A Note on Sham Recitals of Consideration Under Texas Law

1464-Eight, Ltd. v. Joppich, 154 S.W.3d 101 (Tex. 2004) (PDF copy here), involved a dispute over an option contract to purchase real estate. The contract included the following recital of consideration:

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].

Joppich subsequently claimed that because the developer hadn’t paid the $10, the option contract wasn’t supported by consideration. The trial court held in favor of the developer; the court of appeals held in favor of Joppich.

In reversing the court of appeals, the Supreme Court of Texas endorsed the approach of section 87(1)(a) of the Restatement (Second) of Contracts, which takes the position that a false recital of nominal consideration is sufficient to make an offer irrevocable so long as the underlying exchange is fair and the offer is to be accepted within a reasonable time.

This court acknowledged that this was “admittedly the minority position among the limited number of state supreme courts that have addressed the question.” Furthermore, it endorses a sham—never a good thing.

But as I’ve said many times, I’m not in the business of making a stand on principle at the expense of expediency. It’s Texas law that fake consideration is sufficient to support option contracts for the purchase of real estate, and drafters should act accordingly.

But it might be appropriate to inform contract parties of that sham, to disabuse anyone inclined to follow in Joppich’s footsteps and argue about it. That could be accomplished by something along the following lines:

The parties acknowledge that although the recital of consideration contained in this agreement is false, under Texas law a false recital of consideration is sufficient to support an option contract for the purchase of real estate.

Any thoughts on that, Texas lawyers?

About the author

Ken Adams is the leading authority on how to say clearly whatever you want to say in a contract. He’s author of A Manual of Style for Contract Drafting, and he offers online and in-person training around the world. He’s also chief content officer of LegalSifter, Inc., a company that combines artificial intelligence and expertise to assist with review of contracts.