Biotechnology Australia Pty Ltd v Pace
(1988) 15 NSWLR 130
Pace entered into an employment contract with Biotechnology which provided that he would have ‘the option to participate in the company's senior staff equity sharing scheme.’ There was no such scheme in existence at the time of contract or at any time during Pace’s employment. Pace sued for breach of contract.
Noted the distinction between illusory terms and uncertain terms was described by the High Court in Placer as follows: “… a promise to pay an unspecified amount of money is not enforceable where it expressly appears that the amount to be paid is to rest in the discretion of the promisor and the deficiency is not remedied by a subsequent provision that the promisor will, in this discretion, fix the amount of the payment. Promises of this character are treated … not as vague and uncertain promises - for their meaning is only too clear - but as illusory promises ….”
His Honour noted that where a third person is given power to (and does) resolve any ambiguities in an agreement then the agreement will not be too uncertain - but that was not the case here and the term was far too uncertain to be enforced. It depended entirely on the decision of one of the parties (Biotech) to provide an equity scheme and there was no 'external standard' the court could use to try and resolve the ambiguity. Even if the term was not illusory it was uncertain – how many shares, what class of shares, what options would exist, what rights would attach?. The term was, therefore, unenforceable.
On the issue of whether the consideration was illusory, it will be ‘illusory if its payment or fulfillment depends upon an unfettered discretion vested in the promisor. Thus a promise by the Commonwealth that it will pay a subsidy “of an amount or at a rate determined by the Commonwealth from time to time” is an illusory consideration’. Similarly, the promise of an employer to pay such sum of money as they deem right in exchange for work performed will be illusory.
In employment contracts, however, where there is a promise to remunerate normally the court will apply a ‘reasonable remuneration’ standard based on market criteria, subject to terms specified by the parties.
In addition, even if the ‘promisor retains a discretion, the consideration will not be illusory if the discretion must be exercised within specified parameters.’
In this case, however, consideration was illusory, as it was solely within Biotech’s discretion and there were no objective standards.