Option contract - wikipedia Option contract The examples and perspective in this article deal primarily with the United States and do not represent a worldwide view of the subject. You may improve this article, discuss the issue on the talk page, or create a new article, as appropriate. ( December 2014 ) Contract law Part of the common law series Contract formation Offer and acceptance Posting rule Mirror image rule Invitation to treat Firm offer Consideration Implication - in - fact Collateral contract Defenses against formation Lack of capacity Duress Undue influence Illusory promise Statute of frauds Non est factum Contract interpretation Parol evidence rule Contract of adhesion Integration clause Contra proferentem Excuses for non-performance Mistake Misrepresentation Frustration of purpose Impossibility Impracticability Illegality Unclean hands Unconscionability Accord and satisfaction Rights of third parties Privity of contract Assignment Delegation Novation Third - party beneficiary Breach of contract Anticipatory repudiation Cover Exclusion clause Efficient breach Deviation Fundamental breach Remedies Specific performance Liquidated damages Penal damages Rescission Quasi-contractual obligations Promissory estoppel Quantum meruit Related areas of law Conflict of laws Commercial law Other common law areas Tort law Property law Wills, trusts, and estates Criminal law Evidence 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. Contents 1 Introduction 2 Application of option contract in unilateral contracts 3 Assignability 4 Contract theory 5 See also 6 References 7 External links Introduction 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 : Call options, which give the beneficiary the right to require the grantor to sell or convey the property to them at the agreed price on exercise Put options, which give the beneficiary the right to require the grantor to buy or receive the property at the agreed price on exercise. 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. Application of option contract in unilateral contracts 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. 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. Essentially, once a promisee begins performance, an option contract is implicitly created between the promisor and the promisee. The promisor impliedly promises not to revoke the offer and the promisee impliedly promises to furnish complete performance, but as the name suggests, the promisee still retains the `` option '' of not completing 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 ). It has been hypothesized that option contracts could help allow free market roads to be constructed without resorting to eminent domain, as the road company could make option contracts with many landowners, and eventually consummate the purchase of parcels comprising the contiguous route needed to build the road. Assignability It is a general principle of contract law that an offer can not be assigned by the recipient of the offer to another party. However, an option contract can be sold ( unless it provides otherwise ), allowing the buyer of the option to step into the shoes of the original offeree and accept the offer to which the option pertains. Contract theory In economics, option contracts play an important role in the field of contract theory. In particular, Oliver Hart ( 1995, p. 90 ) has shown that option contracts can mitigate the hold - up problem ( an underinvestment problem that occurs when the exact level of investment can not be contractually specified ). However, there is a debate in contract theory whether option contracts are still useful when the contractual parties can not rule out future renegotiations. As has been pointed out by Tirole ( 1999 ), this debate is at the center of the discussions about the foundations of the incomplete contracts theory. In a laboratory experiment, Hoppe and Schmitz ( 2011 ) have confirmed that non-renegotiable option contracts can indeed solve the hold - up problem. Moreover, it turns out that option contracts are still useful even when renegotiation can not be ruled out. The latter observation can be explained by Hart and Moore 's ( 2008 ) idea that an important role of contracts is to serve as reference points. See also Offer and acceptance Firm offer References Jump up ^ http://dictionary.findlaw.com/definition/optionor.html Jump up ^ See § 45 of Restatement ( Second ) of Contracts for the black letter law of the option contract 's application to this situation. Jump up ^ Benson, Bruce L. ( 2006 ). `` Do Holdout Problems Justify Compulsory Right - of - Way Purchase ''. Street Smart : Competition, Entrepreneurship, and the Future of Roads. p. 65. Jump up ^ John D. Calamari, Joseph M. Perillo, The Law of Contracts ( 1998 ), p. 707. Jump up ^ Hart, Oliver ( 1995 ). Firms, contracts, and financial structure. Clarendon Press. Jump up ^ Lyon, T.P. ; Rasmusen, E. ( 2004 ). `` Buyer - Option Contracts Restored : Renegotiation, Inefficient Threats, and the Hold - Up Problem ''. Journal of Law, Economics, and Organization. 20 ( 1 ) : 148 -- 169. doi : 10.1093 / jleo / ewh027. ISSN 8756 - 6222. Jump up ^ Tirole, Jean ( 1999 ). `` Incomplete Contracts : Where do We Stand ? ''. Econometrica. 67 ( 4 ) : 741 -- 781. doi : 10.1111 / 1468 - 0262.00052. ISSN 1468 - 0262. Jump up ^ Hoppe, Eva I. ; Schmitz, Patrick W. ( 2011 ). `` Can contracts solve the hold - up problem ? Experimental evidence ''. Games and Economic Behavior. 73 ( 1 ) : 186 -- 199. doi : 10.1016 / j. geb. 2010.12. 002. Jump up ^ Hart, Oliver ; Moore, John ( 2008 ). `` Contracts as Reference Points * ''. Quarterly Journal of Economics. 123 ( 1 ) : 1 -- 48. doi : 10.1162 / qjec. 2008.123. 1.1. ISSN 0033 - 5533. External links Retrieved from `` https://en.wikipedia.org/w/index.php?title=Option_contract&oldid=833264658 '' Categories : Contract law Hidden categories : Articles with limited geographic scope from December 2014 USA - centric Talk Contents About Wikipedia Azərbaycanca Čeština Español Esperanto 한국어 Magyar Edit links This page was last edited on 30 March 2018, at 15 : 23. About Wikipedia

Question: what type of contract is an option to buy contract
Answer: protects an offeree from an offeror's ability to revoke their offer to engage in a contract