1464-EIGHT, LTD., A TEXAS LIMITED PARTNERSHIP AND MILLIS MANAGEMENT CORPORATION v. GAIL ANN JOPPICH (Majority)

No. 03-0109

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1464-Eight, Ltd. & Millis Management Corporation, Petitioners

v.

Gail Ann Joppich, Respondent

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On Petition for Review from the

Court of Appeals for the First District of Texas

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Argued January 28, 2004

Chief Justice Jefferson, joined by Justice Brister, concurring.

Today the Court adopts section 87(1)(a) of the Restatement (Second) of Contracts to hold that an option contract in which consideration is recited, but not paid, is enforceable. But if the Court enforces option contracts containing fictional recitals of consideration, why mandate such recitals at all? Why recognize and require parties to recite a lie, a sham ? James D. Gordon III, Consideration and the Commercial-Gift Dichotomy, 44 Vand. L. Rev. 283, 294 (1991) (commenting on section 87 of the Restatement (Second) of Contracts); see also John P. Dawson, Gifts and Promises 4 (1980) (criticizing consideration requirement as a needless hindrance to the processes by which agreement is reached and, being artificial as well as needless, was soon made to look silly, so that a dollar, a hairpin, or a false recital would do ).

Instead, I agree with the authors of a leading treatise that while the Restatement approach is a step in the right direction, it 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 part of a mature legal system. Commercial promises such as options and credit guaranties should be enforceable without consideration. 2 Joseph M. Perillo & Helen Hadjiyannakis Bender, Corbin on Contracts 5.17 (rev. ed. 1995) (footnote omitted); see also id. 5.17 n.19 (noting that undue deference is being paid to fictional recitals and the appropriate solution is that options should not require consideration ).[1] Although I am not prepared to advocate elimination of the consideration requirement in all commercial contracts, I believe it is time to acknowledge that the doctrine serves no justifiable purpose in option agreements.

Typically, courts require consideration to separate binding agreements from unenforceable donative promises. See id. 5.17 (rev. ed. 1995). But option contracts rarely involve gifts. Generally, options are one commercial step in a commercial deal. Id.; see also Gordon, 44 Vand. L. Rev. at 294 ( Offerors typically do not grant options because they intend to make a gift of the option. The offeror usually grants it to induce the offeree to deliberate and to increase the probability that the offeree will accept the offer. ) (footnote omitted); Melvin Aron Eisenberg, The Principles of Consideration, 67 Cornell L. Rev. 640, 653 (1982) (noting that U.C.C. firm offers are made not for altruistic motives, but to advance the offeror s interests by inducing the offeree to deliberate ). They are related to economic exchanges transactions based on self-interest, not altruism. Gordon, 44 Vand. L. Rev. at 294. Additionally, there is no reason to assume that an option unsupported by consideration is a gift; if the proposed terms are very favorable to the optionor, that alone may justify the option.

Moreover, enforcing option agreements even without consideration comports with the parties expectations. [P]eople expect that option contracts are serious and binding commitments. Gordon, 44 Vand. L. Rev. at 294. We can safely presume that was the case here. Millis and Joppich entered into a detailed, four-page option agreement, which was signed and notarized. It expressed the parties intent to be bound. It was incident to Joppich s purchase of the lot for $65,000. Joppich agreed to begin construction within eighteen months. The option included the familiar refrain, [i]n 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, something the parties likely paid little attention to, until Joppich sought a means to avoid her promise. I agree with the Court that the option should be enforced even though Millis did not actually pay the recited ten dollars. But we should go further and dispense with that recital requirement in option contracts.

This view is hardly novel. For centuries, commentators and courts have advocated the elimination of the consideration requirement from contracts altogether. In eighteenth-century England, Lord Mansfield, Chief Judge of the King's Bench from 1756 through 1788, urged the enforcement of commercial contracts based on moral obligation rather than consideration. Kevin M. Teeven, Development of Reform of the Preexisting Duty Rule and Its Persistent Survival, 47 Ala. L. Rev. 387, 401 n.76 (1996). But the force of precedent surrounding this keystone common law doctrine proved too much to overcome, and the requirement remained a part of the common law. Id. at 441 n.314.

