Firm Offer Contract: Everything You Need to Know
A firm offer contract is when there's an offer as well as an acceptance in a contract between two parties.3 min read
2. MBE Fast Fact: The Firm Offer Rule
3. Examples of Option Contracts
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.
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.
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.
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.
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