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Corbin on Contracts

Copyright 2007, Matthew Bender & Company, Inc., a member of the LexisNexis Group.

PART I FORMATION OF CONTRACTS

TOPIC A OFFER AND ACCEPTANCE

CHAPTER 2 OFFERS; CREATION AND DURATION OF POWER OF ACCEPTANCE

1-2 Corbin on Contracts § 2.23

§ 2.23 Options Created by a Conditional Contract or Covenant

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An offer can be made irrevocable in a number of different ways. As has already been seen, an ordinary offer between private individuals is revocable by the offeror. Classically, an offer was irrevocable only when the offeror promised not to revoke it, or promised the offered exchange of performances on condition of acceptance within a period of time, and that promise is binding by reason of a seal, or a consideration given in exchange.n1 By merely stating that the offer is irrevocable or that a document creates an option contract the promisor does make the power of acceptance irrevocable.n2 An option granted by Will is the equivalent of an option under seal,n3 indeed better, because the seal has been abolished or restricted in effect in so many jurisdictions while the Will has not. Under the more modern approach, in addition to the classic means of creating irrevocable offers, an irrevocable power of acceptance also is created by the offeree's part performance under an offer to a unilateral contract,n4 or subsequent action in reliance upon an offer to a unilateral or bilateral contract,n5 or by operation of a statute or treaty dealing with firm offers.n6 Such a binding promise is itself a contract, as that term is commonly defined. In such a case, also the offeree is said to have a ''binding option.''n7

Option contracts are considered in detail in Chapter 11 in this treatise, but it is important to observe here that a binding option is a standing offer as well as a contract. It involves a binding promise, and is therefore a contract, usually unilateral in character. The giving of an ''option'' is also the making of an offer of some exchange and creates a power of acceptance in the holder of the option, just as in the case of a revocable offer. If, in return for ten dollars paid by B, A gives to B an option to buy Blackacre for $5,000 at any time within thirty days on condition of notice to be mailed within that time, a unilateral contract has been made. This is a promise to convey the land, on the express condition of notice of acceptance within thirty days and on the constructive condition of tender of $5,000 within a reasonable time after such notice. The equivalent given in exchange for this conditional promise is ten dollars. The advantage that B gets in return for the ten dollars is that B has a power of acceptance for thirty days, to be exercised by the mailing of a letter. This is a conditional contract to convey Blackacre, and not a collateral contract to hold an offer open.

Does A have any power of revocation, whereby A can terminate B's power of acceptance? In the first place, it is clear that if A purports to revoke B's power of acceptance, this constitutes a breach of the contract by repudiation. The promise of A, paid for by B, certainly creates in B a right that A shall not transfer the land to a third person, a right that is enforceable specifically by an injunction so long as a conveyance has not been made, and by a judgment for damages in any case. Even a conveyance to a third person, actually made, with notice of revocation received by B, does not deprive B of a power of acceptance. If the third person had actual or constructive notice of B's option, and B gives the specified notice within thirty days, B can get a decree for specific performance, operative against both A and the third person.n8 In spite of the conveyance, B still had power to accept. If the third person, however, received the conveyance without notice of B's option, then equity will not deprive the third person of the advantageous position as an innocent purchaser for value, with good and perhaps, superior rights. Even in this case, A's revocation and conveyance to an innocent purchaser do not terminate B's power to accept. They merely deprive B of one form of remedy, the form that would work injustice to an innocent third person. B's remedy in damages for A's breach of a consummated contract to convey is available. Indeed, although aggrieved optionees normally seek the remedy of specific performance, there are many cases in which the remedy of damages is the remedy of choice. Damages for repudiation or other material breach by an optionor are the same as for the material breach of the contract that would have come into force by exercise of the option.n9

Legal Topics:

For related research and practice materials, see the following legal topics:

Contracts LawFormationOffersRevocable OffersContracts LawFormationOffersIrrevocable OffersContracts LawTypes of ContractsOption Contracts

FOOTNOTES:

(n1)Footnote 1. See § 2.18 above and Restatement (Second) of Contracts § 25 and comments thereto.

(n2)Footnote 2.

Md. - Beall v. Beall, 45 Md.App. 489, 413 A.2d 1365 (1980) , rev'd, 291 Md. 224, 434 A.2d 1015 .

Or. - Troutman v. Erlandson, 44 Or.App. 239, 605 P.2d 1200 (1980) .

Va. - Hummer v. Engeman, 206 Va. 102, 141 S.E.2d 716 (1965) , noted 7 Wm. & Mary L.Rev. 186 (1966).

See also § 2.18 above.

This common law rule is criticized by Melvin Eisenberg, The Principles of Consideration, 67 Cornell L.Rev. 640 (1982).

(n3)Footnote 3. In re Estate of Fitzgerald, 370 N.W.2d 683 (Minn.App.1985) . The testator left real property to his daughters, giving his sons a six-month option to purchase. The sons failed to give a notice of exercise to their sisters within the six month term, thinking they could purchase directly from the estate. They were incorrect.

(n4)Footnote 4. See § 2.29 below.

