Firm Offer Rules in Contracts and Credit Law

Key Takeaways

• A firm offer is a legally binding commitment under the UCC that cannot be revoked for a set period, even without consideration.
• Only merchants can make valid firm offers under UCC § 2-205, and such offers must be in writing and signed.
• The firm offer rule helps support commercial reliability by ensuring offer stability in the sale of goods.
• A firm offer of credit under the Fair Credit Reporting Act (FCRA) requires a clear and unconditional promise of credit or insurance that cannot be revoked if the consumer meets prescreened criteria.
• Businesses should distinguish between a firm offer and other pre-qualification or advertisement language to avoid legal issues.
• Option contracts differ from firm offers in that they require consideration to hold the offer open.

A firm offer contract is when there's an offer as well as an acceptance in a contract between two parties. This must not be based on falsehoods in order to be valid. Both parties need to mutually agree on the terms of the contract. Both option and firm offer contracts are based on these.

Firm Offer

Contract law applies to a sales contract and cannot be taken back if the offer includes the following:

• Shows an intention that it won't be revoked
• Is written
• Has been signed by the merchant

An offer is usually valid in most contracts once it's been accepted. Until the offer is accepted, there are no legal consequences if seller revokes the offer. As an example, a seller named Smith offers, in writing, to sell Bill a stereo set for $500. According to the offer, Bill has until June 25 to decide if he will accept the offer. However, Smith sends Bill a written notice on June 15 revoking the offer.

Bill writes Smith a note on June 20 saying he accepts the offer. Smith is not able to revoke his offer before June 25 since he had a firm offer, making the contract enforceable. Note that the period of irrevocability cannot go past three months. If nothing gets said during that time period, the offer can be taken back. Having a firm offer is essential even if the seller doesn't receive any consideration for keeping the offer open.

Difference Between Firm Offer and Option Contract

While both firm offers and option contracts involve holding an offer open, they differ significantly in legal requirements:

This distinction is crucial in determining enforceability and risk exposure in commercial contracts.

Firm Offer Under the UCC: Key Requirements

Under UCC § 2-205, a firm offer is defined as an irrevocable offer made by a merchant to buy or sell goods. To qualify, the offer must:

• Be made by a merchant (someone who regularly deals in goods of the kind or otherwise holds themselves out as having knowledge or skill in the goods).
• Be in writing and signed by the offeror.
• Provide assurance that it will be held open (though specific wording is not mandated).

The duration of irrevocability cannot exceed three months, even if the offer says otherwise, unless the offeree provides consideration to extend it beyond that time. After the period ends, the offer becomes revocable unless accepted or renewed.

The firm offer rule promotes reliability in commercial transactions by temporarily removing the offeror's power to revoke, creating a stable foundation for negotiation and planning.

MBE Fast Fact: The Firm Offer Rule

The Firm Offer Rule is a distinction between the Uniform Commercial Code and the common law of contracts that needs to be considered when making the contract. An option contract is arranged between a seller and buyer that allows them to buy or sell a certain asset at a date in the future at a price that is agreed upon by the two parties. This is called the strike price.

Put options let the beneficiary, or the party who benefits from the option, to make it mandatory for the grantor, i.e. the party who is granting the option, to purchase the property for the strike price. Call options let beneficiaries require grantors to sell their property at the strike price. An option contract is offered where an offeree gives consideration by promising the offeror they won't revoke the offer. Consideration is defined as the party who has the option to give something that's valuable to the party that's offering the option contract.

In order to exercise the option that's offered in an option contract, an exercising party has to give their normal notice that's written to the offering party. Since the offeree is able to provide consideration, the offeror must promise to not revoke the offer and is bound by that. This offer can't be revoked for a certain amount of time, which is stated in the offer.

However, the rules change drastically under the Uniform Commercial Code. According to Article 2, if the merchant decides to sell goods in a written contract and the act of writing this down ensures that it'll be held open, the offer can't be revoked for this specific period by the merchant. Consideration will not be required in this case. Look for situations where there isn't a time period that's stated, as the offer can't be revoked for a period of time that's considered reasonable and no time period past three months.

If merchants make a claim that they'll keep the offer open for four months, they still are only bound to keep it open for three months. They can decide to put limitations on the time period that they're required to keep the offer open for by defining a period that's less than three months.

Practical Uses of Firm Offers in Business Transactions

Firm offers are widely used in commercial settings, especially where timing and reliability are critical. Common uses include:

• Wholesale purchases where a buyer needs time to evaluate terms.
• Supplier commitments during procurement processes.
• Negotiations involving fluctuating prices, such as commodities or bulk goods.
• Bidding processes where fixed offers must be honored during the review window.

These offers allow buyers to plan with confidence and sellers to project future sales, fostering trust in business-to-business (B2B) settings.

Examples of Option Contracts

If you decide to buy a car and offer the car dealership $1,000 as a down payment so the dealership will hold the car for you, that means you want an option contract. This is different than a firm offer because you must provide a down payment and the period of time for the agreement can go past 90 days.

Risks of Mislabeling a Firm Offer

Businesses must use caution when labeling a communication as a “firm offer.” Misuse can lead to:

• Legal liability under the FCRA or UCC.
• Consumer confusion over whether an offer is binding.
• Reputational harm from perceived bait-and-switch tactics.

Best practices include:

• Ensuring language reflects the irrevocable nature of the offer.
• Complying with disclosure requirements in credit and insurance contexts.
• Using disclaimers when making non-binding solicitations.

Consulting a contract attorney can help businesses navigate compliance and avoid unintended contractual obligations.

Firm Offer of Credit Under the FCRA

The term "firm offer" also appears in the context of consumer credit, governed by the Fair Credit Reporting Act (FCRA). A firm offer of credit or insurance occurs when:

• A creditor accesses a consumer’s credit report using a prescreened list.
• The creditor extends a clear, unconditional offer, subject only to verification of the consumer’s eligibility criteria.

Unlike general advertising or prequalification notices, a firm offer of credit must include:

• Specific terms (e.g., credit amount or range, interest rates).
• A guarantee of offer if criteria are met.
• Required disclosures under 15 U.S.C. § 1681m(d), including instructions on opting out of prescreened offers.

Failure to meet these requirements can result in liability for misleading or unlawful credit solicitations.

Frequently Asked Questions

1. What is a firm offer in contract law?
   A firm offer is a written, signed offer by a merchant to buy or sell goods that cannot be revoked for a certain time, even without consideration, under UCC § 2-205.
2. Who qualifies as a merchant for making a firm offer?
   A merchant is someone who deals in the goods involved in the transaction or has specialized knowledge about them. Only merchants can make valid firm offers under the UCC.
3. How is a firm offer different from an option contract?
   A firm offer requires no consideration and is only valid for up to three months if no consideration is given. An option contract requires consideration but can be made by anyone and held open for any agreed period.
4. What is a firm offer of credit?
   Under the FCRA, a firm offer of credit is a binding offer extended to consumers based on prescreened credit information, contingent only on meeting stated conditions.
5. Can a firm offer be revoked?
   No, during the stated period (or up to 3 months by default), a valid firm offer cannot be revoked. After that period, it may be withdrawn if not accepted.

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