Friday, February 2, 2018
On April 16, 1677, the English Parliament passed the “Statute of Frauds.” The new law required that certain contracts for the sale of goods be in writing to be enforceable. In the United States, nearly every state has adopted, and retained, a statute of frauds. Most recently, state legislatures have had to amend existing laws to account for electronic communications and specify whether those communications satisfy the writing requirement.
A type of contract that must be in writing to be enforceable is one that involves the sale of goods worth $500 or more. Obviously, this type of contract will involve many contracts involving the sale agricultural commodities and other agricultural goods. But, there are exceptions to the writing requirement for contracts that would otherwise have to be in writing to be enforceable. One of those exceptions turns on whether a farmer is a merchant or not, and the rule involving the matter is known as the “merchant’s confirmatory memo rule.” It often comes up in situations involving the sale of grain under a forward contract.
That’s the focus of today’s post – the merchant’s confirmatory memo rule.
The Writing Requirement and the UCC
The writing requirement for sales of goods is found in a particular state’s version of § 2-201 of the Uniform Commercial Code (UCC). The official version, adopted by most states, is applicable only when the goods have a price of $500 or more. In addition, under UCC § 1-206, there is an overall statute of frauds for every contract involving a contract for the sale of personal property having a value in excess of $5,000. Thus, for personal property except “goods” a contract is not enforceable beyond $5,000 unless there is some writing signed by the party against whom enforcement is sought.
Contracts involving merchants. As indicated above, a contract for the sale of goods for $500 or more is generally not enforceable unless there is some writing signed by the party against whom enforcement is sought sufficient to indicate that the contract had been made between the parties. For contracts between merchants, it is common for one merchant to send the other merchant a letter of confirmation, or a pre-printed form contract. This confirmation will be signed by the party who sent it, thus leaving one party at the other party’s mercy. The UCC remedies this situation by providing that unwritten contracts between merchants are enforceable if a writing in confirmation of the contract is received within a reasonable time unless written notice of objection to the contents of the writing is given within ten days. UCC § 2-201(2); see also Topflight Grain Cooperative, Inc. v. RJW Williams Farms, Inc., No. 4-12-1079, 2013 Ill. App. Unpub. LEXIS 1753 (Ill. Ct. App. Aug. 13, 2012).
Thus, the effect of this “merchants” exception is to take away from a merchant who receives a writing in confirmation of a contract the statute of frauds defense if the merchant does not object to the confirmation. In any event, the sender of the written confirmation must still be able to persuade a jury that a contract was in fact made orally, to which the written confirmation applies.
Consider the following example:
In December of 2017, Jesse telephoned his local elevator for a price quote on wheat. During their telephone conversation, Jesse and the elevator agreed that Jesse would sell the elevator 25,000 bushels of wheat at a specified quality at the December price next June, with performance to be completed no later than June 30, 2018. The elevator sent Jesse a written confirmation asking that it be signed and returned within ten days. Jesse did not sign the written confirmation. Because of unexpected market conditions, the June 2018 wheat price was substantially higher than the December 2017 price. Jesse refused to perform in accordance with the forward contract, preferring instead to sell his wheat crop at the higher current market price. The elevator sued to enforce the forward contract. Jesse asserted the statute of frauds as a defense – because they didn’t have a written contract, he didn’t have to deliver.
If Jesse is a merchant with respect to the kind of goods contemplated in the forward contract (wheat), he will be bound by the oral contract. If Jesse is not a merchant, the elevator might be able to recover if it can establish that it changed its position in reliance on Jesse’s conduct, that Jesse knew or reasonably should have known the elevator would sell the forward contract, or can demonstrate that Jesse’s nonperformance was based on his desire to benefit from a higher market price.
When Is A Farmer a Merchant?
A “merchant” is defined as one who deals in goods of the kind being sold, or one who by occupation holds himself or herself out as having knowledge or skill peculiar to either the goods involved or the practice of buying and selling such goods. Courts are divided on the issue of whether a farmer or rancher is a merchant, with the outcome depending on the jurisdiction and the facts of the particular case. See, e.g., Huprich v. Bitto, 667 So.2d 685 (Ala. 1995); Smith v. General Mills, Inc., 968 P. 2d 723 (Mont. 1998); Brooks Cotton Co., Inc. v. Wilbine, 381 S.W.3d 414 (Tenn. Ct. App. 2012).
Unfortunately, in many instances, farmers and ranchers cannot know with certainty whether they are merchants without becoming involved in legal action on the issue. Courts consider several factors in determining whether a particular farmer is a merchant. These factors include (1) the length of time the farmer has been engaged in marketing products on the farm; (2) the degree of business skill demonstrated in transactions with other parties; (3) the farmer’s awareness of the operation and existence of farm markets; and (4) the farmer’s past experience with or knowledge of the customs and practices unique to the marketing of the product sold. For a couple of courts opinions on the issue of whether a farmer is a merchant that reached different outcomes, see Nelson v. Union Equity Co-Operative Exchange, 548 S.W.2d 352 (Tex. 1977) and Harvest States Cooperatives v. Anderson, 217 Wis. 2d 154 (Wis. Ct. App. 1998)
Whether a farmer is a merchant or not is the key to determining whether an oral conversation involving the sale of goods is enforceable. Just another one of those interesting aspects of agricultural law – with its roots dating back to 1677.