In 1925, the National Conference of Commissioners on Uniform State Laws proposed the Uniform Written Obligations Act, drafted by Samuel Williston. Handbook of the National Conference of Commissioners on Uniform State Laws and Proceedings 193-215 (1925); Teeven, 47 Ala. L. Rev. at 439 (1996); Anthony J. Petrone, Pennsylvania s Experience with the Uniform Written Obligations Act: Saving Contracts Otherwise Unenforceable for Lack of Consideration, 90 Com. L. J. 571, 572 (1985). That act eliminated consideration as a technical requirement for an enforceable contract. The act provides that [a] written release or promise hereafter made and signed by the person releasing or promising shall not be invalid or unenforceable for lack of consideration, if the writing also contains an additional express statement, in any form of language, that the signer intends to be legally bound. Unif. Written Obligations Act 1, Handbook of the National Conference of Commissioners on Uniform State Laws and Proceedings 584 (1925). The act s drastic [2] approach was not widely accepted, however; only Pennsylvania and Utah adopted the act, and Utah subsequently repealed it. Teeven, 47 Ala. L. Rev. at 439.

Instead, courts dogged insistence on a formalistic recital remains, tempered only by the creative doctrines they employ to enforce option contracts when the stated consideration is not paid. Thus, courts have invoked estoppels, promissory and equitable, and have implied promises to save options from the destructive force of the exaggerated impact of consideration doctrine. Perillo & Bender, Corbin on Contracts 5.17 (noting that [s]ome courts have estopped the promisor from denying that the [stated consideration] was paid and [o]thers have sustained the option by virtue of an implied promise to pay the dollar ) (footnotes omitted). Instead of engaging in these machinations, courts should take a simpler, more straightforward approach and eliminate the consideration requirement in option contracts.

Because the consideration requirement [for option contracts] has been imposed by the courts as a matter of common law, the courts are free to discard this requirement. Because courts have traditionally been unwilling to take this needed step, legislators have stepped in in some jurisdictions and enacted curative legislation. Perillo & Bender, Corbin on Contracts 5.17; see also Teeven, 47 Ala. L. Rev. at 441 n.314 ( Consideration is not required for the formation of a commercial contract under any legal system other than the common law. ). Perhaps this explains the Uniform Commercial Code s firm offer rule, adopted verbatim in Texas in 1966.[3] See Tex. Bus. & Com. Code 2.205. Section 2.205 eliminates the consideration requirement for some option agreements by sanctioning firm offers B enforceable option contracts without any consideration. Id. Under the U.C.C., a firm offer is enforceable if it is in writing, states that it is irrevocable, and is signed by the offeror, who is a merchant.[4] Id. Firm offers are not revocable, for lack of consideration during the stated time B or, if no time is stated, a reasonable time B not to exceed three months. Id. Section 2.205 applies only to transactions in goods, however. Id. 2.102, 2.205. The U.C.C. firm offer rule was promulgated to give the business community a means of making options binding even without consideration. 1 William D. Hawkland, Uniform Commercial Code Series 2-205:1 (1998)(noting that pre-Code law permitted a businessperson to revoke an offer in spite of a promise not to do so if the promise to keep the offer open was not supported by consideration and [t]he commercial community needed legislation to make firm offers efficacious ). Despite eliminating the consideration requirement, section 2.205 does not seem to have spawned much litigation, having been mentioned in just five published decisions since the Texas Legislature adopted it thirty-eight years ago.[5] See Tubelite v. Risica & Sons, Inc., 819 S.W.2d 801, 803 (Tex. 1991); Nelson v. Union Equity Co-Operative Exchange, 548 S.W.2d 352, 356 (Tex. 1977); Traco, Inc. v. Arrow Glass Co., 814 S.W.2d 186, 188 (Tex. App.BSan Antonio 1991, writ denied); Alamo Clay Prods., Inc. v. Gunn Tile Co., 597 S.W.2d 388, 392 (Tex. Civ. App.BSan Antonio 1980, writ ref d n.r.e.); Echols v. Bloom, 485 S.W.2d 798, 800 n.1 (Tex. Civ. App.BHouston [14th Dist.] 1972, writ ref d n.r.e.); see also Uniform Commercial Code, 59th Leg., R.S., ch. 721, 2-205, 1965 Tex. Gen. Laws 1, 18. Given Texas s apparently favorable experience with section 2.205, it seems logical to expand its principles to other types of option contracts.[6]

