What Is an Irrevocable Contract?
What Is an Irrevocable Contract?
If you've heard about irrevocable contracts, you've stumbled onto an area of law with confusing terminology and concepts. Sorting these out requires learning about contracts, options, and waivers. To begin, you need to know some basics of how a contract is formed.
Forming a Contract
As with anything involved with the law, contracts can be complicated matters. But the process can be simplified by breaking it down into three basic steps:
- Offer. The first step in creating a contract is for Party A, the offerer, to make an offer to Party B, the offeree. The offer must be clear about the details of the proposal, such as what each party must do, the amount of money to be paid, and any necessary time frames. At this point, there is no contract. Party A is free to cancel, or revoke, the offer with no penalty. Party B is free to simply ignore the offer or reject it, also without penalty.
- Acceptance. This step takes place when Party B communicates to Party A that they are accepting the offer. Exactly how this is communicated depends upon what is required by the offer, although it is usually done either verbally or in writing. In some cases, however, the offer may indicate that it can be accepted by Party B taking some other type of action. For example, suppose Party A says to Party B, “If you come to my office Tuesday before noon, I will sell you my car for $2,000." All Party B needs to do to accept the offer is show up at Party A's office on Tuesday before noon.
- Consideration. This is a confusing, and somewhat imprecise, legal concept. It basically means that both parties must commit something of value to the agreement. This can consist of giving money, such as a deposit, or of making a promise to pay money or to perform a certain act. In most situations, the promises and obligations of the two parties are sufficient consideration. This is why you frequently see contracts that include the statement “for the sum of one dollar and other valuable consideration."
The central purpose of a contract is to create a binding agreement that can be enforced in court if there is a breach of contract. Once a contract is formed—by an offer, acceptance, and consideration—it is essentially irrevocable.
The term irrevocable does not mean that a party cannot refuse to perform its obligations under the agreement, but rather that it can be held financially liable in a court of law for such refusal. The only exception would be if the terms of the contract specifically state that one or both parties can revoke it in certain situations.
When someone talks about an irrevocable contract, they are often actually referring to an irrevocable offer—or, more precisely, a contract to make an offer irrevocable.
As stated above, an offerer has the right to revoke an offer at any time before it is accepted by the offeree. However, the offerer can waive the right to revoke the offer by creating a contract that obligates them to hold the offer open, either for a specified amount of time or until a specified event occurs.
Although just about any contract offer can be made irrevocable, there are certain situations where irrevocable offers are common:
Option contracts. An option contract gives one party the right, or option, to either buy or sell something at some time in the future for a specified price. With an option to buy, the potential buyer is not obligated to make the purchase, but the potential seller is obligated to sell: it is the buyer's choice. The reverse is true with an option to sell: the potential seller is not required to sell, but the potential buyer is required to buy.
This is common in real estate transactions involving a lease with an option to purchase. The property owner rents the property to the lessee with the option to purchase the property at a future time for a specific price. Such an offer to sell the property to the lessee is irrevocable.
Waivers and releases. These are legal documents that give up some type of legal right. Such documents are commonly used to cede the right to sue for personal injuries or other damages, to permit the use of photographs, to allow the disclosure of certain information (such as financial or medical information), or to waive the right to file a lien against property. Waivers and releases typically contain provisions stating that the waiver or release is irrevocable.
Any option contract, waiver, or release that is intended to be irrevocable should clearly state that fact. Otherwise, a court may determine it is not irrevocable.