Option Flashcards
What is an “option”
It is an offer made irrevocable by consideration (i.e., the offeree pays the offeror to keep the offer open for some period of time). It creates a property right in the offeree, which means that without a provision otherwise, the offeree can sell or transfer this power of acceptance to someone else, enabling him to accept the original offer.
NOTE: Unlike an offer, an option contract does not necessarily terminate upon the death or insanity of either party.
UCC VIEW: Under UCC §2-205, an offer can be irrevocable in the absence of consideration—called a “firm offer”—as long as the offeror is a merchant, the transaction concerns the sale of goods, and the assurance not to revoke is embodied in a “signed writing.” (The maximum length of a “firm offer” is three months; if the parties state a longer period, it’s only valid to three months.)
NOTE: When the option expires, the offer isn’t automatically revoked; instead, the offeror gets back the right to revoke the offer. CP §2.25 at 115.
Under the UCC, may a non-merchant make an offer irrevocable in the absence of consideration?
No. UCC §2-205 allows irrevocable offers without consideration, or “firm offers,” only where the offeror is a merchant and the offer of irrevocability is made in a “signed writing” (and, naturally, the offer must involve the sale of goods). Also, the time period of the “firm offer” is limited to three months. Therefore, under the UCC, a non-merchant cannot make an irrevocable offer.
COMMON-LAW RULE: Consideration is required to create an option.
CP §2.25 at 116-117.
King George III validly offers to sell Canada to James Monroe. Before Monroe accepts, George calls him and says, “I revoke my offer.” May Monroe still accept the offer?
No. Unless there’s something specific that makes them irrevocable, offers are revocable whenever the offeror wants to revoke. Once he revokes, the offeree can’t accept and make a contract. Here, there’s nothing to make the offer irrevocable, so once George revoked, Monroe no longer had the power to accept.
COMMON EXCEPTIONS: “Firm offers” by merchants under the UCC and options (where the offeree pays to keep the offer open for a set period of time).
CP §2.20 at 94.
Missy Million offers her collection of law school hornbooks to Paul Rumpels in return for Paul’s collection of gold coins. Million says, “I promise you faithfully that I will leave the offer open for one week.” Three days later, before Rumpels has made up his mind, Million sells her hornbooks to Carmella. Was Million entitled to revoke her offer to Rumpels?
Yes. A non-merchant cannot make an offer irrevocable in the absence of consideration, and as such the revocation is valid. Note that exceptions to this rule, making offers irrevocable, include option contracts and the offeree’s detrimental reliance on the promise to keep the offer open.
RELATED ISSUE: Had Rumpels, say, given Million $10 to keep the offer open for a week, he would have an “option,” which would mean Million could not revoke for that period of time.
RELATED ISSUE: Note that Million need not have told Rumpels about the revocation, because she performed an act inconsistent with her offer— she sold the subject matter of the offer to someone else. As soon as Rumpels found out about the sale to Carmella, the offer to him would be considered revoked.
CP §2.25 at 116.
