An option contract is defined as "a promise which meets the requirements for the formation of a contract and limits the promisor's power to revoke an offer." Restatement (Second) of Contracts § 87 (1981).

Quite simply, an option contract is a type of contract that protects an offeree from an offeror's ability to revoke the contract.

Consideration for the option contract is still required as it is still a form of contract. Typically, an offeree can provide consideration for the option contract by paying money for the contract or by rendering other performance or forebearance. See consideration for more information.

Application of option contract in unilateral contracts

The option contract provides an important role in unilateral contracts. In unilateral contracts, the promisor seeks specific performance from the promisee. In this scenario, the classical contract view was that a contract is not formed until the performance that the promisor seeks is completely performed. This is because the consideration for the contract was the performance of the promisee. Once the promisee performed completely, consideration is satisfied and a contract is formed and only the promisor is bound to his promise.

A problem arises with unilateral contracts because of the late formation of the contract. With classical unilateral contracts, a promisor can revoke his offer for the contract at any point prior to the promisee's complete performance. So, if a promisee provides 99% of the performance sought, the promisor could then revoke without any remedy for the promisee. The promisor has maximum protection and the promisee has maximum risk in this scenario.

An option contract can provide some security to the promisee in the above scenario. See § 45 of Restatement (Second) of Contracts for the black letter law of the option contract's application to this situation. Essentially, once a promisee begins performance, an option contract is implicitly created between the promisor and the promisee. The option contract here is a bilateral contract; the promisor impliedly promises not to revoke the offer and the promisee impliedly promises to furnish complete performance. The consideration for this option contract is discussed in comment d of the above cited section. Basically, the consideration is provided by the promisee's beginning of performance.

Case law differs from jurisdiction to jurisdiction, but an option contract can either be implicitly created instantaneously at the beginning of performance (the Restatement view) or after some "substantial performance." Cook v. Coldwell Banker/Frank Laiben Realty Co., 967 S.W.2d 654 (Mo. App. 1998).

See also

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• Offer and acceptance

Contract law