But perhaps Justice Holmes s aphorism that a page of history is worth a volume of logic applies here. New York Trust Co. v. Eisner, 256 U.S. 345, 349 (1921). A rule known only to lawyers and relied on by parties seeking a technicality by which to avoid contractual obligations, consideration in option contracts is a relic, much like the seal of earlier days.[7] Although Texas eliminated the seal requirement in 1858,[8] our courts continue to insist on a formalistic (even if false) recitation of consideration in an option contract that both parties enter into willingly, fully expecting it to be enforceable, and as part of an underlying transaction that is supported by consideration. It is time to put this overworked shibboleth to rest. Ryev. Phillips, 282 N.W. 459, 460 (Minn. 1938).

For these reasons, I concur in the Court s judgment but not in its reasoning.

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Wallace B. Jefferson

Chief Justice

 OPINION DELIVERED: December 31, 2004

[1] Yet another problem with the Restatement approach is that, in addition to mandating a recital of consideration, the Restatement requires that an option be Aon fair terms@ and that the exchange occur Awithin a reasonable time.@ Restatement (Second) of Contracts 87(1)(a) (1981). This approach unduly complicates enforcement of option contracts, requiring a factual inquiry regarding fairness of terms and reasonableness of time in each case. See Gordon, 44 Vand. L. Rev. at 294 (ARequiring that the option be in a certain form is too narrow because it relieves people of option contracts that everyone expects to be binding.@). Perhaps this explains why, as the Court notes, Athe Restatement . . . is admittedly the minority position among the limited number of state supreme courts that have addressed the question.@ __ S.W.3d at __.

[2] Petrone, 90 Com. L. J. at 572.

[3] U.C.C. section 2-205 has been adopted by the District of Columbia, the United States Virgin Islands, and every state except Louisiana. 2 Ronald A. Anderson, Anderson on the Uniform Commercial Code 2-205:2 (3d ed. 1997).

[4] A merchant is:

a person who deals in goods of the kind or otherwise by his occupation holds himself out as having knowledge or skill peculiar to the practices or goods involved in the transaction or to whom such knowledge or skill may be attributed by his employment of an agent or broker or other intermediary who by his occupation holds himself out as having such knowledge or skill.

Tex. Bus. & Com. Code 2.104(a).

[5] In 2003, the National Conference of Commissioners on Uniform State Laws approved a minor amendment to section 2.205, permitting the firm offer to be made in a Arecord@ rather than a writing. U.C.C. 2-205 (2003); Lary Lawrence, Lawrence s Anderson on the Uniform Commercial Code ' 2-205:28 (Supp. 2004). ARecord@ means information that is inscribed on a tangible medium or that is stored in an electronic or other medium and is retrievable in perceivable form. U.C.C. 2-103(m) (2003). Texas has not yet adopted amended section 2.205. See Tex. Bus. & Com. Code 2.205.

[6] Indeed, Samuel Williston, although he did not disapprove of the U.C.C. rule, advocated a broader approach (perhaps like that of his Uniform Written Obligations Act):

Section 2-205 proposes to change the existing law of contracts by making binding without consideration an offer stated to be "firm" or otherwise irrevocable for a period not exceeding three months. . . . I strongly favor enactment of some such statute . . . . It is, however, unfortunate that there should be a different rule for contracts for the sale of goods from that governing sales of shares of stock or of land, or indeed for any other offer or promise. It would be better to enact a general statute on the subject than to make this special rule for the sale of goods.

Samuel Williston, The Law of Sales in the Proposed Uniform Commercial Code, 63 HARV. L. REV. 561, 576-77 (1950) (footnote omitted).

[7] AWhen the seal was in its heyday as a legal formality, use of a sealed instrument would make a gratuitous promise enforceable.@ Mark B. Wessman,Retraining the Gatekeeper: Further Reflections on the Doctrine of Consideration, 29 Loy. L.A. L. Rev. 713, 833 (1997).

[8] See Act approved Feb. 2, 1858, 7th Leg., R.S., ch. 78, 1, 1858 Tex. Gen. Laws 96, 96, reprinted in 4 H.P.N. Gammel, The Laws of Texas 1854-1861, at 968, 968 (Austin, Gammel Book Co. 1898).