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.

Battle of the Forms: No Battle

The Reply Doctrine of Section 2-201(2) creates a logical introduction to Section 2-207—Battle of the Forms.  In fact, Section 2-207(1) uses language almost identical to Section 2-201(2) insofar as it speaks of a ‘written confirmation’ of acceptance.  Before turning to the text and meaning of Section 2-207, it should be noted that this section has been heavily litigated with differing interpretations as to its meaning.

            Section 2-207 provides an opportunity to demonstrate the connectivity between Code sections, and the intertwining of meaning.  The skilled advocate creates a logical sequence through all of that with a favorable outcome.  For example, standing alone you have fairly clear statutory text for Section 2-201(2).  ‘A writing in confirmation’ is very clear when stated like the example given in the last post.  Of course, in reality it is rarely done so cleanly.  Rather, the writing in confirmation may be a simple purchase order, with no specific confirmation language, and courts have so held.

            The Code sections which immediately come into play are Sections 1-201(b)(3),(12), the definitions of agreement and contract.  This in turn activates Section 1-303 and the elements of course of performance, course of dealing and usage of trade. There are also supplemental principles of law which may apply pursuant to Section 1-303(b). As facts are added to the substantive provisions of the statute, the Code sections come to life with new interpretations.  These various interpretations create a very dynamic and fertile ground for structuring arguments or drafting provisions in a manner most favorable to your client.

            As for Section 2-207, I believe that section can be understood by a careful reading of the text of the statute.  As I was taught ‘The answer is always in the Statute.’  At the outset, one must remember that Section 2-207 is predicated upon an offer having already been made by either the buyer or seller, for the section speaks in terms of a ‘definite and seasonable expression of acceptance or a written confirmation’.  There can be no acceptance or written confirmation unless an offer has been made. [Unless of course, someone is using Section 2-201(2) to solidify a deal that may or may not have existed.]

Section 2-207(1) states as follows:

(1) A definite and seasonable expression of acceptance or a written confirmation which is sent within a reasonable time operates as an acceptance even though it states terms additional to or different from those offered or agreed upon, unless acceptance is expressly made conditional on assent to the additional or different terms.

The rule of Section 2-207(1) is clear and straightforward.  It contemplates an acceptance or written confirmation of an offer, with the acceptance presenting additional terms to those offered.  The rule is that the acceptance is binding unless the acceptance is made conditional on the offeror’s assent to the additional terms.  In other words, it is a ‘take it or leave it’ acceptance.

            For example, Seller offers buyer 1,000 pairs of shoes for $18.00 per pair with no stated delivery terms.  Buyer sends the following response:

I accept your offer to buy 1,000 shoes at $18.00 per pair, delivery to be made in five separate lots of 200 units per lot.

Under Section 2-207(1), Buyer has accepted Seller’s offer.  Delivery in five lots is not a condition to Buyer’s acceptance, simply a statement or request.

If on the other hand, Buyer had demanded inclusion of his delivery term as a prerequisite to the acceptance, there would be no acceptance under Section 2-207(1).  In that scenario, Buyer’s proffered acceptance might read as follows:

I accept your offer to buy 1,000 shoes at $18.00 per pair.  However, I need delivery in five separate lots of 200 units per lot or I will not do the deal.

Buyer has made his ‘acceptance’ conditional upon Seller’s acquiescence to his delivery demand.  Hence, no acceptance.

            Section 2-207(2) explains what happens when additional terms are proposed but not made as a condition to the acceptance:

The additional terms are to be construed as proposals for addition to the contract. Between merchants such terms become part of the contract unless:

(a) the offer expressly limits acceptance to the terms of the offer;

(b) they materially alter it; or

(c) notification of objection to them has already been given or is given within a reasonable time after notice of them is received.

In the first part of the example given above, Buyer’s request for delivery in five lots would be treated as a ‘proposal’ for addition to the contract.  If both parties involved in the transaction are merchants, Buyer’s delivery proposal will become part of the contract unless one of the contingencies covered in Section 2-207(2) occurs.  For example, one question might become whether the proposed delivery terms ‘materially alter’ the original offer.  Trade custom would have particular relevance here.

            It is interesting to note that the first contingency stated in 2-207(2) goes back to the original offer which set things in motion.  If that offer is a ‘take it or leave it’ proposal, no additional terms will be incorporated into the contract.  If the additional terms ‘materially alter’ the offer, they will not be included.  And finally, if a notice of objection to the additional terms has been given within a reasonable time, the terms will not become part of the contract.       

            So, at this point we have two take it or leave it scenarios.  Under Section 2-207(1) a ‘take it or leave it’ acceptance results in no acceptance.  Under Section 2-207(2), if the original offer was a ‘take it or leave it offer’ no new terms will be considered.  The reality is that these situations rarely occur in orderly communications such as those hypothesized above.  It happens under time and business pressures, with many transactions ongoing.  Sometimes, forms don’t get read, and if they are, often are not understood.  So, there is no formal contract and you may have writings going back and forth with contradictory terms.

