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so that the offeree is assured of a set time to consider and respond to the proposal without the risk of its being withdrawn before the expiry date.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 binds them 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 is committed 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 has given consideration for that promise. a) In exchange for the grant of an option (offerors promise to keep the offer open and not revoke it for a designated period of time) the offeree has to give something to the offeror. i) Could be a cash payment OR ii) 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 or promising 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. Upon acceptance 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 consideration the 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 when the offer is for a unilateral contract. a) In this instance an option has been created by law to protect the reliance of the offeree in beginning 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 made b) With the reasonable expectation of inducing her to reliance c) And that she suffered some detriment as a result.

3) When the promise in issue is an undertaking to keep an offer open, the offeree can use promissory estoppel 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, she was 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 offeree is justifiably induced to take rely on that offer, thereby incurring a legal detriment, she is entitled to relief 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 incur time 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 of situation, 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 that her 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 that the offer would remain open that 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 only the 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 as soon 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).

e) The Remedy: It is the promise to keep an offer open that is being enforced, it is therefore necessary 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 cut short 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 the option period. a) That is, the offeror must receive the acceptance i) 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 buyers and sellers, there are some sections --2-205 being one of them that 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 an assurance of irrevocability hidden in the offerees boilerplate 2) If all of these conditions are satisfied, then consideration is not needed to make the offer irrevocable for 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 state time 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 give consideration to validate it beyond the three-month period.

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