Option (law)

An option contract, or simply option, 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 § 25 (1981).

An option contract is a type of contract that protects an offeree from an offeror's ability to revoke their offer to engage in a contract.

Consideration for the option contract is still required as it is still a form of contract, cf. Restatement (Second) of Contracts § 87(1). Typically, an offeree can provide consideration for the option contract by paying money for the contract or by providing value in some other form such as by rendering other performance or forbearance. See consideration for more information.

An option is the right to convey a piece of property. The person granting the option is called the optionor (or more usually, the grantor) and the person who has the benefit of the option is called the optionee (or more usually, the beneficiary).

Options characteristically exist in one of two forms:

Because options amount to dispositions of future property, in common law countries they are normally subject to the rule against perpetuities and must be exercised within the time limits prescribed by law.

In relation to certain types of asset (principally land), in many countries an option must be registered in order to be binding on a third party.

The option contract provides an important role in unilateral contracts. In unilateral contracts, the promisor seeks acceptance by 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.

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