Hamilton Bancshares v. Leroy

Appellate Court of Illinois · Contracts

ContractsOption contractsConsiderationSpecific performanceSummary judgmentoption contractconsiderationlegal detriment

Facts

Plaintiff received two written 80-day stock purchase options dated June 11, 1981, each stating consideration of one dollar and other good and valuable consideration, and each also stating that plaintiff's president had paid $5,000 earnest money to be applied to the purchase price if exercised and refunded if not exercised. Plaintiff admitted the recited one dollar was never paid, but the record contained canceled checks showing the $5,000 payments under each option. Defendants sent notice withdrawing the options during the 80-day periods and before plaintiff exercised them. Plaintiff then rejected the withdrawals, exercised the options, and brought this action for specific performance.

Issue

Whether the $5,000 earnest money paid under each option, even though refundable if the options were not exercised, constituted sufficient consideration to keep the options open during the stated option periods. Relatedly, the court considered whether the money was merely held in trust for plaintiff so that defendants received no legally cognizable consideration.

Rule

An option contract must be supported by sufficient consideration; otherwise it is merely a revocable offer that may be withdrawn before acceptance. Consideration sufficient to support an option consists of either a benefit to the promisor or a legal detriment to the promisee, and legal detriment includes parting with money or giving up a right one was otherwise free to retain, even if the promisor's actual gain is uncertain or the payment is refundable if the option is not exercised.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

In Peoria, Olivia Trent signed a written 45-day option giving Devon Pike the right to buy her warehouse shares. The document recited "$1 and other good and valuable consideration," but Devon never paid the $1; instead, on the same day he paid Olivia $3,000 in earnest money, to be credited to the purchase price if he exercised the option and refunded if he did not. Twenty days later, before Devon exercised, Olivia sent a letter revoking the option.

If Devon sues to enforce the option period, which is the strongest argument under the governing rule?

Explanation. An option is irrevocable only if supported by sufficient consideration. If the stated nominal consideration was not actually paid, the court looks to other real consideration in the record. Sufficient consideration may be either a benefit to the promisor or a legal detriment to the promisee. Parting with money and losing its use for a period of time is a legal detriment, even if the money must be refunded if the option is not exercised. Thus Devon has the strongest argument that the option remained open for the stated period.