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Illusory terms in contracts and what to watch out for

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 good – 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.

Conclusion

If you are concerned that your standard contract terms, or a contract you are about to enter into, contains illusory terms or grants such broad discretions that may undermine the validity of the contract, please contact a member of our Corporate team and we can have a Contract Lawyer assist you – Contact Us.


This publication has been prepared for general guidance on matters of interest only and does not constitute professional legal advice. You should not act upon the information contained in this publication without obtaining specific professional legal advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication and to the extent permitted by law, Cowell Clarke does not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting or refraining to act in relation on the information contained in this publication or for any decision based on it.

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