Merchants and the Economic Loss Doctrine

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 (8^th 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:

            Economic Loss Doctrine In All 50 States - Matthiesen ...

***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’.

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.

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.

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.

Parol Evidence and Article 2

 We have discussed the basic drafting of Article 2 insofar as it relates to the general formation of a contract, noting that the Code has removed many formal restrictions for contract formation which existed in pre Code law.  This is consistent with the overall drafting of Article 2 which reflects the reality of the business world.  Often, there is no finalized contract, but instead a series of writings followed by conduct which recognizes the existence of a contract.  If there is an acceptance in ‘confirmation of an offer’ the rules of Section 2-207 will apply.

In that situation, and even in situations where you have a finalized contract, parties may wish to introduce evidence which assist the court in interpreting the writings in a manner favorable to the proponent of the evidence.  In that situation, Section 2-202 comes into play.  That section reads as follows:

Terms with respect to which the confirmatory memoranda of the parties agree or which are otherwise set forth in a writing intended by the parties as a final expression of their agreement with respect to such terms as are included therein may not be contradicted by evidence of any prior agreement or of a contemporaneous oral agreement but may be explained or supplemented

(a) by course of dealing or usage of trade (Section 1-205) or by course of performance (Section 2-208); and

(b) by evidence of consistent additional terms unless the court finds the writing to have been intended also as a complete and exclusive statement of the terms of the agreement .

            Section 2-202 once again, underscores the importance of the individual elements of agreement in the ultimate interpretation of the meaning of the contract.  Thus, course of performance, course of dealing, and usage of trade not only create avenues whereby conduct and trade can supply terms of a contract, but also create an avenue by which evidence can be introduced to ‘explain or supplement’ the terms contained in any writings between the parties.  The manner in which this evidence is presented to the court is critical.  If the evidence of course of performance, course of dealing and trade usage is presented to ‘contradict’ the writing, it is not acceptable. If however, such evidence is introduced to ‘explain or supplement the writings’ the evidence is proper.  This is true regardless of whether or not the writings are intended as a ‘final expression’ of the parties’ agreement.

            Section 2-202 was discussed by the Arkansas Court of Appeals in L.F. Brands v Dillard’s 314 SW 3d 736, 2009 and, like most cases which have disc used Section 2-202, reached a decision that was consistent with the statute.  The case involved a breach of contract action brought by L.F. Brands against Dillard’s.  Brands was a supplier of Dillard’s with whom Dillard’s had a long standing relationship.  All transactions between the parties were governed by a document entitled ‘Dillard’s Inc. Purchase Order Terms, Conditions, and Instructions’.  In addition to the terms contained in the purchase orders, undisputed testimony from Brands and Dillard’s employees established that the parties would meet at the beginning of each fashion season to discuss profit margins.  Sales were monitored throughout the course of the season, and allowances would be processed at various times during the year to make adjustments to the margins.  At the end of the year, parties would determine if gross margins had been met.  If not, the parties would negotiate on further allowances to achieve an acceptable resolution.

            Among the provisions contained in the Purchase Order agreement was the following provision:

[L.F. Brands] acknowledges by acceptance and shipment against any Dillard Purchase Order that the terms, conditions and instructions stated herein, in the Purchase Order, [and in two other Dillard's documents] (collectively, the “Agreement”) shall bind [L .F. Brands] and shall constitute the entire agreement between Dillard and [L.F. Brands], which cannot be modified by either party except in a writing executed by both parties, or [another method]; provided, however, that this provision shall not apply to markdown allowance and other credits authorized by [L.F. Brands]․

L.F. Brands went out of business in December of 2003.  In February 2004, Dillard’s deducted markdown allowances and chargeback’s from its account balance.   These markdowns and chargebacks were the basis of Brands’ appeal. 

The trial court denied both parties’ motion for summary judgment determining that the entirety of the parties’ agreement must be determined by looking at both the written documents, as supplemented by the parties’ oral agreements.  The case was submitted to a jury with instructions with the definition of course of dealing, and that course of dealing evidence may be used to give particular meaning to and supplement the terms of the agreement.  The jury found for Dillard’s on the complaint, and further found for Dillard’s on its counterclaim in the amount of $1,265,938.98

            In discussing Brand’s argument that the merger clause in the Purchase Order superceded the prior oral agreements concerning merchandise allowances the Court stated:

This argument sweeps too broadly in this case for the sale of goods governed by Article 2 of the Uniform Commercial Code(UCC) which has a specific provision allowing parol evidence to be introduced even in situations involving fully integrated written agreements.  Under the UCC’s parol evidence rule, a writing intended to the parties’ final expression of their agreement may not be contradicted by evidence of any prior agreement or contemporaneous oral agreement, but it may be supplemented by evidence of the parties’ course of dealing or course of performance. [citing Section 2-202(a).]

The court went on to state:

In such instances, the evidence of a course of dealing that explains or supplements a contract is competent evidence of the parties’ intent and can become a part of a contract.

In affirming the trial court, the court of appeals also noted that, per comment one to Section 2-202, there is no requirement that the contract be ambiguous in order for such evidence to be introduced.

