Vanguard Energy Services, LLC v. Shihadeh
82 NE 3d 1284 (2017)
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Rule of Law:
Under the UCC Statute of Frauds, a business that purchases goods for its own consumption is not a 'merchant' of those goods, and fungible goods are not 'specially manufactured' simply because they are subject to specific contractual terms of price, volume, and time.
Facts:
- Ibrahim M. Shihadeh, who operated a business named Creative Designs Kitchen and Baths, began purchasing natural gas from Vanguard Energy Services, L.L.C. in 2009 to heat his building.
- Shihadeh had a history of purchasing gas from Vanguard both at the current market rate (spot market) and at a fixed price for a set volume and time period.
- In February 2014, Shihadeh allegedly entered into an oral agreement to purchase 25% of his anticipated natural gas needs from Vanguard at a fixed price for the 2014-15 and 2015-16 winters.
- On June 18 and 20, 2014, Vanguard sent Shihadeh an e-mail confirming the February agreement, to which Shihadeh did not object.
- On June 27, 2014, the parties allegedly made a second oral agreement for Vanguard to supply an additional 50% of Shihadeh's anticipated gas needs at a fixed price for the same time period.
- On February 2, 2015, Shihadeh sent a letter to Vanguard terminating its services, effective April 30, 2015.
- Vanguard warned Shihadeh that terminating the service would force it to 'unwind' his fixed-price positions, but Shihadeh proceeded with the termination.
Procedural Posture:
- Vanguard Energy Services, L.L.C. (Plaintiff) filed an amended complaint against Ibrahim M. Shihadeh (Defendant) in the Circuit Court of Du Page County.
- The complaint alleged, in Counts I and II, breach of two separate oral agreements for the sale of natural gas.
- Shihadeh filed a motion to dismiss Counts I and II under section 2-619(a)(7) of the Code of Civil Procedure, asserting the claims were barred by the UCC Statute of Frauds.
- The trial court granted Shihadeh's motion and dismissed both breach of contract counts.
- Vanguard (Plaintiff-Appellant) appealed the trial court's dismissal to the Appellate Court of Illinois, Second District.
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Issue:
Do the 'merchant exception' or the 'specially manufactured goods exception' to the UCC Statute of Frauds apply to oral agreements for the sale of natural gas where the buyer is a business that consumes the gas for its own operations and does not resell it?
Opinions:
Majority - Justice Burke
No. Neither the merchant exception nor the specially manufactured goods exception to the UCC Statute of Frauds applies to render the oral agreements enforceable. For the merchant exception to apply, the buyer must have knowledge or skill peculiar to the specific goods or practices involved in the transaction, not simply be a businessperson. The court reasoned that Shihadeh was a mere end consumer of natural gas for heating his building, not a dealer or someone with specialized knowledge in the natural gas industry, and thus could not be classified as a merchant under UCC § 2-104(1). Regarding the specially manufactured goods exception under UCC § 2-201(3)(a), the court held that the goods themselves must possess unique characteristics making them unsuitable for sale to others. Here, the natural gas was a fungible commodity; Vanguard's difficulty in reselling it stemmed from market conditions and the specific price and volume terms of the alleged contract, not from any special feature inherent to the gas itself.
Analysis:
This decision reinforces a narrow interpretation of the UCC's 'merchant' and 'specially manufactured goods' exceptions in Illinois. By rejecting the argument that any businessperson is a 'merchant' for the purposes of the exception, the court protects small businesses from being bound by unwritten agreements for goods outside their area of expertise. It also clarifies that the specially manufactured goods exception applies to the nature of the goods themselves, not to the commercial terms of the transaction, preventing sellers of commodity goods from using this exception to enforce oral contracts when market prices shift unfavorably.
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