1464-Eight, Ltd. v. Joppich , 48 Tex. Sup. Ct. J. 275 ( 2004 )

Justice SMITH

delivered the opinion of the Court,

in which Justice HECHT, Justice OWEN, Justice O’NEILL, Justice WAINWRIGHT, and Justice MEDINA joined. STEVEN WAYNE SMITH, Justice.

The question presented is whether section 87(l)(a) of the Restatement (Second) of Contracts should be incorporated into the common law of Texas. See 3 Williston & Lord, A Treatise on the Law of Contracts § 7:23 (4th ed. 1992) (“As far as option contracts are concerned, the Restatement (Second) has taken the position, adopted by some common law courts, that a false recital of nominal consideration is sufficient to support the irrevocability of an offer so long as the underlying exchange is fair and the offer is to be accepted within a reasonable time.”).

The petitioners, citing section 87(l)(a) of the Restatement (Second) of Contracts, assert that the respondent’s offer to sell real property should be binding as an option contract because the offer was in writing and signed by the respondent, acknowledged the receipt of a nominal consideration of ten dollars, and proposed an exchange on fair terms within a reasonable time. The respondent, contending that the parties’ written option agreement is unenforceable, asserts that the agreement lacks consideration because the recited nominal consideration was never actually paid, and that the offer was revoked before it was properly accepted.

In this case of first impression, we agree with the petitioners that the nonpayment of the recited nominal consideration does not preclude enforcement of the parties’ written option agreement. Therefore, we will reverse and remand.

I

In July 1997, Gail Ann Joppich entered into an earnest money contract with 1464-Eight, Ltd. and Millis Management Corporation (collectively “Millis”) under which Joppich agreed to buy, and Millis agreed to convey, an undeveloped residential lot located in a subdivision being developed by Millis. The purchase price was $65,000. An addendum attached to the earnest money contract provided:

All Lots being sold in Shiloh Lake Estates Subdivision are being sold pursuant to an Option Agreement to be executed by Buyer and Seller at closing that shall survive closing and provide Seller with an option to purchase the Property from the Buyer at a price equal to 90% of the sale price herein if Buyer fails to commence construction of a private residence on the Property within 18 months from the date of closing.

At the closing later the same month, Millis executed a special warranty deed conveying the lot to Joppich. In addition, the parties executed a separate four-page document entitled “Option Agreement.” The notarized document, which was signed by both Joppich and Millis, provided:

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.

3. Expiration Date. This Option shall automatically expire at 5:00 o’clock p.m. on the date which is five (5) years after the date of execution and recording in the Office of the County Clerk of Fort Bend County, Texas unless prior to the expiration date this Option is exercised by Developer.

4.Termination. This Option shall automatically terminate on the date that Purchaser, or Purchaser’s assigns, commence construction of a primary residence which has been approved by [the appropriate committee].

The Option Agreement did not contain an express statement regarding whether the parties intended the offer to sell real property to be revocable or irrevocable.

In October 1999, Joppich filed suit against Millis, seeking a declaratory judgment that the Option Agreement was unenforceable. In her original petition, Jop-pich asserted that “[although the Option Agreement states that a sum of Ten and No/100 dollars was given to Plaintiff in consideration for granting the option, this sum was not then nor has it ever been tendered to nor paid to Plaintiff,” and she requested that “the Court declare that the Agreement granting the exclusive right and option to purchase [the Property] to the Developer is void and unenforceable for lack of consideration or alternatively, failure of consideration.” Millis answered with a general denial.

In September 2000, Millis filed a counterclaim seeking specific performance, damages, and attorney’s fees, asserting:

Counter Defendant failed to begin construction of a primary residence on the property, therefore, Counter Plaintiffs sent notice of their exercising of the option to Counter Defendant on September 4, 1999.... Counter Defendant refused and continues to refuse to convey the property pursuant to the terms of the option.

