Option Contracts, 87(1) Q--False Recital v. Nominal

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SwampRat88
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Option Contracts, 87(1) Q--False Recital v. Nominal

Postby SwampRat88 » Mon Oct 10, 2011 5:46 pm

Restatement 87(1) provides that an option contract can be formed without the actual giving of consideration as long as it recites a purported consideration for the making of the irrevocable offer.

Under this view, I understand that this encompasses "nominal" consideration, regardless if paid. (Example: Upon consideration of $1.00 rendered this day, I promise to keep the offer open for 1 week." This would be an enforceable option contract, even if the nominal consideration of $1.00 was never paid)

LexisNexis says "There is some conflict as to whether a sham recital of consideration in option contracts is sufficient to enforce the promise. Restatement § 87, comment c, states "the option agreement is not invalidated by proof that the recited consideration was not in fact given." However, most courts continue to deny enforcement where there is a false recital of consideration in option contracts."

Is Comment C/"false recital of consideration" referring to something other than "nominal" consideration? Or are they the same thing?

Is a false recital of consideration something like beginning a document with " "For valuable consideration, I hereby grant unto you..." ? Would this be a false recital of consideration because it is not referring to a specific "nominal" amount?

SwampRat88
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Joined: Sun Jan 09, 2011 4:23 pm

Re: Option Contracts, 87(1) Q--False Recital v. Nominal

Postby SwampRat88 » Mon Oct 10, 2011 6:39 pm

Well, I think I've somewhat answered my own question. They are two different concepts in option contracts. A false recital of consideration is where recited payment is not actually made, whether nominal or not.

However, what would this be considered as when trying to form an option contract: "For valuable consideration, I hereby grant unto you..." ? This is not nominal consideration under 87(1), because there is no amount given. And because there is no amount given, it cannot be a false recital of consideration for 87(1) purposes.

Would that phrase simply void any attempt to create an option contract between two parties under the Restatement 87 view (assuming no consideration by the offeree was given)? Or does it constitute a recitation of purported consideration?
Last edited by SwampRat88 on Mon Oct 10, 2011 7:20 pm, edited 2 times in total.

Renzo
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Re: Option Contracts, 87(1) Q--False Recital v. Nominal

Postby Renzo » Mon Oct 10, 2011 6:40 pm

SwampRat88 wrote:Restatement 87(1) provides that an option contract can be formed without the actual giving of consideration as long as it recites a purported consideration for the making of the irrevocable offer.

Under this view, I understand that this encompasses "nominal" consideration, regardless if paid. (Example: Upon consideration of $1.00 rendered this day, I promise to keep the offer open for 1 week." This would be an enforceable option contract, even if the nominal consideration of $1.00 was never paid)

LexisNexis says "There is some conflict as to whether a sham recital of consideration in option contracts is sufficient to enforce the promise. Restatement § 87, comment c, states "the option agreement is not invalidated by proof that the recited consideration was not in fact given." However, most courts continue to deny enforcement where there is a false recital of consideration in option contracts."

Is Comment C/"false recital of consideration" referring to something other than "nominal" consideration? Or are they the same thing?

Is a false recital of consideration something like beginning a document with " "For valuable consideration, I hereby grant unto you..." ? Would this be a false recital of consideration because it is not referring to a specific "nominal" amount?


There is a difference between sham consideration and nominal consideration. Nominal consideration is consideration of trifling value, but actually changes hands. Sham consideration never actually changes hands, it just gets recited in a contract as if it were going to be provided.

Both parties know sham consideration won't actually change hands (that's what separates sham consideration from fraud/breach), and view it as a legal formality to put some consideration language in the contract; for most contracts this "legal formality" doesn't actually work, since courts won't consider it as consideration. However, in some jurisdictions (and under the Restatement) you can create an option with sham consideration, or in other words, you can create a unilateral obligation without any real consideration/exchange, so long as the parties recite a "sham" consideration.

SwampRat88
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Re: Option Contracts, 87(1) Q--False Recital v. Nominal

Postby SwampRat88 » Mon Oct 10, 2011 6:48 pm

Renzo wrote:
SwampRat88 wrote:Restatement 87(1) provides that an option contract can be formed without the actual giving of consideration as long as it recites a purported consideration for the making of the irrevocable offer.