This case underscores a point that has been made repeatedly in previous posts—course of dealing and course of performance, if they exist, are always relevant.  If however, the parties choose to do so, they can include a provision in their contract which excludes evidence of course of dealing, course of performance or usage of trade.  If you are drafting a contract, it is a good practice to examine each of these concepts in the context of your situation, so that any desired adjustments can be made.

Article 2: Facilitation of Contract Formation

By way of brief review—Article 2 applies to ‘transactions in goods’.  Some transactions are hybrid or ‘mixed transactions’ involving a combination of a sale and services.  If the ‘gravamen’ of the action or the essence of the transaction is a sale, the transaction will be within the purview of Article 2.  Conversely, if the transaction is primarily the delivery of services in connection with a sale, the transaction will be outside the scope of Article 2.

Once the scope issue has been satisfied, the question turns to the basic enforceability of the purported contract under the Statute of Frauds provision of Section 2-201.  The basic rule contained in Section 2-201(1), requires a writing, ‘signed by the person against whom enforcement is sought’ if the value of the contract exceeds $500.  The exceptions to the basic rule are contained in Section 2-201(2)(3)(a)(b)(c), and deal with the Reply Doctrine; specially manufactured goods; court documents and admissions in court that confirm the contract; and goods for which payment has been made or accepted.

Previous posts also discussed Section 2-207 in the context of this basic scheme for it is generally in the formation stages of the contract that documents are moving back and forth among the buyer and seller.  In approaching Section 2-207, one must remember that it is predicated upon an offer having been made by the buyer or the seller prior to the activation of that section. If the writings between the parties do not establish a contract, but the parties have engaged in conduct which ‘recognizes the existence of a contract’, the terms of the contract will be those on which the writings of the parties agree with the balance of the terms being supplied by the Code.  This basic rule is contained in Section 2-207(3).

As we continue to work through Article 2, it is important to remember and consistently apply the definition of ‘contract’ and ‘agreement’ under Article 1.  The former is the ‘total legal obligation that results from the parties’ agreement’; the agreement includes: language; course of performance; course of dealing; usage of trade; and inference from other circumstances.  Always remember how critically important trade usage is and the hierarchy of these concepts in the interpretation of the meaning of the contract as stated in Section 1-303(e).

With that introduction and review in place, we will continue the journey through Article 2.  At the outset, it should be noted that Article 2 is drafted in a style that facilitates contract formation by eliminating some of the technical barriers that existed in pre Code law.  Part 2 of Article 2 deals with Form, Formation and Readjustment of Contract.  Formation in general is covered in Section 2-204 with the basic rule stated in Section 2-204(1):

A contract for sale of goods may be made in any manner sufficient to show agreement, including conduct by both parties which recognizes the existence of such a contract.

The general underlying policy of facilitating contracts is elaborated on in Section 2-204(3):

Even though one or more terms are left open a contract for sale does not fail for indefiniteness if the parties have intended to make a contract and there is a reasonably certain basis for giving an appropriate remedy.

Section 2-204(3) represents a radical departure from pre Code law which required much more specificity in order for a contract to be enforceable.  There are two requirements stated in order for a contract to be enforceable: first, the parties must have ‘intended to make a contract’; second, there must be ‘a reasonably certain basis for giving an appropriate remedy’.  As noted in the comments ‘commercial standards on the point of ‘indefiniteness are intended to be applied’.  The Code supplies certain terms which may be missing in communications between the parties.  For example, if no place of delivery is stated in the writings, Section 2-308(a)(b)(c) will supply one:

Unless otherwise agreed

(a) the place for delivery of goods is the seller's place of business or if he has none his residence; but

(b) in a contract for sale of identified goods which to the knowledge of the parties at the time of contracting are in some other place, that place is the place for their delivery; and

(c) documents of title may be delivered through customary banking channels.      

            Similarly, if there is no provision dealing with the delivery of goods in a single or multiple lots, Section 2-307 requires delivery in a single lot; if there is no stated time for shipment or delivery, Section 2-309(1) requires delivery to be within a ‘reasonable time’, which term is defined under Section 1-205(1):

Whether a time for taking an action required by the Uniform Commercial Code is reasonable depends on the nature, purpose, and circumstances of the action.

The Code is so liberal on the formation of a contract that ‘[t]he parties if they so intend can conclude a contract for sale even though the price is not settled’ per Section 2-305(1).   Section 2-305 will be discussed in detail in a subsequent post, but for now, attention is directed to underscore the lengths to which the Code has gone in terms of promoting the formation of the contract and removing sales transactions from the technical restrictions that preceded the Uniform Commercial Code.

Further evidence of the Code’s liberal approach to the formation of the contract is found in Section 2-206(1)(a):

 (1) Unless otherwise unambiguously indicated by the language or circumstances

(a) an offer to make a contract shall be construed as inviting acceptance in any manner and by any medium reasonable in the circumstances;

As noted in the comments to Section 2-206:

Any reasonable manner of acceptance is intended to be regarded as available unless the offeror has made quite clear that it will not be acceptable.  Former technical rules as to acceptance, such as telegraphed offers be accepted by telegraphed acceptance, etc., are rejected and a criterion that the acceptance be ‘in any reasonable manner, and by any medium reasonable under the circumstances,’ is substituted.

            The policies for keeping the deal in play are evidenced in numerous other sections in Article 2.  These will be discussed in future posts.