Illusory obligations in a contract

Posted: April 11, 2017 By: De Novo Review Category: Contracts

Can a party to a contract enforce a termination clause that allows both parties to terminate with or without cause but requires that the other party pay the complete amount of the contract upon exercising its right to terminate?

Probably no. “It is basic hornbook law that a contract which is not mutually enforceable is an illusory contract.” Pan-Am Tobacco Corp. v. Dept. of Corrections, 471 So. 2d 4 (Fla. 1984). “Where one party retains to itself the option of fulfilling or declining to fulfill its obligations under the contract, there is no valid contract and neither side may be bound.” Id. (citations omitted). When a contractual damages provision renders one party’s performance obligation to be wholly illusory and allows that party to breach with impunity, such a provision cannot be enforced. See Port Largo Club, Inc. v. Warren, 476 So. 2d 1330 (Fla. 3d DCA 1985). In Port Largo, the Third District Court of Appeals determined that a damages clause limiting a buyer’s damages to the return of the deposit rendered the seller’s obligation to perform under the contract illusory. Id. A limitation where a buyer can only recover its own money allows the seller to breach the contract without any consequences. Id.

Although parties to a contract may limit their remedies and these need not be the same, a default or termination clause that takes a “heads-I-win, tails-you-lose” approach is so skewed that it is patently unreasonable. Blue Lakes Apts., Ltd. v. Gowing, 464 So. 2d 705 (Fla. 4th DCA 1985). It would subvert the purpose of the contract to allow one party to breach without consequences while the other party is faced with real obligations and real consequences for the breach thereof. Id.Such provisions are antithetical to the concept of fair dealing in the marketplace and will not be enforced by courts of law.” Id. See also Hardwick Properties, Inc. v. Newbern, 711 So. 2d 35 (Fla. 1998)(“Under contract law generally, while parties unquestionably enjoy the freedom to limit their respective remedies under a contract, a contract must nevertheless be reasonable and must provide a mutuality of obligation in order to be considered enforceable.”); Handi-Van, Inc. v. Broward County, 116 So. 3d 530 (Fla. 4th DCA 2013)(“A contract is illusory under Florida law when ‘one of the promises appears on its face to be so insubstantial as to impose no obligation at all on the promisor-who says, in effect, ‘I will if I want to.’”)

When a termination clause in a contract allows either party to terminate with or without cause, the contract cannot require that one party (party A) pay the entire value of the contract upon exercising its right to terminate while imposing no obligations on the other party (party B) upon exercising the same right. Under this scenario, if party A terminates the contract, it is still liable for all payments specified therein. On the other hand, if party B terminates the contract, it need not provide any payments after the termination date. In essence, this one-sided termination agreement allows party B to violate the agreement with impunity. It permits party B to do nothing under the contract, thereby forcing party A to terminate for cause. Upon party A’s termination of the contract for cause, party B is then entitled to collect the entire sum referenced in the agreement. Thus, party B’s obligation under the contract is illusory. This is the quintessential “heads-I-win, tails-you-lose” approach that Florida’s courts have repeatedly refused to enforce for lack of mutuality of obligation.

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