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CONTRACTS- OPTIONS AND FIRM OFFERS 2-205

1) Option: is a promise to keep an offer open for a stated period of time.a) The offeror undertakes not to revoke the offer for a specified period, so that the offeree is assured

of a set time to consider and respond to the proposal without the risk of its being withdrawn

before the expiry date.

b) Classical Theorists argue that an offer does not bind either party until acceptance, and then bindsthem simultaneously when acceptance is properly communicated.

2) An option binds the offeror to keep his promise to keep the option open, and in this sense he iscommitted before the oferee becomes bound.

a) Offeree must accept within the prescribed time.b) Offeree is not bound until acceptance.

3) A promise to keep an offer open for at state time is not binding on the offeror unless the offeree hasgiven consideration for that promise.

a) In exchange for the grant of an option (offerors promise to keep the offer open and not revoke itfor a designated period of time) the offeree has to give something to the offeror.

i) Could be a cash payment ORii) Promise to pay a specific sum of money for the option.

b) The basic legal requirement is that the grantee must pay for the option by transferring orpromising property or sacrificing a legal right in exchange for the promise to keep the option

open.

i) EXOffer to pay $2 mill. For Blackacre and offeree has until Friday to decide. Uponacceptance of the offer, the offeree promises to pay the money and that payment is valid

consideration given in exchange for the farm.

4) To be valid, the option must have its own separate considerationthe offeree must, in effect,purchase the option by providing an additional consideration, tied to the promise not to revoke.

5) Options are not usually motivated by gratuitous intent and the common purpose is commercial.a) Nominal consideration will usually be accepted by the courts to facilitate commercial exchange

or at least the opportunity for a valid contract to enter into existence.

6) Restatements 87(1)(a) the grant of an option is valid if it is in writing, signed by the grantor,recites a purported consideration for the offer, and proposes an exchange on fair terms within a

reasonable time.

5.3 RELIANCE ON AN OPTION WITHOUT CONSIDERATION: THE APPLICATION OF

PROMISSORY ESTOPPEL TO PROMISES OF IRREVOCABILITY

1) Commencement of a non-instantaneous performance creates an option in favor of the offeree whenthe offer is for a unilateral contract.

a) In this instance an option has been created by law to protect the reliance of the offeree inbeginning the combined act of acceptance and performance.

2) To have a promise enforced under this doctrine, the promisee must:a) Establish that the promise was deliberately madeb) With the reasonable expectation of inducing her to reliancec) And that she suffered some detriment as a result.

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3) When the promise in issue is an undertaking to keep an offer open, the offeree can use promissoryestoppel to bind the offeror to honor that commitment only if

a) She can show that despite having not given consideration for the promise of irrevocability, shewas justified in relying on it.

4) When there is a written a promise to keep an offer open for a specified amount of time and the offereeis justifiably induced to take rely on that offer, thereby incurring a legal detriment, she is entitled torelief under the doctrine of promissory estoppel. Even if the offeror has communicated his revocation

of the offer before the option term has expired, the offeree can still accept that offer in the prescribed

manner set forth in the terms of the option agreement or another reasonable medium of acceptance.

a) Afterwards, she can claim that her reliance on the promise of irrevocability caused her to incurtime and investment costs in order to raise the necessary capital (finding investors), and if the

promise is not enforced she will suffer an unfair detriment. She most likely entered into contracts

with the investors, assuring them that she had an option and all she needed was the money.

Therefore, she is now liable to others.

5) Restatements 87(2) recognizes the possibility of applying promissory estoppel in this kind ofsituation, setting forth the requirements in 90

6) Seller did make a promise to keep the offer open for 120 days, and he must reasonably expected thather promise in clear terms would in some way cause the buyer of the horse to rely on being able to

delay acceptance because she needed to acquire the necessary investors in order to raise the capital

needed to buy the stud.

a) Based on the facts, it is apparent that she did in fact take detrimental action the assumption thatthe offer would remain openthat is, she abandoned other opportunities and incurred further

liability by entering into contracts with investors.

