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Corbin on Contracts

Copyright 2007, Matthew Bender & Company, Inc., a member of the LexisNexis Group.

PART I FORMATION OF CONTRACTS

TOPIC A OFFER AND ACCEPTANCE

CHAPTER 3 ACCEPTANCE AND REJECTION OF OFFER

1-3 Corbin on Contracts § 3.38

§ 3.38 A Counter-Offer or Rejection by One Who Has a ''Binding Option'' or an Irrevocable Offer Does Not Terminate the Power of Acceptance

If the original offer is irrevocable, creating in the offeree a ''binding option,'' the rule that a counter-offer terminates the power of acceptance does not apply. Even if it is reasonable to hold that it terminates a revocable power, it should not be held to terminate rights and powers created by a contract. A ''binding option'' is such a contract (usually unilateral) and so also is an offer in writing, that allows a time for acceptance (either definite or reasonable) and that is irrevocable by virtue of a statute. One generally does not lose a contract right merely by rejecting it. A counter-offer by such an offeree, or other negotiation not resulting in a contract, does not terminate the power of acceptance.n1 Even in cases like this, however, rights and powers can be lost by reason of facts that create an estoppel. A conditional notice, even if it does not terminate the option holder's power, is not itself effective as an acceptance, but an otherwise proper notice is not made ineffective by the fact that it is accompanied by an independent offer of a substitute arrangement subject to the other party's assent.n2

There has been little authority on the question whether an express rejection by the holder of a binding and irrevocable option operates as a termination of the power. It is believed, however, that it should have no such effect. The holder of such an option has a right as well as a power, created by contract and not by a mere offer. The holder of a contract right does not terminate it and discharge the duty of the other party by merely saying that it is discharged or by expressing an intention not to enforce it. Such a statement followed by a material change of position by the other party will operate as a discharge by estoppel. Similarly, a notice of rejection by an option-holder, followed by a material change of position, should terminate both the contract right and power of acceptance.n3 Even if the notice of rejection were also the repudiation of a contract duty, which it is not, it would be subject to retraction prior to a change of position induced by it and prior to expiration of the time limit for performance. Similarly, a notice of rejection should be revocable.n4

Legal Topics:

For related research and practice materials, see the following legal topics:

Contracts LawFormationOffersIrrevocable OffersContracts LawFormationCounteroffersContracts LawFormationAcceptanceGeneral Overview

FOOTNOTES:

(n1)Footnote 1.

U.S. - Title Ins. & Guar. Co. v. Hart, 160 F.2d 961 (9th Cir.1947) , cert. denied, 332 U.S. 761 . A lease created in the lessee an option to purchase. The lessee misinterpreted the provision and attempted to exercise the power of acceptance in a manner that was held to be erroneous. Later, within the time covered by the option, the lessee accepted according to the proper interpretation of the provision. This was held to be legally operative, the court refusing to apply the rule that the making of a counter-offer terminates the power of acceptance of an ordinary revocable offer. Dicta makes the opinion equivocal on the point for which it is here cited.

Conn. -In Tracy v. O'Neill, 103 Conn. 693, 131 A. 417 (1925) , the defendant gave the plaintiffs, real estate brokers, an option for one week to sell his real estate upon stated terms for an agreed commission. The plaintiffs procured a customer who proposed a contract for the purchase of the property incorporating these terms and containing certain additional terms which was refused by the defendant. The customer, thereafter, and before the expiration of the option, offered to take up the option on its terms, but the offer was refused by the defendant. It was held that ''the proposals and counter-proposals of the parties did not alter their legal relation under the option, and until two P.M. January 22, 1924 [time of expiration of option] the defendant remained legally bound to sell the property on the terms stated therein.''

N.J. -In McCormick v. Stephany, 61 N.J.Eq. 208, 48 A. 25 (1900) , a lease contained a provision that the lessee should have the option to buy the land for $12,000, and that he would vacate the premises within three months if, on receiving notice that the lessor had found a purchaser for the premises, he should refuse to buy the premises at the named price. It was held that the right of the lessee to a conveyance in accordance with this option was not defeated either by a loose statement by the lessee to the lessor that he wished he would sell the property or by a notice of acceptance in which the lessee demanded a deed ''with full covenants.'' The court referred to Hyde v. Wrench, 3 Beav. 336 (1840) , saying that the rule in that case was not applicable. The court said: ''Such an agreement to convey is not a mere unaccepted proffer based upon no consideration, as is a letter offering to sell, nor is it a naked promise to sell at a price within a limited time. It is a completed purchase of a right to have a conveyance if the purchaser shall choose to buy upon the terms named. In such case there is no question of the arrival of the parties at a common intent. They have already made a contract upon consideration paid, by which the owner is bound to convey whenever the condition happens, and the making of a counter proposal to him does not enable him to retain the consideration paid, and to declare the contract forfeited.''

