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Option Contractscontracts OPTIONOPTION CONTRACTSCONTRACTS ThereThere areare variousvarious kindskinds ofof options;options; inin allall ofof themthem thethe option-option­ holderholder hashas a achoice,choice, a apowerpower ofof electingelecting betweenbetween alternatives.'alternatives;'!. UsuallyUsually thisthis choicechoice oror powerpower ofof electingelecting isis possessed'bypossessed'by onlyonly oneone party,party, andand forfor thatthat reasonreason thethe transactiontransaction isis oftenoften referredreferred toto asas unilateral;unilateral; butbut itit isis possiblepossible forfor bothboth partiesparties toto aa transactiontransaction toto havehave anan option.option. Thus,Thus, inin thethe casecase ofof anyany subsisting,subsisting, unacceptedunaccepted offer,offer, notnot yetyet becomebecome aa contract,contract, anan optionoption isis possessedpossessed" byby bothboth parties;parties; thethe offereeofferee maymay acceptaccept oror rejectreject atat hishis option;,opti<m;, thethe offererofferer hashas thethe optionoption ofof withdrawingwithdrawing hishis offeroffer beforebefore acceptaice.acceptance. SdchStich two-sidedtwo-sided optionsoptions asas thisthis willwill bebe touchedtouched uponupon hereafterhereafter onlyonly toto distinguishdistinguish them.them. TheirTheir fullfull discussiondiscussion wouldwould covercover thethe forma-forma­ tiontion ofof almostalmost allall contracts.contracts. ThisThis articlearticle willwill bebe almostalmost whollywholly restrictedrestricted toto aa discussiondiscussion ofof so-calledso-called "binding"binding options",options", oror "no optionoption contractscontracts givinggiving toto oneone thethe legallegal rightright ofof choice,choice, butbut no' suchsuch rightright toto thethe other.other. ItIt mightmight bebe said,said, also,also, thatthat anyany partyparty toto aa contractcontract hashas thethe optionoption ofof performingperforming hishis contractcontract oror ofof breakingbreaking it;it; butbut thisthis isis notnot aa lawfullawful option,option, andand bothboth lawlaw andand equityequity willwill dodo whatwhat theythey can,can, consistentlyconsistently with justice,justice, toto preventprevent and punishpunish hishis makingmaking an illegalillegal choice.choice. ThisThis paperpaper willwill not dealdeal withwith thethe power ofof doing illegalillegal things.things. Again, therethere are certain option contracts that are mademade illegal by statutesstatutes the object of which isis thethe prevention of gamblinggambling inin 2 stocks and commodities. These statutes do not make the exer-exer­ cise of his power of choice by"by' an option-holder illegal; they for­for- bid the making of the agreement by which one is given such a power of choice. These statutesstatutes have raisedraised some difficult ques­ques- tionstions andand have caused the courts toto draw finefine distinctions. These m~st questions asas toto legalitylegality must also be excludedexcluded here.here. 1 The word "option" is derived from "opto", to choose. The Celltury 1The word "option" is derived from "opto", to choose. The Century Dictionary defines it as, "(1) Choice, wish, preference, election; (2)(2) t1\ethe Dictionary defines it as, "(1) Choice, wish, preference, election; power or liberty of choosing, the opportunity of electing, or selecting, 'ail'av- power or liberty of choosing, the opportunity of electing, or selecting, alternative, or one of several lines of conduct." alternative, or one of several lines of conduct." 2See2 See CellturyCentury DictilmaryDictionarydefining defining "option":"option": "(4)"(4) OnOn stock,stock, oror otherother exchanges, a privilege, secured by the payment of a certain premium, oror exchanges, a privilege, secured by the payment of a certain premium, consideration, either (1) of calling for the delivery, or (2) of making de­de- consideration, either (1) of calling for the delivery, or (2) of making livery, of a certain specified amount of some particular stock or"produce, atat livery, of a certain specified amount of some particular stock or 'produce, a specified price, and within specified limits' of time. The first kindkind ofof a specified price, and within specified limits- of time. The first option is usually designated a call, and the second a Pllt,. but both areare option is usually designated a call, and the second a put; but both sometimessometimes calledcalled futures."futures." HeinOnline -- 23 Yale L.J. 641 1913-1914 YALEYALE LAWLAW JOURNALIOURNAL ThereThereremain remainfor fordiscussion, discussion,then, then,lawful lawfultransactions transactionsbetween between two parties where* two parties where'ititis istheir theiriritention intention thatthatone oneof ofthem, them,but butnot not the other, the other, shallshallhave have aalawful lawful