus a great tip, so long as it is in his best interest.  The Barista, excited for a large tip ahead of the holiday season, hands David his cup of coffee, but David does not hand back money.  Instead of payment, David sits and thinks for a moment.  He produces an abacus and after some calculations, decides that it would actually not be in his best interest to pay and tip the Barista for his coffee.  He explains that he would have paid if it had been in his best interest, but upon closer inspection it would better serve his interests if he kept the money.  David’s promise to pay has disappeared.

Although the above scenario is whimsical, similar instances of illusory promises have plagued contract law for centuries.  Because of the varying nature of contracts, as well as a need for flexibility in business dealings, illusory promises emerge in contracts to this day.  This is usually found in complex contractual dealing where parties attempt to reserve discretion over certain aspects of the dealings.  There is a great deal of recent precedent addressing when a party has the ability to modify a contract without approval.  If one party has the power to change terms after an agreement, such as price, without informing or acknowledgment of the other party, the contract may be illusory.  This is because the agreement at the time it was signed was actually not based on the terms the controlling party offered, but on terms they have modified after the parties have already agreed.  This can colloquially be called a “bait and switch.”

It is important to note that precedent cases on the subject have clarified that parties can maintain discretion to change certain terms of goods and services.  Companies like phone service providers are legally allowed to change their price after entering into a contract, as long as this is within the reserved discretion of the contract.  The same can be said for employee handbooks or contracts concerning employee benefits.  In both cases contracts are not illusory, so long as the exercise of the discretion is limited under the terms and subject to the principals of “fairness and reasonable notice.” Asmus v. Pacific Bell (2000) 23 Cal.4th 1, 16.  

What is my recourse if I am the victim of an illusory promise in a contract?

Being the victim of an illusory promise to a contract can be a difficult proposition.  Examining this from the position of the Barista in the previous example, what can the Barista do?  In this situation, the Barista can demand the coffee back.  An illusory promise in a contract means that one of the promises is not a promise at all.  If one of the promises is not there, the contract never actually existed.  The coffee is the property of the coffee shop.  Without a valid contract transferring ownership to David, the coffee is not his property.

Without an exchange of promises, a contract will not be created.  If a contract is not created, the benefits and obligations cannot be enforced.  Put simply, a contract based on illusion is void.

By: Dustin J. Moses, Law Clerk

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