This post will conclude the discussion of
who is, or may be a merchant under Article 2. The impact of ‘merchant status’
has been discussed in general. However,
there is one point which has not been touched on, which should be. That involves the impact of the good faith
definition under Article 2 for those states that have not enacted the amended
definition of good faith in Article 1. The amended definition, if you recall requires
‘honesty in fact and the observance of reasonable commercial standards of fair
dealing’, per Section 1-201(b)(20). This
applies to merchants and non merchants alike since the definitions in Article 1
apply to all substantive Articles of the Code per Section 1-102.
There are however, a significant number of
states which have not adopted the amended definition of good faith*, but have
instead, remained with the earlier definition of good faith which simply
requires ‘honesty in fact in the
conduct or transaction concerned’. Under
Article 2 however, if a party is classified as a merchant, the good faith
definition [Section 1-103(1)(b)] is almost identical to the amended definition
under Article 1 and thus, requires the observance of reasonable commercial
standards of fair dealing in the trade by the party designated as a
merchant. Thus, the standard of conduct
is elevated in the commercial arena.
Conversely, if a party is not designated as a merchant and the state law
governing has not adopted the amended the definition of ‘good faith’, the party
in question simply needs to demonstrate honesty. Moreover, there are areas outside the Code
which are dramatically impacted by whether or not a party is classified as a
merchant under Article 2.
The latter
point is dramatically illustrated in the case of Regents of the University of Minnesota v. Chief Industries Inc., 106
F3d 1409 (8th Cir., 1997).
Among the program offerings at the University of Minnesota was an
agricultural program which included the Southwest Research station, which was
one of several such agricultural research stations operated by the
University. In 1985, the University
decided to purchase a new grain dryer for the Southwest Station. After
soliciting bids, the superintendent of the Research Station purchased a drying
unit manufactured by a subsidiary of the defendant, Chief Industries. In August of 1982, a fire damaged the
structure to which the unit was attached.
The University brought a cause of action alleging that the electric
solenoid valve, designed to stop the flow of fuel to the unit at a certain
temperature, failed and was the cause of the fire. In addition to damages for the allegedly
defective grain dryer, the University sought damages to the connected
structure.
The controlling statute in the case was
Minnesota Section 604.10, which deals with the economic loss doctrine in
Minnesota. ** That section states as follows:
Minn.
Stat. § 604.10. Economic loss arising
from the sale of goods.
(a) Economic loss that arises from a sale of goods that
is due to damage to tangible property other than the goods sold may be
recovered in tort as well as in contract, but economic loss that arises from a sale of goods between parties who are
each merchants in goods of the kind is not recoverable in tort; (b) Economic loss that arises from a sale of
goods, between merchants, that is not due to damage to tangible property other
than the goods sold may not be recovered in tort; (c) The economic loss
recoverable in tort under this section does not include economic loss due to
damage to the goods themselves; (d) The economic loss recoverable in tort under
this section does not include economic loss incurred by a manufacturer of goods
arising from damage to the manufactured goods and caused by a component of the
goods; and (e) This section shall not be interpreted to bar tort causes of
action based upon fraud or fraudulent or intentional misrepresentation or limit
remedies for those actions. [Emphasis added].
Hence, if the University of Minnesota was held to be a merchant, it would
be barred from recovery for damage to the additional structure by the economic
loss doctrine. The district court granted summary judgment against the
University concluding that the University was a ‘merchant.'
The
Court of Appeals phrased the matter on appeal as follows:
This
brings us to this appeal's sole question: is the University a “merchant in
goods of the kind?" That is, is the University a merchant with respect to
grain drying heaters such as the one that allegedly caused the fire at the
Southwest station? If, as the district court concluded, the University is a
merchant with respect to grain dryers, then it may not recover in tort under
either the statute or [case law]. Regents of the
University of Minnesota @ 1411
In addressing the issue, the court first noted the
definition of ‘merchant’ under Section 2-104(1), noting in its analysis two
ways in which a party can become a merchant: ***
1.
By dealing in the goods involved;
2.
By way of specialized knowledge of the goods.
After quickly dismissing avenue number one—i.e.—that the University
‘dealt in goods of the kind’ the court turned its attention to attaining merchant
status by way of specialized knowledge of the goods. In addressing that question, and affirming
the decision of the district court, the court of appeals stated:
In
the present case, the University's knowledge and experience with respect to
grain dryers constituted “knowledge or skill peculiar to the practices or goods
involved in the transaction.” Minn.Stat. § 336.2-104(1).
The
University had purchased a number of such units over the prior thirty years,
and had the advantage of a centralized purchasing department that solicited
bids for the purchase. Before purchasing the unit, the Southwest station's
superintendent (who had been responsible for other such purchases) consulted a
prominent expert in grain drying, who provided advice on such specifications
for the unit as fan size and BTU.
Creating ‘merchant’ status on the basis of ‘specialized
knowledge’ opens the door to finding merchant status in situations outside of
the normal professional in business.
While this may not be significant in all cases, it will be in some. This is yet another example where leverage
and vulnerability can be created where the other party never saw it
coming. This creates insecurity and
facilitates a good settlement for your client.
*Among those states are: Illinois,
Missouri and New York
**If you interested in an excellent
article on the Economic Loss Doctrine, please check the following:
***The court did not mention
the third way a party can become a merchant, which is through the ‘employment
of an agent or broker or other intermediary who by his occupation holds himself
out as having such knowledge or skill’.
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