Option Contracts under Contracts
Option Contracts under Contract Law
1. What is an Option Contract?
An option contract is a binding agreement where the offeror promises to keep an offer open for a specified period in exchange for consideration (something of value given by the offeree). During this period, the offer cannot be revoked.
In simple terms:
The offeree pays for the option (the right to accept or reject the offer later).
The offeror cannot revoke the offer during the option period.
The offeree has the power to accept or reject the offer within that timeframe.
2. Elements of an Option Contract
Offer: A definite promise to sell or do something.
Consideration: The offeree must give something of value to keep the offer open.
Intention to create legal relations: Both parties intend to be legally bound.
Specified Time: The offer remains open for a set period.
3. Importance of Consideration
Consideration is essential to create an option contract. Without consideration, the offeror can revoke the offer anytime before acceptance.
4. Difference Between Option Contract and Mere Offer
Option contract: Binding and irrevocable for the period.
Mere offer: Can be revoked anytime before acceptance.
5. Key Case Law on Option Contracts
a) Dickinson v. Dodds (1876) 2 Ch D 463
Facts: Dodds offered to sell property to Dickinson, promising to keep the offer open until Friday. However, before Friday, Dodds sold the property to someone else. Dickinson tried to accept on Friday.
Issue: Was the offer irrevocable by promise alone without consideration?
Holding: No, the offer was revocable because there was no consideration for keeping it open.
Significance: Established that a promise to keep an offer open without consideration is not binding; thus, no option contract existed.
b) Payne v. Cave (1789) 3 TR 148
Facts: An auctioneer withdrew an offer before acceptance.
Principle: Offers can be revoked any time before acceptance unless there is an option contract.
Significance: Reinforces the rule that offers are revocable without an option contract.
c) Carlill v. Carbolic Smoke Ball Co. (1893) 1 QB 256
While primarily about unilateral contracts, this case shows how performance can act as consideration to create binding obligations.
The principle that consideration is required for enforceability is central to option contracts as well.
6. Application: Creating and Enforcing Option Contracts
The offeree gives consideration (e.g., money) to keep the offer open.
The offeror cannot revoke during the option period.
If the offeree accepts within the option period, a binding contract forms.
If the offeree rejects or time expires, the offer lapses.
7. Example Scenario
Suppose A offers to sell a car to B for $10,000 and promises to keep the offer open for one week if B pays $100 for the option. B pays $100. During the week, A cannot revoke the offer. B can accept at any time during the week. If B accepts, the sale contract is binding.
8. Summary
| Aspect | Explanation |
|---|---|
| Option Contract | Contract to keep an offer open for a period |
| Consideration | Required to make the option binding |
| Revocability | Offer cannot be revoked during option period |
| Case law | Dickinson v. Dodds (no consideration = revocable) |
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