Banks, Merchants & Article 2

As discussed in the previous post, the characterization of a party as a merchant or non merchant has great significance under Article 2.  This brings us to a point where the cases add a unique flavor to an otherwise very clear definition.  These cases also illustrate the positive results that creativity can bring to the table.  Very early in these posts, the importance of utilizing the mandates of Section 1-103 in presenting creative arguments was emphasized. By way of review, and in the context of the case to be discussed, Section 1-103 directs the court to ‘liberally construe and apply the code’ and to do so in a manner which promotes the underlying purposes and policies of the Code:

(a) The Uniform Commercial Code must be liberally construed and applied to promote its underlying purposes and policies, which are: (1) to simplify, clarify, and modernize the law governing commercial transactions; (2) to permit the continued expansion of commercial practices through custom, usage, and agreement of the parties; and (3) to make uniform the law among the various jurisdictions.

As you view these creative applications of the definition of ‘merchant’, it is useful to see how many of these purposes and policies support the broad interpretation adopted by the courts. 

            The first case for consideration is National Microsales v. Chase Manhattan Bank  761 F. Supp. 304 (S.D.N.Y. 1991)   The facts are briefly as follows:

National Microsales Corporation was engaged in the business of buying and selling computer output microfilming equipment. Chase Manhattan entered into negotiations with National Microsales Corporation to sell some of its used Computer Output Microfilming equipment to NMC for resale. When Chase subsequently sold the equipment to a third party, NMC filed suit alleging breach of contract.

Chase moved for summary judgment dismissing NMC's complaint on the basis of the Statute of Frauds, alleging that the purported contract in question was over $500 and there was no writing as required by Section 2-201(1).

National Microsales Corporation also moved for summary judgment claiming the contract in question was covered by the ‘merchant exception’ contained in Section 2-201(2).  As you may recall, that section applies only to transactions ‘between merchants’; hence, for that section to apply, the court would have to conclude that the bank was a ‘merchant’ under Article 2.

In presenting its case, NMC noted that Chase sold $6.5 million worth of used COM equipment from 1987-1989, and further that there were established policies and procedures of Chase which had been adopted for the purchasing new equipment as well as other ‘fixed surplus assets’.

Chase's response was that it never purchased goods for resale and that Chase has no specialized knowledge concerning the goods which it buys for its own use. There was also testimony that Chase had no familiarity with the market for the equipment which it purchased, and that when it disposed of surplus goods, it generally sold them to resellers, rather than end users, and usually sold the equipment for less than fair market value.

The court found that Chase was in fact a ‘merchant for purposes of the UCC’.  As support, the court quoted the definition of ‘merchant in Section 2-104 and Official Comment 2 to Section 2-104 which states:

The special provisions as to merchants appear only in this Article and they are of three kinds. Sections 2-201(2), 2-205, 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 typical of and 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 the practices . . . involved in the transaction . . ." since the practices involved in the transaction are non-specialized business practices such as answering mail.

In applying the definition of merchant and comment 2 above, the court stated: 

This comment implies that Chase's familiarity with the goods it purchases and sells is sufficient to establish that it is a merchant for the purposes of § 2-201… For Statute of Frauds purposes, the scope and extent of Chase's activities qualify it for merchant status under the UCC.  National Microsales at 307

            The extent of the Court’s holding on the merchant matter is unclear.  On the one hand, the court seems to attempt to limit is holding on the merchant question to the Statute of Frauds provision.  If that were the case however, the Court could have easily so stated without any discussion of ‘Chase’s familiarity with the goods it purchases and sells’.  The limited reading would be found in the fact that responding to mail is something everyone in business should do as clearly stated in the comment.  In mentioning the goods and familiarity of practices with those goods, the Court can easily be interpreted to be saying more.

            There are huge implications from holding that the bank is a ‘merchant with respect to goods of the kind’ for at this point, the warranty of merchantability kicks in, as well as a host of other merchant provisions, some of which have been stated in the last post.  There is a large potential exposure to the bank if it is classified as a ‘merchant under Article 2’, which can create great leverage in litigation.

Creating and Applying a Systematic Approach

         

            As of this post we have worked through Parts 1 and 2 of Article 2, the former dealing with scope and Article 2 definitions, the latter with the general formation of a contract. This content should be considered in the context of the definitions of ‘contract’ and ‘agreement’ contained in Article 1.   For those who are interested in laying a strong foundation for approaching all Uniform Commercial Code matters, I suggest going back to the first post on March 5, 2015 and reading and learning subsequent posts through May 5, 2015. 

