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Contracts • Formation Requirements
K#022
Legal Definition
An option contract, under common law and UCC, is an offer that cannot be revoked. It is created when the offeror has made an offer and: (1) promised not to revoke, (2) in exchange for consideration. A rejection of an offer in an option contract scenario does not terminate the offer, unless the offeror has detrimentally relied on the rejection.
Plain English Explanation
You can pay money to force someone to hold an offer open. In other words, you are buying extra time to decide if you want to accept an offer while obligating the person making the offer to keep the offer open and wait on you.
Hypothetical
Hypo 1: Bob is selling his car for $1,000. Sam is interested in buying it, but first he needs to talk to his wife and make sure he can afford to buy it. Sam also knows that $1,000 is a great deal, and Amy is interested in purchasing the car as well. Bob tells Sam, "If you give me $5 right now, I will give you 7 days to decide if you want to buy the car." Sam gives Bob $5. Result: Sam has purchased an option contract with Bob that gives him 7 days to decide, during which time Bob may not make or accept any other offers for the car. Note that if 3 days later, Sam calls Bob and says, "Will you take $900 for it?" this would usually be a counter offer, which would terminate the original offer -- but since this is an option contract, Sam would still have 4 more days to accept the original offer for $1,000. The only exception to this rule is if Bob detrimentally relies on the rejection, which would be something to argue for or against on the exam.
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