N.Y. -In Silverstein v. United Cerebral Palsy Ass'n, 17 A.D.2d 160, 232 N.Y.S.2d 968 (1962) , the plaintiff's offer was in writing and (by statute) irrevocable for 3 weeks. The offer was itself a ''unilateral contract,'' citing §§ 2.22-2.28 above. The court says that such an ''irrevocable offer is not deemed rejected and canceled out by mere counter-proposals or negotiations....'' But see Bartholf v. Hautala, 22 Misc.2d 46, 194 N.Y.S.2d 660 (1959) . Additional cases in accord with Silverstein:

Cal. - Glascock v. Sukumlyn, 131 Cal.App.2d 587, 281 P.2d 90 (1955) , citing this treatise. But see Landberg v. Landberg, 24 Cal.App.3d 742, 101 Cal.Rptr. 335 (1972) .

Md. - Foard v. Snider, 205 Md. 435, 109 A.2d 101 (1954) .

Minn. - Republic Nat. Life Ins. Co. v. Marquette Bank, 295 N.W.2d 89 (Minn.1980) .

N.C. - Kidd v. Early, 289 N.C. 343, 222 S.E.2d 392 (1976) .

Pa. - Cerbo v. Carabello, 376 Pa. 571, 103 A.2d 908 (1954) ; Atlantic Ref. Co. v. Wyoming Nat. Bank, 356 Pa. 226, 51 A.2d 719, 170 A.L.R. 1060 (1947) .

Tex. - Humble Oil & Refining Co. v. Westside Investment Corp., 428 S.W.2d 92 (Tex.1968) .

Wyo. - Trautwein v. Leavey, 472 P.2d 776 (Wyo.1970) .

See further Chapter 11, ''Option Contracts,'' especially §§ 262, 263.

Jones v. Moncrief-Cook Co., 25 Okla. 856, 108 P. 403 (1908) , appears to be contra.

A mere effort to induce the option-giver to sell on different terms, there being no specific counter-offer, does not terminate the option-holder's power. First Nat. Exch. Bank v. Roanoke Oil Co., 169 Va. 99, 192 S.E. 764 (1937) .

(n2)Footnote 2. See Orr v. Doubleday, Page & Co., 223 N.Y. 334, 119 N.E. 552, 1 A.L.R. 338 (1918) , reargument denied, 223 N.Y. 700, 119 N.E. 1064 . A lessee with an option to renew gave notice reserving the power to withdraw the notice on certain conditions. This would have prevented its being an effective acceptance, except for the fact that the court interpreted the reservation as being made expressly conditional on the assent of the lessor. As so interpreted the reservation was a mere accompanying offer.

More to the point is Charles Hyman, Inc. v. Power Cooling, Inc., 106 A.D.2d 423, 482 N.Y.S.2d 516 (1984) , where plaintiff exercised an option to purchase real property and subsequently proposed that closing be postponed for three years. This proposal did not detract from the effectiveness of the acceptance.

An option to renew a lease for a period of two years is not effectively exercised by a notice of renewal for one year. Hayward Lumber & Inv. Co. v. Construction Products Corp., 117 Cal.App.2d 221, 255 P.2d 473 (1953) ; but it should not terminate the lessee's power.

(n3)Footnote 3. In Ryder v. Wescoat, 535 S.W.2d 269 (Mo.App.1976) , eleven days before an option was due to expire, the option-holder said he would not exercise the option to purchase certain real property. The owner then made preliminary arrangements for others to do work on the land. The court said that rejection would not terminate the power of acceptance and that the preliminary arrangements did not create such a change of position as to justify the imposition of an estoppel.

(n4)Footnote 4. Disagreement with the views stated here and by the majority of the courts is expressed in Michael J. Cozzillio, The Option Contract: Irrevocable not Irrejectable, 39 Catholic U.L.Rev. 491 (1990). The author proposes a Restatement provision that would provide: ''The power of acceptance of an offer contained in an option contract, or other like offer rendered irrevocable by consideration, statute or other formality, shall be terminated if the offeree manifests an intent to reject such offer, either by means of an outright rejection or a counter-offer.'' Id. at 555. He proceeds to clarify that under ''this model, a counter-offer that would have the force and effect of a rejection shall not include any response that manifests the optionee's desire to hold the offer open during further consideration of the offer, notwithstanding non-conformity in the optionee's response.'' Ibid. The basic underlying disagreement stems from Professor Cozzillio's analysis of an option as primarily an offer rather than primarily as a contract.