Joppich answered with a general denial. In addition, in compliance with Texas Rules of Civil Procedure 93 and 94, the answer was verified by affidavit and set forth the affirmative defenses of lack of consideration and failure of consideration.

In January 2001, Joppich moved for final summary judgment “based on failure and/or lack of consideration.” Joppich asserted that “[sjince no consideration flowed from Defendants to Plaintiff and she revoked the Option Agreement before consideration had in fact passed, the Option Agreement is void and unenforceable.” In her affidavit, which was attached to the motion, Joppich stated: “The Option Agreement states that a sum of Ten and No/100 dollars was given to me in consideration for granting Defendants the right to repurchase the property under certain conditions. This sum was not then nor has it ever been tendered to or paid to me.”

Millis responded to Joppich’s motion and, in the same document, moved for partial summary judgment. Millis asserted:

At the closing, Plaintiff acknowledged the receipt of ten dollars by signing the Option Agreement. She did not mention to anyone before or after signing the agreement that she had not actually received the ten dollars. Texas case law is clear that this option is supported by adequate consideration and at most, Plaintiffs alleged failure to actually receive the recited consideration creates nothing more than a right to payment of the stated sum.

In support of the motion for partial summary judgment, Millis attached the Option Agreement. Millis proffered no additional summary judgment evidence regarding whether the recited nominal consideration of ten dollars was actually paid. In the motion, Millis requested only a declaration that the Option Agreement was enforceable.

In February 2001, the trial court denied Joppich’s motion for final summary judgment and granted Millis’s motion for partial summary judgment. In May 2001, the trial court rendered a final judgment declaring that the Option Agreement was enforceable, requiring Joppich to sell the property in compliance with the terms of the Option Agreement, and awarding attorney’s fees to Millis.

In the court of appeals, both sides characterized the consideration recited in the Option Agreement as “nominal.” Millis, relying on McKay v. Tally, 220 S.W. 167 (Tex.Civ.App.Amarillo 1920, no writ) and Heard v. Pratt, 257 S.W. 660 (Tex.Civ.App. San Antonio 1923, writ dism’d), asserted:

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 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.

Joppich acknowledged that “[i]f unpaid nominal consideration without other consideration is sufficient, then the court should overrule [her first issue] challenging the enforceability of a contract for failure or lack of consideration.” Neither Millis nor Joppich cited or otherwise discussed section 87(l)(a) of the Restatement (Second) of Contracts.

In December 2002, the court of appeals reversed and remanded, concluding that “summary judgment for [Millis] was improper.” 96 S.W.3d 614, 617.¹ Because it sustained her first issue, the court of appeals did not address Joppich’s other issues. Id.

In this Court, Millis asserts that “[t]he court of appeals’ holding that failure to deliver the nominal consideration recited in an option contract precludes its enforcement directly conflicts with the modern view reflected in the Restatement (Second) of Contracts.” In response, Jop-pich argues that “[t]he Restatement shows that its view is not the modern view but is in fact the minority view consisting of one and possibly two states.” Joppich does not dispute Millis’s contention, made in both its petition for review and its brief on the merits, that the Option Agreement satisfies section 87(l)(a) of the Restatement (Second) of Contracts, including its requirement that an offer propose an exchange on fair terms within a reasonable time.

II

“[A] promise to give an option is valid if supported by an independent consideration. For example, if a sum of money be paid for the option, the promisee may, at his election, enforce the contract.” Nat’l Oil & Pipe Line Co. v. Teel, 95 Tex. 586, 68 S.W. 979, 980 (1902); see also Restatement (Second) of Contracts § 25 (1981) (“An option contract is a promise which meets the requirements for the formation of a contract and limits the promi-sor’s power to revoke an offer.”).

