§ 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.

COMMENTS & ILLUSTRATIONS:

Comment:

a. "Option." A promise which constitutes an option contract may be contained in the offer itself, or it may be made separately in a collateral offer to keep the main offer open. Such promises are commonly called "options." But the word "option" is also often used for any continuing offer, even though revocable, and indeed is sometimes used to refer to any power to make a choice. To avoid ambiguity the phrase "option contract" is used in this Restatement.

Illustrations:

1. A promises B under seal or in return for $ 100 paid or promised by B that A will sell B 100 shares of stock in a specified corporation for $ 5,000 at any time within thirty days that B selects. There is an option contract under which B has an option.

2. A offers to sell B Blackacre for $ 5,000 at any time within thirty days. Subsequently A promises under seal or in return for $ 100 paid or promised by B that the offer will not be revoked. There is an option contract under which B has an option.

b. The need for irrevocable offers. To provide the offeree with a dependable basis for decision whether or not to accept, the rule in many legal systems is that an offer is irrevocable unless it provides otherwise. The common-law rule, on the other hand, resting on the requirement of consideration, permits the revocation of offers even though stated to be firm. See Comment a to § 42. The offeree's need for a dependable basis for decision is met in part by the common-law rule that mailed acceptance prevents revocation. See § 63. Where more is needed, the option contract is available.

c. Types of option contracts. The traditional common-law devices for making an offer irrevocable are the giving of consideration and the affixing of a seal. The requirement of consideration may be met in any of the ways permitted by the rules stated in §§ 71-81: payment of money or some other performance by the offeree is effective, as is a promise of such performance; one option may furnish consideration for another, and a single consideration may support both a present contract and a future option. Compare Illustration 3 to § 47; see § 45 as to the beginning or tender of performance.

The option under seal is the traditional mode of making an offer irrevocable without consideration. Cf. § 95. In some cases a negotiable instrument or a letter of credit may operate as an offer binding without consideration. See Uniform Commercial Code §§ 3-408, 5-105, 5-106. Offers may also be irrevocable by statute or by virtue of reliance by the offeree or other circumstances bringing into play one of the rules stated in §§ 82-94. See, especially, § 87.

d. Effect of option contract. The principal legal consequence of an option contract is that stated in this Section: it limits the promisor's power to revoke an offer. The termination of the offeree's power of acceptance is subject to the requirements for discharge of a contractual duty. See § 37. A revocation by the offeror is not of itself effective, and the offer is properly referred to as an irrevocable offer.