Spooner v. Reserve Life Insurance Co.
47 Wash. 2d 454, 287 P.2d 735 (1955)
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Rule of Law:
A promise is illusory and does not create an enforceable contract when the promisor retains the unconditional discretion to perform or not. A bonus plan that explicitly states the bonus is a "voluntary contribution" that may be "withheld... with or without notice" renders the promise to pay the bonus illusory and unenforceable.
Facts:
- On February 29, 1952, Reserve Insurance Company issued a bulletin to its agents, including the respondents, detailing a 'Renewal Bonus Plan'.
- The bulletin provided a specific schedule for calculating bonus payments based on the agents' performance, measured by their 'lapse ratio'.
- The agreement contained a clause stating, 'This renewal bonus is a voluntary contribution on the part of the Company. It is agreed by you and by us that it may be withheld, increased, decreased or discontinued... with or without notice.'
- The bulletin also required the bonus to be contingent on the agent being actively employed at the time of payment.
- The agents signed a copy of the agreement and continued to work for the company for the full twelve-month bonus period, from February 29, 1952, to February 28, 1953.
- During this period, the agents met the performance criteria outlined in the bonus schedule, achieving a lapse ratio that qualified them for a bonus payment.
Procedural Posture:
- The agents (plaintiffs) sued the Reserve Insurance Company (defendant) in a trial court to recover bonus payments.
- The trial court found in favor of the agents and entered a judgment for the amount of bonuses they claimed they were owed.
- The Reserve Insurance Company (appellant) appealed the trial court's judgment to this court, with the agents acting as the respondents.
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Issue:
Does a company's bonus plan create an enforceable contract when the plan document explicitly states that the bonus is a "voluntary contribution" that the company may withhold, decrease, or discontinue at its sole discretion and without notice?
Opinions:
Majority - Hill, J.
No. A company's bonus plan does not create an enforceable contract when it reserves the company's absolute discretion to withhold payment. The promise contained in the bulletin is illusory because the language giving the company the right to withhold the bonus with or without notice makes performance entirely optional. While the agents performed their side of the arrangement in reliance on the bonus, they were relying on the 'corporate conscience of the appellant and not upon an enforcible contract.' The court cannot ignore or delete the unambiguous terms that make the promise non-binding, even if the result seems harsh or one-sided. An illusory promise cannot serve as consideration for a contract, and therefore no enforceable contract was formed.
Analysis:
This decision solidifies the contract law doctrine of illusory promises, confirming that a party cannot be bound by a promise if it has reserved an unrestricted right to avoid performance. The ruling emphasizes the critical importance of clear and unambiguous language in employment agreements, particularly concerning discretionary compensation. For employees, it serves as a caution that bonus announcements containing discretionary clauses may not be legally enforceable rights. For employers, it clarifies how to structure a truly discretionary bonus program that avoids creating contractual liability, though the court itself described such a practice as 'perilously near the perpetration of a fraud.'
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