powerpower ofof electingelectingbetween between alter­alter- natives affecting their natives affecting their legallegal relationsrelations withwith eacheach other.other. SuchSuch . options are of various sorts. options are of various sorts. AnAnoption option maymaybe begranted granted inina asep­ sep- arate and independent agreement, arate and independent agreement, asas wherewhere AA payspays BB aa sumsum ofof money for an option to buy money for an option to buy propertyproperty atat aa fixedfixed priceprice withinwithin aa certain time. certain time. TheThe propertyproperty involvedinvolved maymay bebe land,land, chattels,chattels, oror any commodity. On the any commodity. On the otherother hand,hand, thethe grantgrant ofof anan optionoption maymay be merely one term or provision be merely one term or provision inin aa largerlarger agreement,agreement, asas wherewhere a lessee is given the 3 a lessee is given the optionoption toto purchasepurchase3 or_or toto receivereceive anan extensionextension of the lease,4 of the lease/ oror wherewhere aa partnershippartnership agreementagreement providesprovides thatthat thethe survivor shall have the option survivor shall have the option ofof buyingbuying thethe interestinterest ofof thethe otherother in case of death I or where in case of death...5 or where aa contractcontract ofof salesale givesgives alsoalso anan optionoption on other property or gives 0 on other property or gives thethe vendorvendor thethe optionoption toto repurchase;repurchase° or where a lease or or where a lease or aa contractcontract ofof employmentemployment givesgives oneone partyparty thethe option of terminating 7 option of terminating itit onon certaincertain terms,7terms, oror wherewhere aa note-holdernote-holder has the option of converting 8 has the option of converting itit intointo stock.stock.8 The intention of giving such The intention of giving such anan optionoption toto oneone ofof thethe partiesparties may be expressed in various may be expressed in various ways.ways. ThereThere isis nono setset andand invaria­invaria- ble form. It may be agreed ble form. It may be agreed thatthat AA shallshall have "the"the optionoption toto buy", or "the first refusal", buy", or "the first refusal", or thethe "right"right ofof pre-emption".llpre-emption") TheThe 3 McCormick v. Stephany, 57 N. J. Eq. 257; Dowling v. Betjemann, 3 McCormick v. Stephany, 57 N. J. Eq. 257; Dowling v. Betjemamt, 22 Johns. & Hem. Johns. & Hem. 544. 4Hersey v. Giblett, 18 Beav. 174; Moss v. Barton,L. R. 1 Eq. Cas. 474; 4 Hersey v. Giblett, 18 Beav. 174; Moss v. Barton, L. R. 1 Eq. Cas. 474; Nicholson v. Smith, Nicholson v. Smith, 2222 Chan. D. 640. 5 Dibbins v. Dibbins, (1896) 2 Ch. 348; Hom fray v. Fothergill, 5 Dibbins v. Dibbins, (1896) 2 Ch. 348; H omfray v. Fothergill, 1 Eq. 567. 567. 6 Barrel v. Sabine, 1 Vernon 268; Woodruff °Barrel v. Sabine, 1 Vernon 268; Woodruff v. Woodruff, 44 N. J. Eq. 349. 349. 7 Hanau v. Ehrlich (1912), A. C. 39 (H. of L.); 7 Ha1lUlt v. Ehrlich (1912), A. C. 39 (H. of L.) ; RustRltSt v. Conrad, 47 Mich. 449 (lease); Singer S. M. Co. v. Mich. 449 (lease); Singer S. M. Co. v. Union Co., Holmes 253;253; PittsburgPittsbltrg Co. v. Bailey, 76 Kans. Co. v. Bailey, 76 Kans. 42. 8 Campbell v. London & B. R. Co., 5 Hare 519, 529. There 8 Campbell v. London & B. R. Co., 5 Hare 519, 529. There isis alsoalso another kind of option, called a contract another kind of option, called a contract inin thethe alternative. HereHere thethe op-op­ tion is not between paying and not tion is not between paying and notpaying,paying, oror betweenbetween doingdoing andand notnot doing;doing; it is between doing one thing and doing it is between doing one thing and doing another.another. See BrantlyBrantly onon Cont.,Cont., Sec. 156-160. Another sort of option contract Sec. 156-160. Another sort of option contraCt isis oneone wherebywhereby thethe ownerowner of goods agrees to sell the same at of goods agrees to sell the same at auctionauction toto thethe highesthighest bidderbidder withoutwithout reserve. Warlow v. Harrison, 1 reserve. Warlow v. Harrison, 1E.E. && E.E. 316.316. 0 The terms of the option must not be too indefinite, or the II The terms of the option must not be too indefinite, or the contractcontract cannot be enforced. Fogg v. Price, 145 cannot be enforced. Fogg v. Price, 145 Mass.Mass. 513513 ("if("if thethe premisespremises areare forfor sale at any time, the lessee shall have sale at any time, the lessee shall have thethe refusalrefusal ofof them."them." HeldHeld tootoo in-in­ definite to enforce.) ; Potts v. Whitehead, definite to enforce.); Potts v. Whitehead,2020 N.N. J.J. Eq.Eq. 55;55; 2323 N.N. J.J. Eq.Eq. 512512 HeinOnline -- 23 Yale L.J. 642 1913-1914 OPTIONOPTION CONTRACTSCONTRACTS agreementagreement
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