Illusory Promise: 3 Simple Steps

As you know, an enforceable contract must be supported by valid consideration. However, there are some instances where you will commonly argue that there is no supporting consideration. One of those instances is an illusory promise. Generally illusory promises lack consideration because the party who makes such a promise is not really committing to do anything. There are a few types of illusory promises.

Personal Satisfaction Clause

One type of illusory promise is the personal satisfaction clause. This is like the time I commissioned Big Steve for a photo shoot. Our contract read that I would pay $3,000 for the photo shoot if I was pleased with the final product. When Big Steve took me before Judge Judy for failure to pay, she ruled that our agreement was not enforceable. While on the surface I appeared to have made a promise to pay for the photo shoot in reality because payment was contingent on whether or not I was “pleased” I had not truly committed to be bound. My being pleased was too unlimited to qualify as a binding promise. For this reason satisfaction clauses are considered illusory promises under the common law.

However, the Restatement has an exception to this rule. Under the Restatement illusory promises are, in fact, enforceable because modern courts apply what is called an implied duty of good faith to my promise. By implying good faith I am no longer as free to simply avoid the contracts enforceability because of my unfettered freedom to say that I am pleased or unpleased. Good faith treats my otherwise illusory promise as being restricted and therefore supported by consideration. In class or on an exam remember to make an argument for illusory promise and a counter argument for implying good faith.

Exclusive Dealing Contracts

Another type of illusory promise is the exclusive dealing contract. This happened once when Big Steve and I entered into a contract wherein I had the exclusive right to sell Steve’s new line of urban ware. Under the contract, if I sold any of Steve’s clothes I would have to split the profits with him but I was not obligated to meet any specific profit goals. When Big Steve licensed another retailer to also sell his new line I took him to court for breach of contract. To my surprise Steve argued that our agreement was unenforceable because exclusive dealing contracts are not supported by consideration. His argument was that while he had promised that I would have the exclusive right to sell his new line I had not actually returned any promise at all because in exchange for being the sole retailer I was not obligated to make any sales or profits.

Using the UCC’s good faith implication I countered Big Steve’s consideration argument. You, see the implied duty of good faith treats my other wise illusory promise as supported by consideration because the implication imposes a duty that I would use reasonable best efforts to market and sell Big Steve’s urban line. Because of the Restatement’s modern approach Big Steve cannot avoid the enforceability of our exclusive dealing contract on the grounds that it is illusory.

Requirements and Outputs Contract

Another type of illusory promise is the Requirements and Outputs contract. This is sort of like that time I opened up a bar during 1L when I recognized an opportunity to capitalize on the drinking habits of my over worked classmates. Well, since Big Steve had recently launched his home brewery we I entered into a deal where Big Steve would provide any and all beer to my pub over the next three years. After first semester I asked Big Steve for a better deal but he refused to lower his price. In response I simply stopped ordering any more beer from Big Steve. When he sued me I argued to Judge Judy that Big Steve and I did not have an enforceable contract because I had only promised to buy beer when I needed it and at any time I was free to say that I no longer needed beer. The way I looked at it, this made my promise with Big Steve illusory and therefore there was no supporting consideration.

Judge Judy wasn’t buying my argument because she favored the modern and Restatement approach which implied a duty of good faith to our contract. Under the duty of good faith my otherwise illusory promise would be enforceable because I was trying to avoid the contract not for the good faith reason that I no longer genuinely needed beer but for the bad faith reason that I wanted to pressure Big Steve into lowering his price by halting all of my orders.

Now that you’ve got the big picture, read your cases, listen in lecture and get practice analyzing the different types of illusory promise with practice problems.