In addition, under the Restatement (Second) of Contracts, certain promises that lack consideration are enforceable. See Restatement (Second) of Contracts §§ 82-94 (1981); see also 1 Murray, Murray on Contracts § 61 (4th ed. 2001) (“The Restatement 2d expressly adopts the view that a clause reciting nominal consideration in either a guaranty or an option contract should operate as a formalistic validation device, supporting the promise in either type of contract, regardless of the fact that the recited amount was never paid.”); 2 Perillo & Bender, Corbin on Contracts § 5.17 (rev. ed. 1995) (“The Restatement (Second) has taken the position that in the commercially important situations of options and credit guaranties, a promise is made binding by a false recital of consideration.”).

Section 87(l)(a) of the Restatement (Second) of Contracts provides: “An offer is binding as an option contract” if the offer “is in writing and signed by the offeror, recites a purported consideration for the making of the offer, and proposes an exchange on fair terms within a reasonable time.” Restatement (Second) of Contracts § 87(l)(a) (1981). Similarly, section 88(a) provides: “A promise to be surety for the performance of a contractual obligation, made to the obligee, is binding” if the promise “is in writing and signed by the promisor and recites a purported consideration.” Id. § 88(a); see also Beltran v. Groos Bank, N.A., 755 S.W.2d 944, 948 (Tex.App.San Antonio 1988, no writ) (applying section 88(a) to determine whether a written guaranty agreement that contained a fictional recital of a nominal consideration was enforceable).

In the remainder of part II, we will review two United States Supreme Court decisions from the 1800’s and several Texas court decisions from the early 1900⅛ before more closely analyzing section 87(l)(a) of the Restatement (Second) of Contracts.

A

In 1844, the United States Supreme Court addressed whether a written guaranty agreement that contained a fictional recital of a nominal consideration was enforceable:

The fifth point is, that there is no valid consideration to support the guarantee. This is pressed under two aspects; the first is, that the consideration was past and not present; for the letter of credit had been already delivered to J. and A. Lawrence by the agents of the London house. The second is, that the payment of the one dollar is merely nominal and not sufficient to sustain the guarantee, if it had been received; and it is urged that it was not received. As to this last point, we feel no difficulty. The guarantor acknowledged the receipt of the one dollar, and is now estopped to deny it. If she has not received it, she would now be entitled to recover it. A valuable consideration, however small or nominal, if given or stipulated for in good faith, is in the absence of fraud, sufficient to support an action on any parol contract; and this is equally true as to contracts of guarantee as to other contracts. A stipulation in consideration of one dollar is just as effectual and valuable a consideration as a larger sum stipulated for or paid....

Lawrence v. McCalmont, 43 U.S. (2 How.) 426, 452, 11 L.Ed. 326 (1844).

In 1881, the United States Supreme Court relied on Lawrence to resolve another case involving a written guaranty agreement. Davis v. Wells, 104 U.S. 159, 167-68, 26 L.Ed. 686 (1881). The agreement in Davis stated: “ ‘For and in consideration of one dollar to us in hand paid by Wells, Fargo, & Co. (the receipt of which is hereby acknowledged), we hereby guarantee....’” Id. at 160, 26 L.Ed. 686. In concluding that the agreement was enforceable, the Supreme Court stated:

It is not material that the expressed consideration is nominal. That point was made, as to a guarantee, substantially the same as this, in the case of Lawrence v. McCalmont (2 How. 426, 452, 11 L.Ed. 326), and was overruled. Mr. Justice Story said: “The guarantor acknowledged the receipt of the one dollar, and is now estopped to deny it. If she has not received it, she would now be entitled to recover it. A valuable consideration, however small or nominal, if given or stipulated for in good faith, is, in the absence of fraud, sufficient to support an action on any parol contract; and this is equally true as to contracts of guaranty as to other contracts. A stipulation in consideration of one dollar is just as effectual and valuable a consideration as a larger sum stipulated for or paid....”

Id. at 167-68, 26 L.Ed. 686.

