A recent case from the Court of Appeals in Tennessee highlighted an important issue in connection with how contracts to purchase farm products will be handled under Article 2 of the Uniform Commercial Code. In Brooks Cotton Co. v. Williams, the court was faced with essentially a single question: may a farmer be a "merchant" within the meaning of Article 2? The court answered the question in the affirmative for the farmer at issue, but it is important to understand both why the question may be critical and that the court’s decision does not answer the question for all farmers.
First, what is a "merchant" under Article 2? Section 2-104(1) of the UCC contains the definition.
"Merchant" means a person that deals in goods of the kind or otherwise holds itself out by occupation as having knowledge or skill peculiar to the practices or goods involved in the transaction or to which the knowledge or skill may be attributed by the person’s employment of an agent or broker or other intermediary that holds itself out by occupation as having the knowledge or skill.
After the jump, we’ll explore why it’s important to be or not be a merchant, how the Tennessee court applied it to farmers and what it means for the farmers from which you may buy farm products.
Being a merchant: The particular provision of Article 2 that was relevant here is called the "merchant exception to the statute of frauds." Under Article 2, any contract for the sale of goods of a value over $500 must be in writing unless an exception applies. The exemption involved here provides:
Between merchants if within a reasonable time a writing in confirmation of the contract and sufficient against the sender is received and the party receiving it has reason to know its contents, it satisfies the requirements of subsection (1) against such party unless written notice of objection to its contents is given within ten days after it is received.
That is a handy way to avoid needing to getting a signature on a document; it also follows the general sense of the law merchant, on which Article 2 is based, that between merchants formalities are regularly not followed in the interest of speeding up commerce.
The Tennessee Decision. The Tennessee court did not plough new ground, but provided a good summary of the state of the law on whether a farmer can be a merchant. In essence, the court held that whether a farmer is a merchant under Article 2 is to be decided on the facts related to the particular farmer. A farmer who is aware of the practice of selling forward contracts on an oral basis and who is familiar with the markets involved in such sales may be a merchant, while one who merely grows a crop for a sale to a single buyer may not be.
A key point is that the focus is on the farmer, not necessarily the transaction itself. In other words, it is the sophistication of the party, not the complexity of the transaction, that will determine whether the farmer is a merchant for Article 2 purposes.
What it Means. As in any test that is based on facts and circumstances, you will not be able to know in advance with perfect certainty if you are buying from a merchant or not. If you’re buying a small quantity of organic vegetables from someone who is selling you their entire crop, it’s probably a good guess they are not a merchant. If you are buying large quantities from someone who sells to large agribusiness companies as well as you, and who quotes you both a current spot price and an historical price without needing to look on a monitor, they are probably a merchant. There will be cases in between where you can’t know for certain, and simply relying on the merchant exception can give your seller a defense if they don’t want to sell.
The merchant exception, though, is not the only exception to the statute of frauds; on the other hand, the status of the other party as a merchant does not satisfy the exception without complying with the rest of 2-201(2). If it matters enough, get it in writing.