Options and Firm Offers

Option Contract

An enforceable promise to keep an offer open for a stated period of time.

• For the duration of the contract, the offer can’t be terminated by means of revocation, rejection, counteroffer, death of the offeror or incapacity of the offeror.

Entering into the option contract does not obligate the offeree to accept the offer for the underlying exchange.

Option: Promise to Keep the offer open for 7 days in exchange for $50.00. 

Underlying Exchange: Dwight’s farm in exchange for $500,000

Spot the Option vs. The Underlying Exchange Contemplated: Example: Dwight offers to sell Jim his farm for $500,000.  Jim wants time to consider the deal and consult with Pam before accepting Dwight’s offer.  Dwight offers to leave the offer open for 7 days in exchange for $50.00.

Common View for Option Contracts

So long as the option was obtained by fair means, its term is not unduly long, and the parties have taken the trouble to formalize it in a writing, the mere recital of consideration is sufficient. It makes no difference if the consideration is nominal or a sham. 

Restatement 87(1)(a): Lenient approach to finding consideration in option contracts

“(1) An offer is binding as an option contract if it

(a) is in writing and signed by the offeror, recites a purported consideration for making the offer, and proposes an exchange on fair terms within a reasonable time….”

• Requirement for a signed writing only applies where one is trying to enforce a contract based on a lesser consideration. It doesn’t apply where the option contract is supported by standard consideration.

Rest. 2d 45: Option Contract Created by Part Performance or Tender

(1) 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.

(2) The offeror's duty of performance under any option contract so created is conditional on completion or tender of the invited performance in accordance with the terms of the offer.

James Baird Co. v. Gimbel Bros

Drennan v. Star Paving Co.

Restatement 87(2) : Reflects Drennan Rule

“An offer which the offeror should reasonably expect to induce action or forbearance of a substantial character on the part of the offeree before acceptance and which does induce such action or forbearance is binding as an option contract to the extent necessary to avoid injustice.”

• The beginning of actual performance is required to create an option contract, where the offer is for a unilateral contract. Mere preparations for performance is not enough. However, an action for recovery of costs incurred in preparation for performance may be brought.

Lahr Construction Corp. v. J. Kozel & Son, Inc.

Merchant Firm Offers: UCC 2-205

An offer by a merchant to buy or sell goods in a signed writing which by its terms gives assurance that it will be held open is not revocable, for lack of consideration, during the time stated or if no time is stated for a reasonable time, but in no event may such period of irrevocability exceed three months; but any such term of assurance on a form supplied by the offeree must be separately signed by the offeror.

Merchant Firm Offers Explained

Offeror is a Merchant—This provision does not require that the transaction be between merchants.  Only the offeror need be a merchant.

Signed Writing—Consistent with our analysis under the Statute of Frauds.  E.g., an electronic record will suffice as a writing, and any form of authentication will qualify as a signature.

Assurance—Must be deliberate and express manifestation of intention to keep an offer open.  Mere statement of when an offer will lapse is not enough—must be an assurance it will be held open for a specified period.

Three Month Limit—Under no circumstances may a firm offer under this provision be held open longer than three months.  If a longer period is stated, it will only be effective for three months.  To create an option contract for a longer period of time, there must be consideration.

Supplied By Offeree—Requirement of a separate signature when form supplied by offeree protects the offeror and assures the offeree that the offeror is aware of and intends the provision.