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.

  1. Financial Buyer

    A financial buyer is a type of buyer in an acquisition that is ...
  2. Buyer's Market

    A buyer's market is a situation in which supply exceeds demand, ...
  3. Buyer's Credit

    Buyer's Credit is a loan that a bank or other financial institution ...
  4. Call Option

    A call option is an agreement that gives the option buyer the ...
  5. Conditional Offer

    A conditional offer is an agreement that an offer will be made ...
  6. Offer

    An offer is a conditional proposal made by a buyer or seller ...
Related Articles
  1. Investing

    Housing deals that fall through

    Find why buyers back out, and what you can do if you're left holding the bag.
  2. Investing

    The Ins And Outs of Seller-Financed Real Estate Deals

    There's more than one way to buy or sell a house. Seller financing presents yet another unique option.
  3. Investing

    Playing hardball when selling your home

    Are you planning on selling your house? Learn these strategies to help you get you a better deal in house sale.
  4. Investing

    Home Sale Contingencies for Buyers and Sellers

    Home sale contingencies protect buyers who want to sell one home before purchasing another.
  5. Investing

    Contingency Clauses In Home Purchase Contracts

    Here, we introduce widely used contingency clauses in home purchase contracts and how they can benefit both Buyers and Sellers.
  1. What are the Differences Between Ex Works (EXW) and Free On Board (FOB)?

    Although these terms are similar, responsibilities and obligations are delegated to different parties in EXW and FOB. Read Answer >>
  2. What is an assumable mortgage?

    The purchase of a home is a very expensive undertaking and usually requires some form of financing to make the purchase possible. ... Read Answer >>
  3. What is the difference between share purchase rights and options?

    An outsider buys the right to purchase a stock via options, whereas share purchase rights inherently offer that right for ... Read Answer >>
  4. When Is a Call Option in the Money?

    Call options have intrinsic values, and a call option is in the money when the underlying stock price is above the strike ... Read Answer >>
Trading Center