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Biotechnology Australia Pty Ltd v Pace

(1988) 15 NSWLR 130

Overview

The case involved an employment contract providing an option to participate ina staff equity sharing scheme; the scheme did not exist and the employee sued for breach of contract.

The Court considered whether the term was illusory or uncertain. Court (by majority) held that it was both.

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Facts

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.

Held

Kirby P

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 unenforceable.

Hope JA (dissenting)

Agreed promises were illusory if promisor has a discretion about whether to do anything. Additionally:

... the promise will not be enforceable if the manner of performance, including the amount of money to be paid or, if relevant, the number of shares to be offered, is a matter entirely in the discretion of the promisor and no criteria by which the performance required of the promisor can be measured, or the minimum of that performance can be measured, is expressed or can be found to be implied ...

Here there was no objective standard against which to measure the offer relating to the equity scheme. However, Hope JA considered Biotech was

... bound at least to make an offer which was an honest one, which gave Dr Pace an option of real and not nominal value and which, in the light of all the circumstances ... could be found to be reasonable.

The law has filled innumerable lacunae in the contractual arrangements of parties by applying a doctrine of reasonableness.

Trying to give effect to the intention of parties, Biotech was required to establish a scheme and give Dr Pace an option on terms it had honestly arrived at. There is no reason why the concept of reasonableness cannot be imported. These would not identify the precise amount of the offer but would provide criteria to fix the 'minimum offer Biotech was required to make'.

I do not think that the law is so removed from commercial and employment practice and exercise that expert evidence should not be admissible to establish what the minimum reasonable amount should be. ...

... the proper conclusion at this stage of the hearing is that there was a valid and enforceable contractual promsie on the part of Biotech to establish a senior staff sharing scheme and that the promise was not unenforceable for uncertainty or as being illusory ...'

McHugh JA

On the issue of whether the consideration was illusory:

A consideration is 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: Placer Development ...

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. 

Where there is a firm promise to pay or remunerate the promisee in return for his services, a conclusion that the consideration was illusory will only be drawn where no standard exists by which the promise can be valued. But even when no objective criterion of measurement is available, it may still be possible to infer a promise to act honestly and/or reasonably. Moreover, notwithstanding that the promisor retains a discretion, the consideration will not be illusory if the discretion must be exercised within specific parameters.

In this case, however, consideration was illusory, as it was solely within Biotech’s discretion and there were no objective standards.

There was no express or implied promise that Biotech would institute the equity scheme - and even if there was it was 'too illusory or too vague and uncertain to be enforceable' or, if that was not the case, breach would only give rise to nominal damages because there ws no external standard by which to determine if the promise was broken.