In 1902, this Court, in a suit to cancel two oil and gas contracts, assumed without deciding that the recital of a nominal consideration was sufficient to support an option contract:

Each of the contracts in this case purports upon its face to have been executed in consideration of the payment of one dollar; and, though the plaintiff below pleaded that no consideration was paid, there was no evidence that the recitals as to the consideration in the contracts were not true. Whether the recital of “one dollar” — commonly called a nominal consideration — is sufficient to support the contracts, we need not discuss, though there is very high authority for holding that such recital is sufficient for the purpose. Davis v. Wells, 104 U.S. 159, 26 L.Ed. 686. Treating the contracts as if supported by a consideration, the question recurs, can the as-signee of such a contract, or the vendee of the right secured by it, shield himself against the fraud of his assignor in its procurement by showing that he is a purchaser for value, without notice of the fraud?

Nat’l Oil & Pipe Line Co. v. Teel, 68 S.W. at 980.

In March 1920, the Amarillo Court of Civil Appeals, in a suit to cancel an oil and gas contract, discussed in dictum the effect of a fictional recital of a nominal consideration:

The question is also presented by this record that the recitation that $1 was paid as a consideration creates an obligation to pay, if in fact it was not actually paid. It seems, under some of the authorities, such would be an obligation to pay, which may be enforced and will support a contract to lease or convey an interest in land.

“Where a contract recites the payment of $1 as its consideration, it is valid, although the sum named is not actually paid, since it creates an obligation to pay such sum, which may be enforced by the other party.” 13 C.J. § 240, “Contracts,” p. 367.

McKay v. Tally, 220 S.W. 167, 169-70 (Tex.Civ.App.Amarillo 1920, no writ).

In June 1920, the Commission of Appeals considered whether a written release that contained a fictional recital of a nominal consideration was enforceable. Fitts v. Panhandle & S.F. Ry. Co., 222 S.W. 158, 158 (Tex. Comm’n App.1920, judgm’t adopted). The release recited the following consideration: “ ‘An order on the treasurer of said company for $1, the receipt of which is hereby acknowledged,’ and ‘the promise of said company to employ me for one day.... ’ ” Id.

In concluding that the release was unenforceable, the Commission of Appeals stated:

We have the views of the Supreme Court upon the question thus presented, expressed in the following language:

“Since the recited consideration of $1 in the release in this case was not paid, it is our opinion that the release was wholly without consideration. It seems to us that a mere promise to re-employ for one day, paying for the work done for that one day no more than the ordinary or customary rate of wages, conferred, in practical effect, no benefit upon the plaintiff....”

Id. The opinion did not provide a citation for the quotation attributed to this Court. Our historical research of the case file and related journals at the State Archives and an electronic legal search failed to reveal the source of the quotation.

In 1922, the El Paso Court of Civil Appeals, in a suit to cancel an oil and gas contract, summarily concluded that a fictional recital of a nominal consideration precluded enforcement of the contract, stating: “A unilateral contract is valid if supported by an independent consideration, but the testimony of plaintiffs is that the independent consideration of $1 cash recited in this lease was not in fact paid.... ” Gary v. McKinney, 239 S.W. 283, 286 (Tex.Civ.App.El Paso 1922, no writ). In 1924, the Waco Court of Civil Appeals, in a similar case, reached the opposite conclusion:

The consideration named in the lease was sufficient to make a binding contract, whether the $1 named was paid or not. If same was not paid, [the lessor] would have a claim against the company for same. Masterson v. Amarillo Oil Co. (Tex.Civ.App.) 253 S.W. 908; McKay v. Tally (Tex.Civ.App.) 220 S.W. 167; Bost v. Biggers Bros. (Tex.Civ. App.) 222 S.W. 1112.

Silverman v. Emerson, 257 S.W. 612, 613 (Tex.Civ.App.Waco 1924, no writ). Neither court of civil appeals discussed the Commission of Appeals’s Fitts decision.