Under this view, I understand that this encompasses "nominal" consideration, regardless if paid. (Example: Upon consideration of $1.00 rendered this day, I promise to keep the offer open for 1 week." This would be an enforceable option contract, even if the nominal consideration of $1.00 was never paid)

LexisNexis says "There is some conflict as to whether a sham recital of consideration in option contracts is sufficient to enforce the promise. Restatement § 87, comment c, states "the option agreement is not invalidated by proof that the recited consideration was not in fact given." However, most courts continue to deny enforcement where there is a false recital of consideration in option contracts."

Is Comment C/"false recital of consideration" referring to something other than "nominal" consideration? Or are they the same thing?

Is a false recital of consideration something like beginning a document with " "For valuable consideration, I hereby grant unto you..." ? Would this be a false recital of consideration because it is not referring to a specific "nominal" amount?


There is a difference between sham consideration and nominal consideration. Nominal consideration is consideration of trifling value, but actually changes hands. Sham consideration never actually changes hands, it just gets recited in a contract as if it were going to be provided.

Both parties know sham consideration won't actually change hands (that's what separates sham consideration from fraud/breach), and view it as a legal formality to put some consideration language in the contract; for most contracts this "legal formality" doesn't actually work, since courts won't consider it as consideration. However, in some jurisdictions (and under the Restatement) you can create an option with sham consideration, or in other words, you can create a unilateral obligation without any real consideration/exchange, so long as the parties recite a "sham" consideration.


Thank you very much. I believe this is in line with my above analysis. Do you have any insight on my latter question, however?

SwampRat88
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Re: Option Contracts, 87(1) Q--False Recital v. Nominal

Postby SwampRat88 » Mon Oct 10, 2011 7:24 pm

Bump. As my earlier posted indicated, I just want to know what this would this be considered when trying to form an option contract: "For valuable consideration, I hereby grant unto you..." ? This is not nominal consideration under 87(1), because there is no amount given. And because there is no amount given, it cannot be a false recital of consideration for 87(1) purposes.

Would that phrase simply void any attempt to create an option contract between two parties under the Restatement 87 view (assuming no consideration by the offeree was given)? Or does it constitute a recitation of purported consideration?

Renzo
Posts: 4265
Joined: Tue Dec 02, 2008 3:23 am

Re: Option Contracts, 87(1) Q--False Recital v. Nominal

Postby Renzo » Mon Oct 10, 2011 7:46 pm

SwampRat88 wrote:Bump. As my earlier posted indicated, I just want to know what this would this be considered when trying to form an option contract: "For valuable consideration, I hereby grant unto you..." ? This is not nominal consideration under 87(1), because there is no amount given. And because there is no amount given, it cannot be a false recital of consideration for 87(1) purposes.

Would that phrase simply void any attempt to create an option contract between two parties under the Restatement 87 view (assuming no consideration by the offeree was given)? Or does it constitute a recitation of purported consideration?


I actually don't know if consideration that would otherwise be void for vagueness is enough to satisfy the requirement of sham consideration, but I suspect not. I think you would have to say "in consideration for $1.00," or some other actual, defined consideration, but with both parties knowing that the dollar would never really change hands.

Edit: department of the redundancy department.
Last edited by Renzo on Mon Oct 10, 2011 8:24 pm, edited 1 time in total.

SwampRat88
Posts: 113
Joined: Sun Jan 09, 2011 4:23 pm

Re: Option Contracts, 87(1) Q--False Recital v. Nominal

Postby SwampRat88 » Mon Oct 10, 2011 8:06 pm

Renzo wrote:
SwampRat88 wrote:Bump. As my earlier posted indicated, I just want to know what this would this be considered when trying to form an option contract: "For valuable consideration, I hereby grant unto you..." ? This is not nominal consideration under 87(1), because there is no amount given. And because there is no amount given, it cannot be a false recital of consideration for 87(1) purposes.

Would that phrase simply void any attempt to create an option contract between two parties under the Restatement 87 view (assuming no consideration by the offeree was given)? Or does it constitute a recitation of purported consideration?


I actually don't know if consideration that would otherwise be void for vagueness is enough to satisfy the requirement of sham consideration requirement, but I suspect not . I think you would have to say "in consideration for $1.00," or some other actual, defined consideration, but with both parties knowing that the dollar would never really change hands.


Perhaps I am overthinking this. If the option contract is prefaced with "For valuable consideration,...," (and there is no consideration on the promisee's end), then under 87(1) that would probably NOT constitute a "recital of purported consideration." A "recital of purported consideration" has to be SOMETHING (otherwise what was the point of including it in the restatement). Under 87, that "something" could either be nominal, sham or refer to the actual consideration on part of the promisee. Given that in this scenario there is no consideration to refer to, I'm inclined to think this would be void for vagueness.




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