CONTRACTS SPRING 2008
IRREVOCABLE OFFER: OPTION CONTRACTS (CONTRACT FORMATION)
Overview
General rule is an O is revocable even if the offeror expressly promises not to review or gives a definite period which the O is to remain open.
i. But Option K is an exception!!!
The power of acceptance under an option K is not terminated by rejection, CO, revocation, death or incapacity unless requirements are met for the discharge of a contractual duty: RS 37
i. Example: Rejecting an O that you have paid to keep open for a wk. You can wake the next morning an A O because under RS 37 it isn’t term’d.
1. It is going to stay open because that is what you have paid for
2. It is REALLY hard to reject an option K
Option K Created by Part Performance or Tender: RS 45
i. Where an offer invites an offeree to accept by performance and des NOT invite a promissory acceptance – an option K is created when the offeree beings the invited performance
ii. When offeree begins performance, the offeree is bound on the conditional completion of the invited performance in terms with the offer
Way of making an option K without an exchange of $$, but in writing: RS 87
i. An option K is binding if it:
1. Is in writing and signed by the offeror and proposes an exchange on fair terms in a reasonable time
a. Don’t have to say you are actually going to exchange the money, but rather just SAY you are going to exchange it
b. Example: I will sell you my property for $5000, and you will give me $50 to keep the option open – even if $50 isn’t exchanged, K is enforceable.
2. Made irrevocable by statute
ii. An offer which the offeror should reasonably expect to induce action or forbearance on the part of offeree before acceptance and DOES induce such action is binding as an option K to the extent necessary to avoid injustice
Implied Promises not to Revoke – RS is that where an act will take some time completed, there is a promise implied in the O that the offeror will not revoke once the offeree has made a substantial beginning of performance, provided that the performance is actually completed within the time required by the offer
Can have IMPLIED consideration – (exception to consideration) you can ‘pretend there is consideration’ even if you don’t know if D will actually pay the money
Option Contracts
Option Ks are valid Ks – negotiations after “the meeting of the minds” and then offeror binds himself to keep the option open during the time stipulated by law
i. Traditional Ks rules, like conditional acceptance, etc isn’t a rejection of an option K
Under an option K, the act necessary to raise a binding promise to sell, isn’t an A of the O, but rather the performance of the condition of the option K.
Parties may choose to negotiate before accepting an option K because the negation doesn’t terminate the option K.
An option K is just a K to keep the option open in and of itself
i. Option Ks don’t always have to be like RS 45 (performance) but can be set or paid for – “kinda like a pre-K option” – an option to keep offer open for X period
UCC Application – see UCC 2-205
i. Option Ks can’t be held open for longer than 3 months – even if the K is modified to say that it will stay open for 6 months, it will still only be open for 3
1. 3 months is used as a bright line rule because to have to determine what is ‘reasonable’ is too fluid and would cause too much litigation
Humble Oil & Refining Co. v Westside Investment Corp – P & D entered into a valid option K. Within option period P wrote D letter proposing an amendment. P later tried to accept, D argues letter was rejection of Option K.
i. Held: Ps letter didn’t terminate the option K. The option K bound P to do nothing but granted P the right to A or R the option in accordance with its terms within the time and manner specified in option. D bound to keep open until date said he would keep it open in the option K.
1. If D didn’t keep it open it would actually have been a breach of the option K. If D didn’t keep it open P could sue for SP if still have property or settle for
needed and withdrew O, P already placed GC bid. Ps bid was later accepted GC and P sues D for breach of K.
i. Held: There was no K between the parties. SC’s offer could be revoked even after GC submitted bid using SC’s quote because SC needed an ‘acceptance’ to be binding, not just mere reliance through a submission of a bid.
ii. This is an early case – later cases have expanded the application of promissory estoppel.
Drennan v. Star Paving Co. – D (SC) makes a bid in P (GC) bid and later D realizes he under bid. P had to include Ds name on GC (this just shows Ps reliance on Ds bid). When P stopped by Ds office to tell D he got the bid – D withdrew and refused to do the work.
i. Held: GC wins. Ds mistake is no defense and promise enforced. D didn’t make its bid irrevocable, nor was Ps use of Ds bid an acceptance which bound P to award K to D – so not an option K or bilateral K. But P relies on promise and D knew that P would if lowest bid and wanted him to.
ii. THIS CASE IS THE GENERAL RULE NOW. VERY DIFF THAN BYRD. CAN’T WITHDRAWAL OFFER ONCE YOU MADE IT.
iii. This case uses a very creative use of Promissory Estoppel.
1. The judge says there is no option K – but then proceeds to create one under PE doctrine.
2. But ct points out limitation of PE – SC isn’t bound if the GC re-opened the project for bidding after already getting project. (trying to re-set the parameters). Limit was about accepting SC bid in hopes of getting a better price.
iv. This case gives a lot more power to GC. D knew P would rely on bid only fair for GC to accept.
v. Essentially court said – we are going to assume that the SC is intending to be bound until the GC does/doesn’t get the bid