Before the court of appeals’s decision in this case, no Texas appellate court had decided whether a written option agreement that contains a fictional recital of a nominal consideration is unenforceable for lack of consideration.

B

Section 87(1) of the Restatement (Second) of Contracts provides:

(1) An offer is binding as an option contract if it

(a) is in writing and signed by the offer- or, recites a purported consideration for the making of the offer, and proposes an exchange on fair terms within a reasonable time; or

(b) is made irrevocable by statute.

Restatement (Second) of Contracts § 87(1) (1981).

The official comment to section 87 states:

b. Nominal consideration. Offers made in consideration of one dollar paid or promised are often irrevocable under Subsection (l)(a)....

[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 (l)(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 the recital, it is said, and that promise furnishes consideration. Compare § 218. But the sound basis for the rule is that stated above.

Id. § 87 cmts. b-c (illustrations omitted).

The illustration following comment c states:

3. A executes and delivers to B a written agreement “in consideration of one dollar in hand paid” giving B an option to buy described land belonging to A for $15,000, the option to expire at noon six days later. The fact that the dollar is not in fact paid does not prevent the offer from being irrevocable.

Id. § 87 cmt. c, illus. 3.

The authors of the national treatises on contracts have generally endorsed section 87(l)(a) of the Restatement (Second) of Contracts. For example, Corbin on Contracts states:

But, even when the dollar was not paid, the option has been sustained. Some courts have estopped the promisor from denying that the dollar was paid. Others have sustained the option by virtue of an implied promise to pay the dollar. The Restatement (Second) carves out two important areas in which the results of these cases [are] duplicated. It makes recital of “a purported” consideration in a signed writing sufficient to bind the promisor in the following two categories of cases: a credit guaranty promise and an option contract.... Unlike the cases mentioned above, the Restatement (Second) does not attempt to obscure its reasoning behind such legal sleights of hand as implied promises and estoppels, but has synthesized those cases into a new doctrine, categorizing guaranty and option contracts— where the formal requisites are met — as enforceable contracts without consideration. The reason for giving special treatment to options and guaranties is their presumptive utility as aneillaries to bargain transactions....

Consideration is designed primarily to protect promisors from their own dona-tive 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.

2 Perillo & Bender, Corbin on Contracts § 5.17 (rev. ed.1995) (footnotes omitted); see also 1 Farnsworth, Farnsworth on Contracts § 3.23 (3d ed. 2004) (“The attempt is to make a recital of consideration as effective a formality as was the seal, where options are concerned.”); 1 Murray, Murray on Contracts § 61 (4th ed. 2001) (“Notwithstanding the compelling view of the Restatement 2d, however, most courts hold that, upon proof that the recited amount has not been paid, the promise fails for want of consideration.”); 3 Willi-ston & Lord, A Treatise on the Law of Contracts § 7:23 (4th ed. 1992) (“[T]he drafters ... have recognized that in the context of option contracts the formal recital of consideration, though false and nominal only, serves the useful purpose of facilitating the underlying bargain.”).

In addition, the authors of law review commentary have agreed that the nonpayment of a recited nominal consideration should not preclude enforcement of a written option agreement. See Siprut, Comment, The Peppercorn Reconsidered: Why a Promise to Sell Blackacre for Nominal Consideration Is Not Binding, but Should Be, 97 Nw. U.L.Rev. 1809 (2003); Wess-man, Retraining the Gatekeeper: Further Reflections on the Doctrine of Consideration, 29 Loy. L.A. L.Rev. 713 (1996); Gordon, Consideration and the Commer-ciaNGift Dichotomy, 44 Vand. L.Rev. 283 (1991); Eisenberg, Symposium, The Principles of Consideration, 67 Cornell L.Rev. 640 (1982).