            Yet, the deal goes forward.  Why?  Everybody wants to make money and they adopt the ‘nothing will go wrong’ approach, and of course, sometimes the deal goes south.  The beautiful wood cabinets called for in communications were not up to the buyer’s expectations. There is no finalized contract.  Negotiations fail, and litigation ensues.  At this point, Section 2-207(3) takes control of what happens.  That section states as follows:

 Conduct by both  parties which recognizes the existence of a contract is sufficient to establish a contract for sale although the writings of the parties do not otherwise establish a contract. In such case the terms of the particular contract consist of those terms on which the writings of the parties agree, together with any supplementary terms incorporated under any other provisions of this Act.

The net effect is that the written portion of the contract will consist of whatever written terms are agreed upon between the parties, date and quantity for example.  Contradictory terms will be eliminated and the agreed written provisions will be supplemented by the UCC. 

The application of Section 2-207(3) can have an enormous impact on a case.  For example, Seller may have had some very specific warranty provisions that are part of all of his deals.  If Buyer has presented a contradictory term—very common in a purchase order, you have the classic situation.  If Seller’s warranty has been eliminated because it is contradictory to Buyer’s purchase order, it is highly likely that the warranties supplied by the Code will be more favorable to the Buyer than the ones contained in the documents Seller prepared.

Thanksgiving and the UCC!

Thanksgiving has always been my favorite Holiday.  One of the reasons this is so is because it transcends any particular belief or religious system, and focuses instead upon something that is universal—gratitude.  Obstacles are an inevitable reality of life, and everyone who has ever accomplished anything of value has experienced this reality.  In the face of adversity and everything that goes with it however, there is always a place for gratitude.  This may require a shift in perspective, and the utilization of the intellect to overcome feelings, but this is doable and, I submit, necessary.

This blog is certainly not the place to discuss what I am personally grateful for, but on this point, I will say that I start everyday focusing on precisely that.  In the context of this blog, I am grateful to have an avenue through which to communicate and promote a legitimate business.  I am also grateful for the knowledge gained in this process, both as to the substantive content of certain Code sections, as well as the knowledge gained through the discipline of the writing process.  These blogs are challenging which creates a pathway toward personal improvement.

 I am grateful for the opportunities that the Uniform Commercial Code has created for me throughout my lifetime.  Through the Uniform Commercial Code I had the privilege of knowing and working with some of the finest legal minds in history, who taught me as a student and from whom I continued to learn as a professor.  After twenty-one years out of the legal world—working with abused, neglected and incarcerated minors in California—the Uniform Commercial Code opened the door to my return to teaching law.   The change from Los Angeles County Central Juvenile Hall to the Stetson University College of Law was so dramatic it was humorous.  This after all, was the first group of students in twenty years who weren’t sentenced to be with me—although a couple of them felt like they were.

The teaching led to the rewrite of The Uniform Commercial Code Made Easy which has been extremely helpful at all levels of my dealings with the legal community. I believe the manner in which the book presents the UCC was instrumental in providing me the opportunity to teach the UCC in one day for CLE credit to bar associations throughout the United States, as well as the consulting opportunities which have followed. Of equal significance, the UCC has opened doors for me to present programs on children at risk to bar associations and staff in residential and correctional facilities.  On March 18, 2016, for example, I have the great opportunity to present to the Missouri Juvenile Justice Association and attorneys and judges who work with the full spectrum of children at risk, the day after a UCC presentation for members of the Missouri Bar Association.

I am also grateful that I had the opportunity to be educated which made the UCC experience possible.  Being given a shot at life is all anyone can ask for.  When I witnessed the incredible obstacles and barriers faced by children with no money, little food and no hope, I understood in a whole new way how fortunate I was to be born into a home where I was offered the opportunity to go to college and then law school.  Within this context, the biggest blessing that I had was the absolute, rock solid belief that life is very important and that the best investment I could make was to invest my full energy and resources into improving my mind and improving myself as a person.

We all have the opportunity everyday to create our reality. I submit that a reality that incorporates gratitude as a cornerstone principle will create a better life.  In an earlier post I presented the concept of the reactionary mind and how to overcome automatic reactions that the brain has to certain events and input presented by life.  This discussion offers a very practical example of the application of some of those principles:

Each time your brain reacts negatively—to anything—respond by thinking of something you are grateful for. 

It’s all physics.

In 2007 I was doing a presentation in Irvine California.  The room I had been given was right next to the elevator, which had a very loud ring each time someone exited—which seemed to be very often.  Initially I was furious each time the elevator opened and deprived me of sleep.  I could feel my blood pressure rise and of course the corresponding anger.  After suffering through this experience for several hours, I had a breakthrough. I decided that each time I heard the elevator bell, instead of being angry, I would be grateful I could hear! ……………It worked.

                                          Happy Thanksgiving