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§ 25 Option Contracts

An option contract is a promise which meets the requirements for the formation of a contract and
limits the promisor's power to revoke an offer.
The option contract is simply a contractual promise that limits the power of the
offeror to revoke the offer. Restatement § 25. f course, the effect of this is that
the offeree has a defined period in which to accept the offer. The promise to
limit the revocation is called the "option."

Let's take one last look at the process of forming an option contract and the
attributes of the different methods of formation to put this all together then:

I. Offers are irrevocable when there is an option contract.

Once you decide that an offer has been made, then determine whether the
offer is irrevocable. An irrevocable offer will prevent the termination of the
power of acceptance by the offeror. See Restatement § 35 , 1-2 Corbin on
Contracts § 2.14. An option contract will make an offer irrevocable for a
specified period of time. See the methods below regarding the formation of an
option contract. Restatement § 25.

II. Methods to form an option contract.

A. Has the performance begun by the offeree?


In the case of an offer for a unilateral contract, an option contract may be
created when the offeree tenders or begins the performance requested in the
offer.
B. Option contract supported by consideration.
A binding option may be created by establishing there is a contract to keep
the offer open through having the elements of a contract present:
1. an offer and a promise not to revoke the offer or to keep the offer open,
2. an acceptance of the promise to keep the offer open, and
3. consideration, i.e., some bargained-for exchange, for the promise to keep
the offer open.
Restatement § 25. Look for these elements in the offer and the response by
the offeree. Remember the consideration for the option contract must be
separate from the underlying contract and bargained for in order to be binding.
C. Option contract without consideration.
A binding option may be created by a writing signed by the offeror which
recites a purported consideration and proposes a fair exchange, Restatement
§ 87(1)(a),
D. Firm offers.
1. Local Statutes. Local statutes sometimes indicate that bids for
construction work for city, state or other governmental branches are
irrevocable for a specified period. Other times, courts have found that even in
the absence of a specific statute, public policy makes bids on public projects
firm offers that are irrevocable (at least after the opening of the bids). Is there
such a statute present?
2. Uniform Commercial Code. UCC § 2-205 provides that an offer by
a merchant (a person dealing in goods of the kind) to buy goods in
a SIGNED writing which gives assurances that it will be held open is not
revocable for lack of consideration. U.C.C. § 2-205. Is there a transaction in
goods present that would make the UCC applicable?
E. Detrimental Reliance.
Look for detrimental reliance where there has not been part performance.
Although this is an exceptional remedy not often used by courts,
circumstances may require the offeree to "undergo substantial expense, or
undertake substantial commitments, or forego alternatives, in order to put
himself in a position to accept by either promise or performance." Substantial
and foreseeable reliance on the offer will create an option contract in these
situations to the extent necessary to avoid injustice. Restatement § 87
comment e.

An option contract can be formed:

(i) by the offeree beginning to perform under an offer that looks to acceptance
by performance only, Restatement § 45,
(ii) by a writing signed by the offeror which recites a purported consideration
and proposes a fair exchange, Restatement § 87(1)(a),
(iii) by statute, including a firm offer under U.C.C. § 2-205, and
(iv) by detrimental reliance, Restatement § 87(2).

A binding option may be created by establishing there is a contract to keep


the offer open through having:

1. an offer and a promise not to revoke the offer or to keep the offer open,

2. an acceptance of the promise to keep the offer open, and


3. consideration, i.e., some bargained-for exchange, for the promise to keep
the offer open.

Make sure that all the elements are present.

Where an offer invites an offeree to accept by rendering a performance and


does not invite a promissory acceptance, an option contract is created when
the offeree tenders or begins the invited performance or tenders a beginning
of it. Restatement § 45. Part of the actual performance invited must be given
or tendered in order to preclude revocation under this Section.
-Beginning preparations, though possibly essential to carrying out the contract
or to accepting the offer, is not enough. For instance, the choice involving an
offer to let the debtor pay early is based on Petterson v. Pattberg, 161 N.E.
428 (N.Y. 1928). That court held that the debtor's presenting himself at the
door and announcing that he had come to pay the debt amounted to
preparation to perform. Only an actual tender of the money might have made
the offer irrevocable. Preparations to perform may, however, constitute
justifiable reliance sufficient to make the offeror's promise binding
under Restatement § 87(2).
nominal consideration is insufficient to support an option contract when the
exchange is not on fair terms. Here, $5 to establish an option to purchase a
$500,000 collection of rare original print books for a mere $400 would not
likely be enough consideration.
Article 2 of the U.C.C. applies. U.C.C. § 2-205 permits a MERCHANT to
make an irrevocable offer in a signed writing.
-Substantial and foreseeable reliance on the offer will create an option
contract in these situations to the extent necessary to avoid
injustice. Restatement § 87.

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