What governs the transaction for the hybrid contract that includes both goods and services–the Uniform Commercial Code (UCC) or the common law? A question that is asked in numerous disputes. A good example is the recent case out of the Eleventh Circuit Court of Appeals, Wadley Crushed Stone Company, LLC v. Positive Step, Inc., 2022 WL 1639011 (11th Cir. 2022), dealing with Alabama law.
In this case, the plaintiff (buyer) wanted to build a granite plant in Alabama that would process 500 tons of granite per hour. The plaintiff reached out to a defendant company to start the process of building a granite plant. The defendant company engaged vendors and professionals in the due diligence process to determine the equipment the plaintiff would need. After this due diligence, plaintiff and defendant entered into a contract that included equipment and services. Thereafter, the parties modified the contract to reduce the amount for the erection, installation, and electrical work (about $1.5 Million) as plaintiff planned to independently hire the contractor to perform that work. The modified contract was worth $4,059,224.43 of which there were 25 lines items for equipment totaling $3,887,274.43 with the balance (less than 5% of the contract amount) for engineering (done by a third party), installation, setup, and calibration of scales.
The plaintiff received its equipment but did not pay some of the invoices because it was unhappy with the functioning of its granite plant, i.e., it was not producing 500 tons of granite per hour. Almost five years after the plant was completed, the plaintiff sued the defendant for breach of contract because its plant did not produce 500 tons of granite per hour. The defendant moved to dismiss arguing that the statute of limitations expired. In particular, the defendant argued that the UCC’s four year statute of limitations applied to the breach of contract because the contract was for the sale goods. The trial court granted summary judgment in favor of the defendant finding that the transaction was governed under the UCC and the statute of limitations expired.
On appeal, the issue was whether the contract was for a sale of goods triggering the UCC or a sale of services where the UCC would not apply. Relying on Georgia law (but it would be the same in many jurisdictions), when a contract is for the sale both goods and services, the court will apply the predominant factor test. “When the predominant element of a contract is the sale of goods, the contract is viewed as a sales contract and the UCC applies even though a substantial amount of service is to be rendered in installing the goods.” Wadley, supra, at *3 (quotation and citation omitted).
Thus, the Eleventh Circuit looked to see whether the services included in the contract were incidental to the sale of the goods/ equipment; “[i]f they were, then the sale of goods was the predominant purpose, but, if the sale of goods was only incidental to the provision of services, then services predominate.” Id.
“To apply the predominant factor test, we must evaluate three aspects of the contract to determine whether goods or services are predominant: 1) the language of the contract—looking at how the parties refer to each other and the labeling of the contract; 2) the subject matter of the contract—looking to see if the contract is for a movable good; and 3) the billing of the contract—looking to see the proportion of the contract’s price dedicated to goods and services. If, after applying the predominant factor test, it is stillunclear whether the contract is for goods or for services, Georgia law says that the UCC should “be liberally construed and applied to promote itsunderlying purposes and policies.”
Wadley, supra, at *4 (internal citations omitted).
In looking at the first factor—the language of the contract—the Court noted that the contract, itself, was not clear whether it was a contract predominantly for goods or services as there was language in the contract that could cut both ways in favor of either party.
In looking at the second factor—the subject matter of the contract—the Court evaluated whether the thrust of the contract was for a movable good. In doing so, the Court observed 25 of the 27 line items in the contract were for movable goods, i.e., “[e]ach piece of equipment is a good that was movable when the contract was signed.” Wadley, supra, at *4.
In looking at the third factor –the billing of the contract—the Court looked at how the contract was billed. In doing so, the Court noted that over 95% of the contract price was for the movable goods/ equipment. Less than 5% of the contract price was for services, with the parties knowing that engineering would be done by a third party. The plaintiff tried to argue that baked into the 95% were service-related charges, but the Court did not buy this argument. “[Plaintiff] has cited no record document or case to suggest that the contracting parties agreed to the markups as disguised service charges, and it seems more logical to conclude that a sale of equipment will include a margin of profit for the sale. So, summary judgment is appropriate, because it is a contract for goods, and the UCC’s applicable four-year statute of limitations has passed.” Wadley, supra, at *5
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