UCC Fundamentals – Part 4: Merchant’s Firm Offer Rule
Offer and Acceptance – Special Rules – RCW 62A.2-205 & 2-206.
In our previous post, we discussed the UCC’s general rules of contract formation for the sale of goods. In this post, we delve into Article 2’s special rules for contract formation relating to “merchant firm offers.”
Generally, offers to form contracts which set a time period for the offer to remain open, otherwise known as an “option,” require consideration for the option to be irrevocable. For example, on October 25, John offers to sell his home to Susan for $300,000 and tells Susan that his offer will remain open until November 30 (the option). Though John told Susan that his offer would remain open until November 30, John can still revoke his offer to Susan so long as he does so before Susan accepts and before November 30. However, if Susan pays John consideration, such as $100, for the option through November 30, John may not revoke his offer before November 30.
However, Article 2 changes this general rule for (1) merchant offerors; (2) in written option contracts; (3) for the sale of goods. RCW 62A.2-205. Importantly, all three elements must be present for the merchant’s firm offer rule to apply. If the Article 2 rule had applied to our previous example, even if Susan failed to pay John the $100 for the option, Susan could nevertheless accept John’s offer through November 30 regardless of John’s previously attempted revocation.
When Does the Merchant’s Firm Offer Rule Apply? – RCW 62A.2-205
RCW 62A.2-205 specifically provides:
“An offer by a merchant to buy or sell goods in a signed record by which 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; but any such term of assurance on a form supplied by the offeree must be separately signed by the offeror.”
Essentially, if a merchant provides a written contract offer, with an option, for the sale of goods, then the option does not require consideration, and the offer is irrevocable until the option expires. For example, if, on October 25, John, who is a merchant of cabinetry (say John is a cabinet wholesaler), offers in writing to sell 150 cabinet sets to Susan for $300,000, and tells Susan in writing that his offer will remain open until November 30, John cannot revoke his offer until the option expires on November 30. Because John is a merchant, offering an option in writing, for a contract for the sale of goods, RCW 62A.2-205 applies. This is called the merchant’s firm offer rule.
In sum, three critical distinctions are at play. (1) the offeror must be a merchant; (2) the option must be stated in writing; and (3) the offer must be for the sale of goods. If any one of these three elements fail, the firm offer rule would not apply.
What is a Merchant? – RCW 62A.2-104(1)
Naturally, under the merchant’s firm offer rule, the definition of “merchant” becomes critical because RCW 62A.2-205 only applies to “merchants”. RCW 62A.2-104(1) defines merchants as:
“a person who deals in goods of the kind or otherwise by his or her occupation holds themselves out as having knowledge or skill peculiar to the practices or goods involved in the transaction or to whom such knowledge or skill may be attributed by his or her employment of an agent or broker or other intermediary who by his or her occupation holds himself out as having such knowledge or skill.”
In our prior example, John was a wholesale distributor of cabinetry meets the definition of a “merchant.” On the other hand, if John was merely a woodworking hobbyist who built a cabinet himself and attempted to sell it on eBay, John would not be considered a “merchant” unless he affirmatively held himself out through his occupation as having knowledge or skill particular to the field of cabinet making.
The determination of whether the seller is a merchant or not is critical. If the seller is not found to be a merchant, the firm offer rule will not apply and an option will be revocable unless it is supported by independent consideration. But if the seller is a merchant, lack of independent consideration is unnecessary so long as each of the elements of the firm offer rule is satisfied.
Considerations
To avoid formation or breach of contract issues related to the merchant’s firm offer rule, or if you have sale of goods questions generally, please contact Beresford Booth at info@beresfordlaw.com or by phone at (425) 776-4100.