(n5)Footnote 5. A power created by an option contract that was strictly limited to three months was held to have been continued over a long period of years by reason of the option holder's having been permitted to occupy, pay taxes, and make improvements, so that after the option giver's death and against the will of the heirs the option holder could still accept and enforce the contract. Malmquist v. Peterson, 149 Minn. 223, 183 N.W. 138 (1921) .

See note herein under § 263 to McPhail v. L.S. Starrett Co., 257 F.2d 388 (1st Cir.1958) , a case in which the defendant gave a stock purchase option to its employees on favorable terms with continuance in service by the latter in reliance on the defendant's promise.

In Stanish v. Polish Roman Catholic Union, 484 F.2d 713 (7th Cir.1973) , PRCU gave plaintiff a loan commitment letter describing itself as ''irrevocable'' for six months. There was no consideration for the promise of irrevocability, nor was there an applicable statute. Stanish asked for the promised funds three days before the expiration of the six month period. The court quoted this § 2.23 to show that the commitment was not irrevocable, but since PRCU did not revoke prior to Stanish's acceptance, a binding contract was formed and PRCU was liable to Stanish for not honoring its commitment. Hoosier Bank relied on the letter of commitment, as PRCU expected, by extending temporary financing to Stanish and also had rights against PRCU.

(n6)Footnote 6. Among the statutes enabling the offeror to make an irrevocable offer without consideration or a seal are Uniform Commercial Code § 2-205, and the earlier New York statute N.Y.-McKinney's Gen'l Obl.L. § 5-1109, and the United Nations Convention Art. 16. Some statutes regulating bidding on government projects also provide for irrevocability of offers. All of these are discussed in § 2.26 below.

(n7)Footnote 7. If an option is granted for a consideration or under seal, a notice of revocation is quite inoperative to terminate the option holder's power, and any purchaser with notice takes subject to the option holder's rights. See:

U.S. - Shubert Theatrical Co. v. Rath, 271 Fed. 827 (2d Cir.1921) .

Ala. - McMillan, Ltd. v. Warrior Drilling & Engineering Co., 512 So.2d 14 (Ala.1986) .

Cal. - Parker v. Beach, 176 Cal. 172, 167 P. 871 (1917) ; Smith v. Bangham, 156 Cal. 359, 104 P. 689 (1909) .

Ga. - Prior v. Hilton & Dodge Lumber Co., 141 Ga. 117, 80 S.E. 559 (1913) ,

Ind. - North Side Asphalt & Material Transport, Inc. v. Foreman, 520 N.E.2d 457 (Ind.App.1988) .

Iowa - Sargent & Co. v. Heggen, 195 Iowa 361, 190 N.W. 506 (1922) .

Mass. - O'Brien v. Boland, 166 Mass. 481, 44 N.E. 602 (1896) ; Tucker v. Connors, 342 Mass. 376, 173 N.E.2d 619 (1961) , citing this section, noted under § 272.

Minn. - McMillan v. Ames, 33 Minn. 257, 22 N.W. 612 (1885) , under seal.

N.Y. - Cortese v. Connors, 1 N.Y.2d 265, 152 N.Y.S.2d 265, 135 N.E.2d 28 (1956) ; Cochran v. Taylor, 273 N.Y. 172, 7 N.E.2d 89 (1937) , seal.

N.C. - Thomason v. Bescher, 176 N.C. 622, 97 S.E. 654, 2 A.L.R. 626 (1918) .

Or. - Davidson v. Wyatt, 289 Or. 47, 609 P.2d 1298 (1980) ; Foulkes v. Sengstacken, 83 Or. 118, 163 P. 311 (1917) , death does not terminate power; Olympia Bottling Works v. Olympia Brewing Co., 56 Or. 87, 107 P. 969 (1910) , exclusive agency to sell beer, with option for 5-year extension.

Pa. - Real Estate Co. v. Rudolph, 301 Pa. 502, 153 A. 438 (1930) .

R.I. - Dawley v. Potter, 19 R.I. 372, 36 A. 92 (1896) , option to sell a colt, if sound at 5 months.

For options in leases, see:

U.S. - Willard v. Tayloe, 75 U.S. (8 Wall.) 557, 19 L.Ed. 501 (1869) .

Mo. - Tebeau v. Ridge, 261 Mo. 547, 170 S.W. 871 (1914) .

N.J. - McCormick v. Stephany, 61 N.J.Eq. 208, 48 A. 25 (1900) .

N.Y. - Spitzli v. Guth, 112 Misc. 630, 183 N.Y.S. 743 (1920) , option irrevocable after improvements made in reliance.

This section is cited (also § 2.22-2.28, § 3.38) in Silverstein v. United Cerebral Palsy Ass'n, 17 A.D.2d 160, 232 N.Y.S.2d 968 (1962) . A written offer that is irrevocable (by statute) is operative as a ''unilateral contract'' that ''is not deemed rejected or cancelled out by mere counter-proposals or negotiations ...''. See notes under § 3.28, 3.38.

In Soderholm v. Chicago Nat. League Ball Club, Inc., 225 Ill.App.3d 119, 167 Ill.Dec. 248, 587 N.E.2d 517 (1992) , appeal denied, 145 Ill.2d 644, 173 Ill.Dec. 13, 596 N.E.2d 637 , it was held purchase of season tickets for five consecutive seasons did not create an option to purchase season tickets for the subsequent season.

