Merchants or Non Merchants—That is the Question

The importance of thoroughly understanding the definitions used throughout the   Uniform Commercial Code has been repeatedly emphasized throughout the posts on the UCC Made Easy blog.  As stated, Article 1 definitions apply throughout the Code; in addition, each Article has definitions unique to its subject content.  One of the most important definitions in Article 2 is the definition of ‘merchant’ contained in Section 2-104(1):

 "Merchant" means a person who deals in goods of the kind or otherwise by his occupation holds himself 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 employment of an agent or broker or other intermediary who by his occupation holds himself out as having such knowledge or skill.

            The definition contains several routes to achieving merchant status:

1.    A person dealing in ‘goods of the kind’’;

2.    A person who holds himself out as having knowledge or skills peculiar to the goods involved;

3.    A person to whom such knowledge can be attributed by employment of a third party who, by his occupation holds himself out as having such knowledge or skill.

            Merchant or non merchant status is very important under Article 2 for a number of reasons.  By way of illustration: the reply doctrine of Section 2-201 requires that the transaction occur ‘between merchants’ in order for that doctrine to apply, Section 2-205 deals with firm offers ‘by a merchant,’ Section 2-207(2) which deals with incorporating certain terms into the contract via a writing in confirmation of a contract only applies in a transaction ‘between merchants,’ the warranty of merchantability only applies when a party is a ‘merchant with respect to goods of the kind per Section 2-314(1), entrustment of goods under Section 2-403(2) does not occur unless the entrustment is to a ‘merchant who deals in goods of the kind’.

            In most cases it will be relatively clear if a person or entity should be classified as a merchant. In a significant number of cases however, it is not so clear.  For example, case law is generally split on whether or not a farmer is a merchant. A large number of the cases discussing this question involved the reply doctrine of Section 2-201(2) with a very practical impact: if the farmer in question was a merchant, a written confirmation of the contract by the buyer which was not answered within ten days would result in an exception to the general statute of frauds rule.  Conversely, if the farmer was not held to be a merchant, the reply doctrine would not apply.        

Moreover, a person or entity may be a merchant for some purposes, but not for others.  In addition, certain entities may be characterized as merchants where that designation may be somewhat surprising.

 An example of the foregoing can be is found in banking institutions or universities.   If someone were to pose the question of whether or not a bank or a university is a merchant for purposes of Article 2, instinctively, most of us would say ‘no’.  However, there is case law to the contrary which itself is supported by the comments to Section 2-104:

The special provisions as to merchants appear only in this Article and they are of three kinds.  Section 2-201(2), 2-207 and 2-209 dealing with the statute of frauds, firm offers, confirmatory memoranda and modification rest on normal business practices which are or ought to be familiar to any person in business. For purposes of these sections almost every person in business would therefore, be deemed to be a “merchant” under the language “who…by his occupation holds himself out as having knowledge or skill peculiar to practices…involved in the transaction…” since the practices involved in the transaction are non specialized business practices such as answering mail…. But even these sections only apply to a merchant in his mercantile capacity; a lawyer or bank president buying fishing tackle for his own use is not a merchant.

It is clear from the text of the Code and the comments noted above that one might be a merchant for certain purposes under the Code, but not for other purposes.

            The next post will discuss cases which address the question of whether or not a bank or university is a merchant for Article 2 purposes when it engages in the sale or purchase of certain products.  As you will see, the impact of the classification as a merchant or non merchant in these situations can be very powerful.