OPTIONS AND FIRM OFFERS

I.                    

A.     Option Contracts

                                                              i.      Acontract with an option to keep the offer open.

1.      Purpose: to allow the offeree some time in which to decide whether to accept the offer.  It makes the offer firm, insulating it from the usual events that otherwise terminate the power of acceptance.

a.       Common law requires consideration: The traditional common-law view is that an option contract can be formed only if the offeree gives the offeror consideration for the offer.  The consideration compensates the offeror for the risk he assumes when he commits to keeping the offer open.  Anything that serves as consideration in a contract generally can serve as consideration in an option contract.  The offeree can pay for the option, render some other performance, or promise to render a performance.

b.      Modern (Restatement) approach: But the modern approach, as shown in the Restatement, is that a signed option contract that recites the payment of consideration will be irrevocable, even if the consideration was never paid.

2.      Any attempted revocation by Offeror during the term of the option contract will be ineffective.

3.      Offeree makes no promise to ultimately accept the offer.

B.     “Firm offers” under the UCC

                                                              i.      The UCC is even more liberal in some cases: it allows formation of an irrevocable offer even if no recital of the payment of consideration is made. By §2-205, an offer to buy or sell goods is irrevocable if it: (1) is by a merchant (i.e., one dealing professionally in the kind of goods in question); (2) is in a signed writing; and (3) gives explicit assurance that the offer will be held open.  Such an offer is irrevocable even though it is without consideration or even a recital of consideration.

1.      Example: Jeweler gives Consumer a signed document stating, “For the next 120 days, I agree to buy your two-carat diamond antique engagement ring for $4,000.”  Even though Consumer has not paid consideration for the irrevocability, and even though there is no recital of consideration in the signed offer, Jeweler’s offer is in fact irrevocable for 120 days, because it is by a merchant (Jeweler professionally sells or buys goods of the kind in question), is in a signed writing, and explicitly assures that the offer will be held open.

a.       Three month limit: No offer can be made irrevocable for any longer than three months, unless consideration is given. §2-205.

b.      Forms supplied by offeree: If the firm offer is on a form drafted by the offeree, it is irrevocable only if the particular “firm offer” clause is separately signed by the offeror.

                                                            ii.      Offers by sub-contractors: Most importantly, an offer by a sub-contractor to a general contractor will often become temporarily irrevocable under this rule.

1.      Example: A,sub-contractor, offers to supply steel to B on a job where B is bidding to become the general contractor. B calculates his bid in reliance on the figure quoted by A.  B gets the job.  Before B can accept, A tries to revoke.  If B can show that he bid a lower price because of A’s sub-bid, the court will probably hold A to the contract, or at least award B damages equal to the difference between A’s bid and the next-lowest available bid.  But observe that B, the offeree, is not bound, so B could accept somebody else’s sub-bid.

II.                UNJUST ENRISCHMENT AND MATERIAL BENEFIT

A.     A cause of action that arises where the claimant has conferred a benefit on the recipient under circumstances that make it unjust for the recipient to keep the benefit without paying for it.

B.     Also available in situations in which acontract is unenforceable or the contract has a defect that allows one of the parties to set it aside (avoid it).

C.     Elements:

                                                              i.      One party must have been enriched by obtaining property, services, or some other economic benefit from the other, and

                                                            ii.      The circumstances must be such that it would be unjust for the beneficiary to keep the benefit of that enrichment without paying or compensating the other party for the benefit.

D.     If the court finds that there has been unjust enrichment, the remedy granted is restitution, which may consist of an order for the return of the benefit itself or a money judgment for its value.

                                                              i.      The most common valuation standard used the market value of the goods or services – quantum merit (as much as deserved) refers to the market value of the services, and quantum valebant (as much as they are worth) is used to denote the market value of goods.

E.     It is not always unjust for a person to retain a benefit that was imposed and cannot be returned.  That is, the person who conferred the benefit had no justification for providing it without being asked, and the benefit cannot simply be given back.  That person is an “Officious Intermeddler,” and the law should not encourage his meddling.

F.      MORAL OBLIGATION

                                                              i.      A moral obligation is not enforceable as a legal right.  A promise is not enforceable as a contract merely because the promisor has some moral duty to perform it.  Unless a bargained-for detriment has been exchanged for the contract, contract law provides no legal basis for enforcement that rests purely on the ground that it is morally right that the promisor should perform.

                                                            ii.      However, courts do sometimes recognize a binding legal promise under circumstances they describe as “moral obligation.”  Applies only in narrow circumstances.

1.      Where a debtor promises to pay a preexisting unenforceable legal debt (debt barred by the statute of limitations) – a promise to pay all or part of an antecedent contractual or quasi-contractual indebtedness owed by the promisor is binding if the indebtedness is still enforceable or would be except for the effect of the statute of limitations (Restatement § 82).

2.      Promise to perform a voidable obligation – if a person enters into a voidable contract and subsequently ratifies it by making a promise to perform, the doctrine of moral obligation renders this promise enforceable even though no new consideration was given for it.

3.      Promise to pay a debt discharged in bankruptcy – at common law, if the debtor makes a promise after bankruptcy to pay the discharged portion of the debt, this promise is supported by a moral obligation and does not need new consideration to make it binding. 

                                                          iii.      It is an exception to the consideration doctrine and allows a prior detriment (past performance) to be treated as sufficient to support the later promise given on account of it.  The prior benefit is conceived of as creating a moral obligation that justifies dispensing with the requirement of an exchange.

                                                          iv.      Like promissory estoppel, MO is a promissory theory of liability, but it focuses on a detriment suffered prior to the promise rather than a detriment subsequent to and in reliance on a promise.