Legally binding contracts must be clear to prevent ambiguities.

Explicit terms and conditions in contracts shine like the North Star, guiding contracted parties safely to the harbor of smooth contract performance.

Yet, some contracts are not drafted under the star’s bright light — in illusory contracts, promises are as elusive as fog and are quite literally out of reach.

Illusory promises in contract law might seem to be genuine commitments.

However, they lack definitive terms and conditions and are unenforceable in a court, which leaves parties without a legal safety net.

This article will guide you through the nuances of invalid, unenforceable contracts to help you evade such cloudy agreements.

You’ll also discover useful tools for contract management to create, share, and securely store all your business contracts.

Key takeaways

  • All parties involved should be aware that illusory contracts, by definition, are unenforceable, and such contracts do not impose reciprocal obligations.
  • Illusory promises are oral and/or written agreements that can be useful at the start of cooperation but are ineligible to be valid contracts on their own.
  • Before executing any contract, determine whether it has clear terms and conditions and seek legal advice to ensure all obligations and rights are understood and enforceable.

What is an illusory contract?

The first thing that comes to mind while dealing with an illusory contract is that the contract is playing pretend with legalese — because it’s actually not a contract at all as far as the courts are concerned.

With terms unclear, an illusory contract lacks mutual obligations and exchange of promises or values.

Inspect such contracts closely, and you’ll find the lack of consideration — a promise, action, or restriction offered by one party in return for a promise by the other party — makes them unenforceable.

Illusory contracts appear when involved parties are too vague or too optimistic about the value they can deliver.

As placeholders in the early stages of negotiations, you and another party/parties might have illusory contracts when expectations and capabilities are still unclear.

But why does an illusory contract lack consideration?

Strictly speaking, such a document lacks real promises. Yes, you can signal your genuine interest and intent with an illusory contract.

Yet, neither you nor the other parties are truly agreeing to do anything — at this stage, you’re not committed to any clear contractual obligations.

To move on from a purely illusory agreement to a legally binding contract, you need to make sure that the contract truly binds parties and emerges valid and enforceable.

Is an illusory promise the same as an illusory contract?

Not really. Illusory contracts and illusory promises in contract law are very close in meaning but are different terms.

Both lack mutual obligations and involve unenforceable commitments.

However, the two are different with respect to their form in legal practice.

Illusory contracts are written agreements between two parties where at least one party’s commitment is vague.

As a result, no party or not all parties are bound to perform.

Such contracts can work as initial agreements but will not be enforced by a court as legally binding.

On the flip side, an illusory promise is an ambiguous oral promise that imposes no clear obligations on parties.

They can appear in the negotiation process when parties seek more flexibility.

Later, a promisor can perform according to the agreement or refuse to do so — following through on the promise is up to the promisor’s discretion.

Unilateral contracts vs. bilateral contracts explained

In a valid contract, consideration or exchange of values between parties is compulsory.

These can be in the form of unilateral or bilateral contracts.

A unilateral contract is an agreement where one party promises to pay or reward the other only after a specific action is completed.

It is created by the promisor and becomes enforceable when the action starts, with payment following upon completion.

For example, marketing promotional strategies often employ unilateral contracts.

A customer can get a discount or a free product if they purchase a certain amount of goods or services.

The discount (the reward) depends on the customer’s action.

Conversely, a bilateral contract involves mutual obligations between two parties, typically formed after negotiations.

Both parties are legally committed to this type of agreement, unlike in a unilateral contract.

In this regard, illusory contracts and promises fall short, as at least one of the parties involved does not commit to carry out any clear contractual obligations — making such a contract one-sided and therefore invalid.

How can you determine if a contract is illusory or valid?

Is your contract only an illusion, or is it legally enforceable?

Let’s clarify what a contract has to include to be deemed valid — or lacking to be considered illusory.

Illusory contract Valid contract
Unenforceable because it’s vague, the offer lacks clarity A clear offer to do or not do something in exchange for something else
One-sided obligations A clear acceptance of the offer
No mutual consideration Valid consideration
Unilateral power to make changes Actual intent and capacity to enter the agreement

Illusory contract examples that you may face

Let’s imagine a wholesale seller and a buyer for a retail store making a deal.

The seller agrees to put up discounts on some items and sell them to the buyer for ten dollars each.

But the seller conditions it by saying the discount will only happen if those items sell at a high volume at the buyer’s store — and the seller gets to decide what “high volume” means as far as total number of sales.

The seller’s actual intent is vague, which would make contract execution challenging to say the least, and in fact any contract would be deemed illusory.

Or take, for example, two friends starting a business together.

One could say, “Let’s agree to invest money equally and make reasonable efforts to always grow the business, adjusting as we go.” The other agrees, but no contract is signed.

The two may stay committed to working together and eventually sign a valid contract.

Or they could part ways because one friend only spends money and does nothing to grow the business — without clear, legally enforceable obligations, everything else is only an illusory promise.

Elevate your contract management with PandaDoc

Ready to transform promises into binding commitments?

PandaDoc can help you create and manage contracts and will equip you with all the tools you might need.

Customizable templates and the ability to integrate your existing CRM will ensure your contracts meet legal standards and benefit all parties involved — no vague promises, only precise obligations!

When you’re ready to finalize an agreement, you can do it securely by using e-signatures.

And the platform makes it easy to set access permissions and track who opens, edits, and completes documents at any stage of the contract lifecycle.

Sign up for a free demo and experience the advantages firsthand!


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