Legal Definitions - merchant exception

The merchant exception is a specific rule in contract law that applies to agreements for the sale of goods between businesses, or "merchants." It provides an exemption from the general requirement, known as the Statute of Frauds, which typically mandates that certain contracts (especially those for the sale of goods above a specific value) must be in writing to be legally enforceable.

This exception recognizes that merchants often conduct business quickly and informally, relying on oral agreements followed by written confirmations. Under the merchant exception, an oral contract between two merchants for the sale of goods can become enforceable even without a formal, signed written agreement if the following conditions are met:

• An oral agreement is reached between two parties who are both considered "merchants" (meaning they deal in goods of the kind or hold themselves out as having knowledge or skill peculiar to the practices or goods involved in the transaction).
• Within a reasonable time after the oral agreement, one merchant sends a written confirmation of the terms of the agreement to the other merchant.
• The recipient merchant receives the written confirmation and does not object to its contents in writing within ten days of receiving it.

If these conditions are met, the merchant who received the confirmation and failed to object cannot later use the Statute of Frauds (i.e., the argument that the contract was not in writing) as a defense if sued for breach of contract. It's important to note that this exception does not automatically prove that a contract existed; the party seeking to enforce the agreement must still demonstrate that an oral agreement was indeed made.

Here are some examples illustrating the merchant exception:

• Example 1: Bulk Ingredient Order
  Gourmet Foods Inc., a large restaurant supplier, calls FarmFresh Produce Co. and orally agrees to purchase 500 pounds of organic heirloom tomatoes for an upcoming catering event. The total value of the order is $2,000, exceeding the typical threshold for the Statute of Frauds. The next day, FarmFresh Produce Co. sends an email to Gourmet Foods Inc. with a detailed purchase order confirmation, specifying the quantity, price, delivery date, and payment terms. Gourmet Foods Inc. receives the email but, due to a busy week, fails to review or object to the terms within ten days.

  How it illustrates the term: Both companies are merchants. FarmFresh Produce Co. sent a timely written confirmation of the oral agreement. Because Gourmet Foods Inc. did not object within ten days, the merchant exception applies. If Gourmet Foods Inc. later tries to cancel the order by claiming there was no formal written contract, they would be prevented from using that defense. FarmFresh Produce Co. would still need to prove that the initial oral agreement for the tomatoes was made.

• Example 2: Specialized Equipment Purchase
  TechBuild Solutions, a construction firm specializing in custom installations, verbally agrees with RoboTools Manufacturing to purchase a custom-fabricated robotic arm for $50,000. The agreement is made over the phone. RoboTools Manufacturing immediately sends an electronic invoice and order summary to TechBuild Solutions, detailing the specifications, price, and estimated delivery. TechBuild Solutions's procurement department receives the documents but does not send any objection for two weeks.

  How it illustrates the term: Both TechBuild Solutions and RoboTools Manufacturing are merchants. RoboTools Manufacturing sent a written confirmation (the invoice and order summary) of the oral agreement within a reasonable time. Since TechBuild Solutions did not object within ten days of receipt, they cannot later argue that the contract is unenforceable because it wasn't formally written and signed. RoboTools Manufacturing would still have the burden of proving that the oral agreement for the robotic arm was indeed formed.

• Example 3: Seasonal Inventory Order
  The owner of Urban Threads Boutique, a clothing retailer, calls Seasonal Styles Wholesalers and places a verbal order for 200 units of a new line of designer scarves for the upcoming fall season, totaling $10,000. Seasonal Styles Wholesalers sends an email confirmation detailing the specific styles, quantities, colors, and pricing within 24 hours. The owner of Urban Threads Boutique sees the email but gets distracted and doesn't review or respond to it for 15 days.

  How it illustrates the term: Both businesses are merchants. Seasonal Styles Wholesalers provided a timely written confirmation of the oral agreement. Because Urban Threads Boutique failed to object to the confirmation within the ten-day period, the merchant exception applies. This means Urban Threads Boutique cannot use the absence of a formal written contract as a defense if Seasonal Styles Wholesalers seeks to enforce the agreement. However, Seasonal Styles Wholesalers would still need to present evidence that the oral agreement for the scarves was initially made.