Contract Law

Illusory consideration and uncertain terms – arguments of last resort?

Kirralee Young has had a success in a shareholder dispute in the Court of Appeal regarding illusory consideration and uncertainty in respect to the interpretation of a shareholders agreement. 

The decision relates to a dispute between the parties relating to the meaning and operation of certain funding provisions in a shareholders agreement. The agreement regulated their rights as equal shareholders in a company. In broad terms, one shareholder provided the intellectual property and expertise for the business and the plaintiff was required to provide funding. Despite the agreement being in place for over 12 months, one shareholder contended that the agreement was void and uncertain because the funding provisions were illusory and uncertain in the sense that they did not impose a definitive obligation on the other party to provide such funding. i.e there was an unfettered discretion.

It cannot be doubted that promises with no substance, or that are ‘illusory’, are not good consideration. For example, A cannot promise to buy B’s goods in return for ‘whatever A feels like paying’. This type of consideration is discretionary and without substance and is therefore not good consideration.  Nor can it be doubted that a promise is not illusory because the promisor has some discretion in how its obligations are to be performed. It is only necessary that there be an obligation that the promise be performed and that the discretion is contained within the defined parameters. 

The question in this case was whether the discretion was completely unfettered. The plaintiff argued that it did not have a completely unfettered discretion as to the provision of funding because it was required to act in good faith under the agreement and pursuant to duties arising at common law and in equity.  The defendant argued these duties were not fetters on the discretion because they could not be specifically enforced.

The Court of Appeal found in favour of the plaintiff that the consideration was not illusory consideration nor were the provisions uncertain and ultimately that the shareholders agreement was valid. They further found that good faith obligations can act as a fetter and that they did not need to be specifically enforceable. It was enough that those obligations could sound in damages only.

Further details of the case can be found here .

Shareholder dispute regarding new Bunnings kitchen bench top roll out

Kirralee Young succeeds in a shareholder dispute regarding new Bunnings kitchen benchtop product roll out

The decision relates to a dispute between the plaintiff and the first defendant relating to the meaning and operation of certain provisions in a shareholders agreement. The agreement regulated their rights as equal shareholders in a company that carries on the business of developing, designing, manufacturing and marketing kitchen bench tops. In broad terms, the first defendant provided the intellectual property and expertise for the business and the plaintiff provided its funding. The shareholders have now fallen out over the company’s trading and financial position and the plaintiff is unwilling to provide further funding.

Among their respective arguments is the first defendant’s contention that the shareholders’ agreement is void and ineffective because the provisions relating to the plaintiff’s funding obligation either impose an illusory obligation or they are uncertain. These questions raised issues of general application in the law of contract.

His Honour found in favour of the plaintiff that the consideration was not illusory consideration despite the fact that certain conditions were required to be satisfied before the shareholder was required to provide funding and ultimately that the shareholders agreement was valid.

Further details of the case can be found here