Option contract under common law


An option contract is a type of contract that protects an offeree from an offeror's ability to revoke their offer to engage in a contract. Consideration for the option contract is still required as it is still a form of contract, cf. Typically, an offeree can provide consideration for the option contract by paying money for the contract or by providing value in some other form such as by rendering other performance or forbearance. See consideration for more information.

An option is the right to convey a piece of property. The person granting the option is called the optionor [1] or more usually, the grantor and the person who has the benefit of the option is called the optionee or more usually, the beneficiary. Because options amount to dispositions of future property, in common law countries they are normally subject to the rule against perpetuities and must be exercised within the time limits prescribed by law.

In relation to certain types of asset principally land , in many countries an option must be registered in order to be binding on a third party. The option contract provides an important role in unilateral contracts. In unilateral contracts, the promisor seeks acceptance by performance from the promisee. In this scenario, the classical contract view was that a contract is not formed until the performance that the promisor seeks is completely performed.

This is because the consideration for the contract was the performance of the promisee. Once the promisee performed completely, consideration is satisfied and a contract is formed and only the promisor is bound to his promise. A problem arises with unilateral contracts because of the late formation of the contract. With classical unilateral contracts, a promisor can revoke his offer for the contract at any point prior to the promisee's complete performance. The promisor has maximum protection and the promisee has maximum risk in this scenario.

An option contract can provide some security to the promisee in the above scenario. An option is the right to convey a piece of property. The person granting the option is called the optionor [1] or more usually, the grantor and the person who has the benefit of the option is called the optionee or more usually, the beneficiary. Because options amount to dispositions of future property, in common law countries they are normally subject to the rule against perpetuities and must be exercised within the time limits prescribed by law.

In relation to certain types of asset principally land , in many countries an option must be registered in order to be binding on a third party. The option contract provides an important role in unilateral contracts. In unilateral contracts, the promisor seeks acceptance by performance from the promisee. In this scenario, the classical contract view was that a contract is not formed until the performance that the promisor seeks is completely performed.

This is because the consideration for the contract was the performance of the promisee. Once the promisee performed completely, consideration is satisfied and a contract is formed and only the promisor is bound to his promise.

A problem arises with unilateral contracts because of the late formation of the contract. With classical unilateral contracts, a promisor can revoke his offer for the contract at any point prior to the promisee's complete performance. The promisor has maximum protection and the promisee has maximum risk in this scenario. An option contract can provide some security to the promisee in the above scenario. The promisor impliedly promises not to revoke the offer and the promisee impliedly promises to furnish complete performance, but as the name suggests, the promisee still retains the "option" of not completing performance.

The consideration for this option contract is discussed in comment d of the above cited section. Basically, the consideration is provided by the promisee's beginning of performance. Case law differs from jurisdiction to jurisdiction, but an option contract can either be implicitly created instantaneously at the beginning of performance the Restatement view or after some "substantial performance. For example, if the offeror tells the offeree to take some time to think the offer over, the offeree will have a reasonable amount of time to consider the offer and accept it if he chooses to.

When an offer is sent by mail, acceptance is considered timely if it is sent within a reasonable time under the circumstances. If the offeree rejects the offer, his power of acceptance is terminated even if the power of acceptance would not have otherwise lapsed. A counteroffer is an offer made by the offeree to the offeror that concerns the same subject matter as the original offer but differs in its terms.

However, the counteroffer is also an offer in and of itself and therefore, it creates a new power of acceptance in the original offeror. An option contract is a contract in which the offeror promises to keep his offer open for a certain amount of time and the offeree actually gives the offeror consideration for that promise as opposed to our examples at the beginning of this chapter where no consideration is given for the promise to hold the offer open.

Where option contracts are involved, a counteroffer made during the option period does not terminate the power of acceptance because the offeree has the contractual right to have the offer held open during its term. See Humble Oil and Refining Co. A conditional or qualified acceptance is an acceptance that adds to, or changes, the terms of the original offer. This is essentially a counteroffer. Just like a counteroffer, a conditional or qualified offer is an offer in and of itself and can be accepted or rejected by the original offeror.

Please note that an unconditional acceptance, coupled with a request is considered a valid acceptance. In other words, if an acceptance deviated from the offer in any way, it was deemed a qualified or conditional acceptance and did not constitute a valid acceptance. Instead, it had the legal effect of a counteroffer. Termination of an offer can also arise through a valid revocation of the offer by the offeror.

A revocation is a retraction of the offer. The fact that a revocation becomes effective only when the offeree receives it becomes problematic when offers, acceptances and revocations are sent back and forth through the mail. Additionally, in order for a revocation to be effective, it must be communicated by the offeror to the offeree. However, there are two exceptions to this rule. The first exception involves offers made to the public.

An offer made to the public ex: This kind of publication terminates the power of acceptance, even for those people who might have seen the offer but did not see the revocation. The second exception involves indirect revocations.