Illusory contract terms are those provisions of an agreement which are so vague, ambiguous or grant one party so much discretion, that they fail to create an actual legal obligation.

Illusory terms

In Australian contract law, an illusory term’s presence in a contract – whether it be for services, provision of goods, insurance, sale, or otherwise – can have significant consequences for ongoing contractual relations between parties, potentially causing the contract to fall away.

Evans v Davantage [2019] FCA 884

A recent decision of the Federal Court considered the question of whether a party’s unilateral discretion to fulfil a promise under a contract will cause the relevant contract term to be deemed “illusory”. Evans v Davantage Group Pty Ltd concerned the Davantage Group issuing motor vehicle warranties under the name of National Warranty Company. The contracts included a term, which amongst others, provided that Davantage:

‘is not obliged to pay all claims that come within the terms and conditions of the Warranty.’

This term, amongst others, was held to grant Davantage an absolute discretion to reject customer’s warranty claims thereby undermining the foundational aspects of the contract itself. Relevantly Justice Beach commented at [111]:

The overriding discretion reserved to the respondent qualifies its promise to pay consumers to such a substantial extent that it renders the promise illusory.’

This case is a reminder of the importance of ensuring that contracts – whether it be for a warranty, service, or goods – include terms that are sufficiently certain in their operation as well as the rights and obligations they impose on the parties. If contract terms grant discretions that make performance by a party to that contract essentially optional, it may mean that those terms are illusory and render the relevant term or, in some cases the whole contract, void.

Additional risks may arise when dealing with consumers and small businesses if the contract takes a “standard form”, with the prohibition on unfair contract terms in the Australian Consumer Law potentially applying and granting contracting parties an option to terminate or void a contract.