            As stated in an earlier post, contracts exist throughout all Articles of the Uniform Commercial Code.  We looked at many under Article 3: the contracts of the maker; drawer; indorser, acceptor and accommodation parties.  In each of these situations, as well as Article 2 and the other Articles of the Code, a basic contract analysis will yield an enormous amount of information.  Piecing together the agreement between the parties will yield any writings which exist; what was stated between the parties; what information can be inferred from other circumstances, such as any course of performance or course of dealing which may exist between the parties.  Trade usage, as has been repeatedly stated throughout these posts, is almost always going to be relevant, for the overwhelming majority of commercial transactions are conducted within an established trade.

            Also referenced in an earlier post is the importance of a systematic approach to Uniform Commercial Code problems.  Understanding that the Code is like a major highway with many side roads, it is very important to stay focused and on track.  My personal approach to all UCC problems is exactly as stated above. Over time my mind has been trained to process information through this medium, and hence has increased efficiency in the process. 

            Once the basic agreement is in place, we turn to the contract.  This, simply stated, is the application of The Uniform Commercial Code as applied to the facts of the agreement as supplemented by all law not specifically displaced by the Code per 1-103(b).

            Once your facts are in place and diagrammed, you move to the index in front of whatever Articles are involved.  At this point, you look to the head notes in the index and process it through the facts of your case to see if any content is relevant.  By way of illustration, let’s take a look at the index to Part 2 of Article 2:

       

       

            The simple system I am proposing essentially involves creating a factual prism through which to process the content within the head notes.  This of course, requires a sufficient grasp of content, but as I have stated all along, this level of expertise is available for anyone who puts in the effort. It does not require complete mastery of the Code, which is also available with sufficient effort, but it does require enough knowledge to look at the head notes and have the content in the section come to mind.  More detailed analysis of the sections will occur later; for now, the basics are being put in place.

            As the facts are processed through the head notes, certain areas within the text will be activated.  For example, if there is no final written agreement, the Statute of Frauds will be activated; Section 2-204 regarding formation in general will also be activated, and of course, if writings are in confirmation of an offer, Section 2-207 will be activated.  This process is applied to each Part of each relevant Article, again yielding activated sections.  At the end of this process, you may have 40-50 sections activated, which when placed in proper sequence tell the ‘UCC story’.  Areas where more information is needed will reveal themselves, and sections of particular importance will become apparent.  These sections are dissected word by word and this process involves the application of the purposes and policies of the Code as stated in Section 1-103(a)(1)(2)(3).

            Part 3 of Article 2 deals with General Obligation and Construction of Contract  and should be read in connection with Part 5 which deals with Performance.  If you recall, Section 2-204(1) provides that the parties can consummate a contract ‘by any means sufficient to show agreement including conduct.’  This is elaborated upon in Section 2-207(3) which discusses what happens when an acceptance in confirmation of an offer results in a contract by conduct with writings insufficient to form a contract.  In that situation Section 2-207(3):

…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.

Part 3 of Article 2 will supply many of the contract terms which may not be contained in the writings.

            If for example, the parties intended to enter into a contract but had not agreed on a price, Section 2-305 provides a mechanism for determining price. As discussed in a previous post, Part 3 also provides for delivery terms regarding single or multiple lot deliveries where no such provision is made in the contract under Section 2-307; place of delivery where none is provided under 2-308; timeliness of action required under Section 2-309; authorization for a seller to make shipment under reservation under Section 2-310; certain options regarding the goods such as assortment of goods and specification of goods under Section 2-311.  In addition, various implied warranties and disclaimer of warranties are created by Section 2-314; 2-315 and 2-316 respectively. 

            Most of us are familiar with the importance of warranties and disclaimers of warranties; however, there is tremendously important content in each of the provisions noted, and, if in undertaking the analysis noted above, certain terms are missing from the terms of the contract, Part 3 will often provide the missing content.  Part 5, on the other hand, will detail what the parties are required to do to perform properly under the contract.  For example, requirements for proper shipment of goods; proper tender of goods; payment responsibilities; inspection rights and cure options are all dealt with in Part 5 of Article 2.

            The next series of posts will work through Parts 3 and 5 of Article 2.