Ill

The position taken by section 87(l)(a) of the Restatement (Second) of Contracts is admittedly the minority position among the limited number of state supreme courts that have addressed the question. See, e.g., Lewis v. Fletcher, 101 Idaho 530, 617 P.2d 834, 835 (1980) (holding that a written option agreement that contains a fictional recital of a nominal consideration is unenforceable for lack of consideration); Berryman v. Kmoch, 221 Kan. 304, 559 P.2d 790, 793 (1977) (same); Am. Handkerchief v. Frannat Realty Co., 17 N.J. 12, 109 A.2d 793, 796-97 (1954) (same); Bard v. Kent, 19 Cal.2d 449, 122 P.2d 8, 10 (1942) (same); Kay v. Spencer, 213 P. 571, 574, 29 Wyo. 382 (1923) (same); Smith v. Wheeler, 233 Ga. 166, 210 S.E.2d 702, 704 (1974) (implying an obligation to pay the recited but unpaid nominal consideration); Real Estate Co. v. Rudolph, 301 Pa. 502, 153 A. 438, 439 (1930) (employing an estop-pel theory to prevent contradiction of a fictional recital of a nominal consideration).

Nevertheless, we are persuaded that the position of the Restatement (Second) of Contracts, which is supported by a well-articulated and sound rationale, represents the better approach. See, e.g., Restatement (Second) of Contracts § 87 cmt. b (1981) (“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.”); Gordon, Consideration and the Commercial-Gift Dichotomy, 44 Vand. L.Rev. 283, 293-94 (1991) (“Option contracts are related to economic exchanges — transactions based on self-interest, not altruism. Moreover, people expect that option contracts are serious and binding commitments.”) (footnote omitted).

IV

Based on the foregoing analysis, we reverse the court of appeals’s judgment and remand the case to the court of appeals for further proceedings.

Chief Justice JEFFERSON filed a concurring opinion, in which Justice BRISTER joined.

1 . In the trial court, Millis made only one argument in support of its motion for partial summary judgment: "The real consideration in this case was the obligation to pay the ten dollars and it is of no consequence whether the ten dollars was paid or not.” In response to Joppich's motion for final summary judgment, Millis argued: "At this point in time, there still remain genuine issues of material fact as to what consideration was actually given for the Option Agreement. Defendants contend that Plaintiff did not only sign the Option Agreement for the right to receive ten dollars, but also signed it in consideration for the right to purchase the property.”

The court of appeals, in one paragraph, addressed and rejected Millis’s appellate argument that "the property itself, which was the consideration exchanged under the earnest money contract, serves as additional consideration for the option granted within it.” 96 S.W.3d at 617. With regard to that argument, the court of appeals stated: "Based on the merger doctrine, the earnest money contract was superseded by agreements executed at closing. Alvarado v. Bolton, 749 S.W.2d 47, 48 (Tex.1988). At closing, the parties executed the option contract, which recited, 'In consideration of the sum of Ten and No/ 100 ($10.00) Dollars.' Therefore, the option contract did not mention any 'other good and valuable consideration,’ such as the property itself.” Id.

Because it was not raised in Millis’s motion for partial summary judgment, the argument that the property itself constitutes consideration for the parties' written option agreement should not have been considered by the court of appeals. Moreover, the court of appeals’s three-sentence analysis lacks clarity, and appears to improperly construe and apply the applicable Texas law. See, e.g., Fort Worth Indep. Sch. Dist. v. City of Fort Worth, 22 S.W.3d 831, 840 (Tex.2000) ("[I]nstru-ments pertaining to the same transaction may be read together to ascertain the parties' intent, even if the parties executed the instruments at different times and the instruments do not expressly refer to each other ....”) (citations omitted); Harris v. Rowe, 593 S.W.2d 303, 306-07 (Tex.1979) ("A deed which constitutes only partial performance of the preceding contract does not merge other distinct and unperformed provisions of the contract.”). Accordingly, we specifically disapprove of that portion of the court of appeals’s opinion.