(n8)Footnote 8.

Md. - Dambmann v. Lorentz, 70 Md. 380, 17 A. 389 (1889) .

Mass. - O'Brien v. Boland, 166 Mass. 481, 44 N.E. 602 (1896) .

Mich. - Solomon Mier Co. v. Hadden, 148 Mich. 488, 111 N.W. 1040 (1907) .

Minn. - McMillan v. Ames, 33 Minn. 257, 22 N.W. 612 (1885) .

N.Y. - Cochran v. Taylor, 273 N.Y. 172, 7 N.E.2d 89 (1937) , sealed option.

Va. - Watkins v. Robertson, 105 Va. 269, 54 S.E. 33 (1906) .

W.Va. - Barrett v. McAllister, 33 W.Va. 738, 11 S.E. 220 (1890) .

Some cases refuse specific performance, if revocation preceded acceptance, but expressly on the ground of lack of consideration. They indicate that the offer is irrevocable if consideration is given. Hartford-Connecticut Trust Co. v. Divine, 97 Conn. 193, 116 A. 239 (1922) ; Corbett v. Cronkhite, 239 Ill. 9, 87 N.E. 874 (1909) ; Crandall v. Willig, 166 Ill. 233, 46 N.E. 755 (1897) ; Graybill v. Braugh, 89 Va. 895, 17 S.E. 558 (1893) .

In O'Brien v. Boland, supra , the court said: ''In the present case, because the offer was under seal, it was an irrevocable covenant, conditional upon acceptance within ten days, and the written acceptance within that time made it a mutual contract which the plaintiff can enforce.'' In Guyer v. Warren, 175 Ill. 328, 51 N.E. 580 (1898) , it is said: ''The covenant in the present contract, giving an option to purchase, was in the nature of a continuing offer to sell.'' In Willard v. Tayloe, 75 U.S. (8 Wall.) 557, 19 L.Ed. 501 (1869) , Justice Field said: ''The covenant in the lease giving the right or option to purchase the premises was in the nature of a continuing offer to sell. It was a proposition ... from which the defendant was not at liberty to recede.'' In Mansfield v. Hodgdon, 147 Mass. 304, 17 N.E. 544 (1888) , Mr. Justice Holmes said: ''The defendant's undertaking not having been a mere offer, but a conditional covenant to sell, bound him irrevocably to sell in case the plaintiff should elect to buy.''

In Galton v. Emuss, 1 Coll. 243 (1844), one Nash contracted with Galton that he should ''have the offer, for twelve months, of both the estates ... by the trustees under the will of the said John Nash.'' Later Nash devised the estates to the trustees, defendants, for other uses and with no power to convey to the plaintiff. The trustees refused to offer the estates to the plaintiff on the agreed terms, but the plaintiff gave them notice of his intention to purchase. Vice Chancellor Knight Bruce decreed specific performance.

In Jordan v. Dobbins, 122 Mass. 168 (1877) , a conditional covenant was held to be revocable.

(n9)Footnote 9.

U.S. - Abdallah v. Abdallah, 359 F.2d 170 (3d Cir.1966) ; Detroit Graphite Co. v. Hoover, 41 F.2d 490 (1st Cir.1930) (damages for breach of unexercised option to extend employment contract).

Ala. - Ford v. Canton, 530 So.2d 217 (Ala.1988) .

Cal. - Oldenkott v. American Electric, Inc., 14 Cal.App.3d 198, 202, 92 Cal.Rptr. 127, 130-131 (1971) (employment contract).

Minn. - Space Center, Inc. v. 451 Corp., 298 N.W.2d 443 (Minn.1980) .

N.H. - Van Hooijdonk v. Langley, 111 N.H. 32, 274 A.2d 798 (1971) .

N.Y. - Van Wagner Advertising Corp. v. S & M Enterprises, 67 N.Y.2d 186, 501 N.Y.S.2d 628, 492 N.E.2d 756 (1986) .

Or. - Fullington v. M. Penn Phillips Co., 238 Or. 321, 395 P.2d 124 (1964) .

Tex. - Dixie Glass Co. v. Pollak, 341 S.W.2d 530, 541 (Tex.Civ.App.1960) , writ ref'd n.r.e., 162 Tex. 440, 347 S.W.2d 596 . This was an employment contract with an option by the employee to extend it. The court said: ''A substantial provision of the contract breached by appellant was the option of appellee to extend it. When the contract was breached, time had not arrived for the exercise of the option. When appellant repudiated the contract, he deprived appellee of his contract right. Too, since appellant had repudiated the contract and discharged appellee, it would be useless for appellee to exercise the option. The law does not require such a useless act. We think the fact there were options in the contract in favor of appellee is one element to be considered by the jury in determining damages, that is, the jury could consider the probability of the exercise of the options in determining the length of the term.''

Wash. - McFerran v. Heroux, 44 Wash.2d 631, 269 P.2d 815 (1954) .

Restatement (Second) of Contracts § 253 ill. 3.