7) Elements of Promissory Estoppel:a) Offeror must have made a promise.b) Offeror must reasonably have expected that offeree would rely on its promise. Reasonable

expectations are based on the entire context in which the promise was made, including not onlythe language and apparent firmness of the promise but also the prevailing practices in the industry

and any prior relationship that the parties may have had. Offeree must establish under all these

circumstances, a reasonable person in the offerees position would have realized that the offeree

might rely on the option/promise in gathering the necessary investors.

c) Offeree must have been reasonably justified on this promise.i) Where there reasonable grounds for offeree to believe that a serious promise was made and

could be relied upon, but it also requires consideration of the nature and the justification of

the action taken in reliance.

d) Enforcement of the promise must be necessary to avoid injustice.i) The offeree is suffering a significant detriment of being bound to her investors for the

purchase of a specific stud, that is, a stud that is unique in its characteristics and qualities

whereby there is no alternative or substitute to satisfy the specific investment opportunity that

the offeree and her investors relied on.

ii) Furthermore, we must determine if the offeree acted in good faith in accepting the offer assoon as possible, and did not try to speculate at the offerees expense. (Such as looking

around for other studs that might be better or cheaper, or even both not equitable and is an

indication that the offeree is not relying on the bid).

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e) The Remedy: It is the promise to keep an offer open that is being enforced, it is thereforenecessary for the offeree to have a claim for breach of contract , that it did in fact accept the offer

within a reasonable time of acquiring the necessary investors and capital needed to purchase the

stud. If she did, then they formed a contract under which offeror promised to sell the stud to the

offeree. If he refuses to perform or cannot hand over the stud, then he is in breach of their

contract. It may that the offeree has made two enforceable contracts in this case.8) If the offeree doesnt purchase the offer, it can be argued that the offeree is assuming the risk of

committing itself before securing a valid offer or option.

9) Offerees power of acceptance does not expire until the end of that period and is generally not cutshort by action that would terminate an ordinary offer.

a) Lawfully, the offeror cannot revoke the offer before the expiration date.b) When valuable consideration has been given, the option remains open until expiration, even if the

offeree rejects it (or makes a counteroffer) before the end of the option period.

10)To accept an irrevocable offer, the offeree must communicate the acceptance to the offeror within theoption period.

a) That is, the offeror must receive the acceptancei) Mailbox rule may not be an acceptable medium of acceptance in this case.

5.5 FIRM OFFERS UNDER UCC 2-205

1) In the sale of goods, 2-205 does not require consideration to validate an option (i.e. firm offer)under defined circumstance. This section only applies when all of its prerequisites are satisfied:

a) The offer to buy or sell goods must be made nu a merchant.i) Under 2-204(1) a merchant is a person who deal in goods of the kinds involved in the

transaction or who otherwise, by trade or profession, represents that he has skill or knowledge

in regard to the foods or the transaction. In essence a merchant, as distinct from one whose

dealings in the goods are casual or inexpert, is a person who trades professionally in goods of

that kinds, either as seller or buyer.

ii) Although Article does not in all cases provide different rules for merchants and casual buyersand sellers, there are some sections --2-205 being one of themthat are applicable only to

merchants or have stricter standards for them. Some of these sections are applicable only in

transactions between merchants, that is, if both parties to the transaction are merchants but

others apply if only one of them is.

iii) The rule validating a firm offer to apply, only the offeror need to be a merchant.b) Under 2-205, the offer must be in a signed writing,c) If the assurance is contained on a form supplied by the offeree, the offeror must sign the

assurance separately.

i)

The purpose of this is to ensure that the offeror was aware of the term and is not bound by anassurance of irrevocability hidden in the offerees boilerplate

2) If all of these conditions are satisfied, then consideration is not needed to make the offer irrevocablefor the time state, or for a reasonable time if no expiry date is specified.

a) 2-205 limits the period of irrevocability to a maximum of three months, so that neither the statetime nor a reasonable time can exceed that period.

i) Therefore, if the option is intended to last more than the three months, the offeree must giveconsideration to validate it beyond the three-month period.

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OFFER AND ACCEPTANCE UNDER THE UCC, AND THE BATTLE OF THE FORMS