Daily Development for Wednesday, March 2, 2005
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
dirt@umkc.edu

OPTIONS; CONSIDERATION; RECITATION OF NOMINAL CONSIDERATION: Optionee’s failure to pay the nominal consideration of ten dollars recited in the contract will not render the contract unenforceable.

1464-Eight, Ltd. v. Joppich, 2004 WL 3019231 (Tex. 2004).

A real estate developer sold lots to purchasers with the requirement that purchasers execute an option back to the developer giving the developer the right to repurchase the property for 80% of the sale price if, within 18 months of purchase, the purchaser had not commenced construction.  The option in the instant case, signed by both parties, read as follows:

“1. Grant of Option. In consideration of the sum of Ten and No/100 ($10.00) Dollars ("Option Fee") paid in cash by Developer, the receipt and sufficiency of which is hereby acknowledged and confessed, Purchaser hereby grants to Developer the exclusive right and option to purchase [the Property]. This Option may be exercised at any time from and after January 21, 1999.

2. Purchase Price. The total purchase price for the Property shall be [$58,500] and shall be due and payable at closing.”

Optionor sought a declaratory judgment that its option contract with the developer was unenforceable due to the fact that developer never paid the nominal consideration recited in the contract.

In a case of first impression, the Texas Supreme Court held in favor of the developer, finding that a false recital of nominal consideration is sufficient to establish that an offer is not revocable, so long as the underlying exchange is fair and the offer is to be accepted within a reasonable time.

The Court's decided to incorporate into the common law of Texas  Section 87(1)(a) of the Restatement (Second) of Contracts, which provides that non-payment of the nominal consideration recited in an option contract does not preclude enforcement of the agreement.

Purchaser argued that the Restatement view represents a minority view that modern courts should ignore.  The Court reviewed two older United States Supreme Court cases and several Texas court decisions, as well as treatises and law review articles.  It determined that, although the position taken by Section 87(1)(a) of the Restatement (Second) of Contracts is the minority position among the limited number of state supreme courts that have addressed the question, the Restatement position is supported by well-articulated and sound rationale and represents the better approach.  It quoted the analysis of an earlier Texas case:

“Where a contract recites the payment of a nominal amount of money as its consideration, the contract is valid, even if the nominal sum identified is not actually paid. The nominal consideration merely creates an obligation to pay such sum, which may be enforced by the other party.”

 The court stated that, here, the real consideration provided in the Option Agreement was the obligation to pay the ten dollars, and it is of no consequence whether the ten dollars was paid or not.

But the court noted that the Restatement viewed the analysis stated above as a mere fiction, and the real reason for the rule is that there is no need, in fairness, to require any further consideration when the option price is fair.  I quoted from the Restatement of Contracts (2nd):

“[A] nominal consideration is regularly held sufficient to support a short-time option proposing an exchange on fair terms. The fact that the option is an appropriate preliminary step in the conclusion of a socially useful transaction provides a sufficient substantive basis for enforcement, and a signed writing taking a form appropriate to a bargain satisfies the desiderata of form. In the absence of statute, however, the bargaining form is essential: a payment of one dollar by each party to the other is so obviously not a bargaining transaction that it does not provide even the form of an exchange.

c. False recital of nominal consideration. A recital in a written agreement that a stated consideration has been given is evidence of that fact as against a party to the agreement, but such a recital may ordinarily be contradicted by evidence that no such consideration was given or expected. See § 218. In cases within Subsection (1)(a), however, the giving and recital of nominal consideration performs a formal function only. The signed writing has vital significance as a formality, while the ceremonial manual delivery of a dollar or a peppercorn is an inconsequential formality. In view of the dangers of permitting a solemn written agreement to be invalidated by oral testimony which is easily fabricated, therefore, the option agreement is not invalidated by proof that the recited consideration was not in fact given. A fictitious rationalization has sometimes been used for this rule: acceptance of delivery of the written instrument conclusively imports a promise to make good t!

 he rec
ital, it is said, and that promise furnishes consideration. Compare § 218. But the sound basis for the rule is that stated above.”

Indeed, the court would have gone further.  It argued that option contracts for short term on fair terms ought to be enforceable whether or not nominal consideration is stated.

“Consideration is designed primarily to protect promissors from their own donative promises. Options, however, are one commercial step in a commercial deal. A number of cases have followed the forthright approach taken by the Restatement (Second). Indeed, it may be urged that the Restatement fails to lead the way to more progressive reform. Having recognized the value of the enforceability of options as commercial devices, it still insists on the fictional recital of a purported consideration. Such fictional charades should not be a part of a mature legal system. Commercial promises such as options and credit guaranties should be enforceable without consideration.”

A thoughtful and discursive concurrence would have held that neither the requirement for statement of nominal consideration nor the independent judicial review of the fairness of the option terms is appropriate.  Options are not donative, and the purpose of consideration - to separate real contracts from donative promises, is not in play here.

Comment: The editor must have slept through this part of Contracts class.  All this is news to him, although it is consistent with his view that commercial agreements ought to be enforced when the courts can tell that the parties meant what they said.  Consideration is only one basis for establishing this.

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