DEFINITION of ‘Buyer’s Option’
In commercial contracts, a buyer’s option is an agreement between a vendor and a buyer that defines price and specifications over a specified time period for a product, but does not stipulate the quantity of the product that the buyer is obligated to purchase. In the auction industry, when multiple units of a product are being auctioned off, “buyer’s option” refers to the right given to the winner of the auction of the first unit, to purchase any or all additional units at the winning bid price.
BREAKING DOWN ‘Buyer’s Option’
The buyer’s option is advantageous to the buyer, who can choose to buy a greater or smaller quantity of product at a fixed price, depending on market conditions. However, it is detrimental to the manufacturer or supplier, since revenues from product sales cannot be estimated accurately. The manufacturer should, therefore, ensure that a supply agreement cannot be construed as a buyer’s option contract. This can be achieved by simply specifying in the contract the fixed quantity of product that the buyer is obligated to buy. Moreover, there has been legal wrangling at the appellate court level with regard to the obligation of a buyer to purchase any goods at all. Sellers have filed cases to compel buyers to follow through on their commitment to purchase goods from them. Appellate courts have ruled that those with a buyer’s option do not have such a legal obligation.
Buyer’s Option Concept in the Uniform Commercial Code?
Section 2-205 of the Uniform Commercial Code (UCC) is clear about the enforceability of “firm offers” in writing but is less specific about the concept of a short-term buyer’s option — hence, the actions by plaintiffs to file suit when buyers do not follow through on agreements to purchase. Section 2-205 states: “An offer by a merchant to buy or sell goods in a signed writing which by its terms gives assurance that it will be held open is not revocable, for lack of consideration, during the time stated or if no time is stated for a reasonable time, but in no event may such period of irrevocability exceed three months … ” According to this section, appellate courts have found, absent a signed purchase order, a seller cannot force a buyer holding a “buyer’s option” in an agreement to purchase its goods.