Restatement 2d §87. OPTION CONTRACT

Facts

§87. OPTION CONTRACT

(1) An offer is binding as an option contract if it

(a) is in writing and signed by the offeror, recites a purported consideration for the making of the offer, and proposes an exchange on fair terms within a reasonable time; or

(b) is made irrevocable by statute.

(2) An offer which the offeror should reasonably expect to induce action or forbearance of a substantial character on the part of the offeree before acceptance and which does induce such action
or forbearance is binding as an option contract to the extent necessary to avoid injustice.

Illustration:

Illustrations:

1. In consideration of twenty-five cents paid by B, A executes and delivers to B a written option agreement giving B the right to buy a piece of land for $100,000 if B gives notice of intention to buy within 120 days. The price and terms of sale are fair. A has made an irrevocable offer.

2. In consideration of one dollar paid by B, A, a widow who owns land worth $25,000 as a farm, gives B a ten-year option to take phosphate rock from the land on paying a royalty of twenty-five cents per ton. As B knows but A does not, the prevailing royalty in such transactions ranges from $1.00 to $1.10 per ton. The offer is not made irrevocable by the one-dollar payment.

c. False recital of nominal consideration. A recital in a written agreement that a stated consideration has been given is evidence of that fact as against a party to the agreement, but such a recital may ordinarily be contradicted by evidence that no such consideration was given or expected. See § 218. In cases within Subsection (1)(a), however, the giving and recital of nominal consideration performs a formal function only. The signed writing has vital significance as a formality, while the ceremonial manual delivery of a dollar or a peppercorn is an inconsequential formality. In view of the dangers of permitting a solemn written agreement to be invalidated by oral testimony which is easily fabricated, therefore, the option agreement is not invalidated by proof that the recited consideration was not in fact given. A fictitious rationalization has sometimes been used for this rule: acceptance of delivery of the written instrument conclusively imports a promise to make good the recital, it is said, and that promise furnishes consideration. Compare § 218. But the sound basis for the rule is that stated above

3. A executes and delivers to B a written agreement “in consideration of one dollar in hand paid” giving B an option to buy described land belonging to A for $15,000, the option to expire at noon six days later. The fact that the dollar is not in fact paid does not prevent the offer from being irrevocable.