Mixed Transactions: UCC or Non-UCC?

As noted in a previous post, although Article 2 is entitled ‘Sales’, the actual scope of Article 2 as stated in Section 2-102 is that its coverage applies to ‘transactions in goods’.  Some transactions involve a combination of sales and services and have been labeled ‘mixed transactions’.  By way of simple example, assume patient ordered a set of dentures from her dentist which he later placed into her mouth.  You have the sales element in the actual sale of the dentures to the patient and you have the service element in measuring for the dentures and installing them into the patient.  These are the facts from a case I used when teaching Sales.  The court found that the transaction between the patient and the dentist was predominantly a service, not a sale. [Cook v Downing 1994 OK CIV APP 178, 891 P2d 611, 27 UCC Rep. Serv. 2d 837 (Ct. App. Div 1 1994) ]  Therefore, the Uniform Commercial Code did not  apply.

Courts have used several tests to determine whether or not a mixed transaction is a sale or a service.  The two most common are posed in the form of questions:

Is the gravamen of the transaction a sale or a service?

Is the primary or predominant purpose of the transaction a sale or a service?

Within these broad based questions, a variety of factors are discussed by the courts.  Before turning to some of these factors, a more fundament question must be asked:

What difference does it make whether a transaction is determined to be a sale or service?

The importance of the classification as a sale of goods or a service lies in the rules governing the drafting of contracts, and, if necessary, determines the governing rules when battles are fought.  As to the drafting of documents if that is in play, the UCC gives great weight to the agreement of the parties and freedom of contract as a general principle.  [Both of these topics have been discussed in earlier posts.]  It is difficult to imagine a more clear set of statutory guidelines with the corresponding ability to impact transactions than those given by the Uniform Commercial Code.  Someone drafting a contract who wants the UCC to govern a mixed transaction should definitely create a provision in the contract stating that it is the intention of the parties to treat the transaction as a sale.   While this is not enough to make a non-sale a sale, it is something the courts have looked at in classifying a mixed transaction contract.  As a general drafting strategy, I encourage a statement of intent where it is important and might ultimately be of use by the court in making its determination.

            If the question arises in the litigation context, the issue becomes: Where do you want to fight the battle?  That will turn on your knowledge base and skill set.  Where are you better equipped to fight?  Do you have better weapons under the Uniform Commercial Code or outside the Code?  That will sometimes be a fact specific analysis which in turn is determined by the relevant Code provisions. For example, statute of limitations protections; warranty provisions; notice provisions and the like.  Obviously, if you have a strong knowledge base in the Uniform Commercial Code, you will generally prefer to have matters resolved within the Code.  Your opponent is not likely to be as well versed in the Code as you are, so he or she will try to keep the case out of the Code, perhaps resolving it through contract law or the law of negligence.  So the answer to the question posed really boils down to what rules do you want to play under?  It can be viewed as something akin to home field advantage.

Mixed contracts occur in a wide variety of settings.  One of the most frequently litigated settings is found in the sale of computer systems.  Often these systems involve two elements—creation and design of the system—and the ultimate sale of the system.  They also involve the sale of software and hardware, both of which have been determined to be goods by the majority of courts.

Micro Data Base Systems, Inc. v. Dharma Systems, Inc 148F3d 649 (7^th Cir. 1998) involved a dispute between two software companies—MDBS and Dharma Systems.  The underlying facts began with an IRS call for bids for a contract to improve its computer capabilities. Unisys Government Systems wanted to bid on the contract.  Toward that end, Unisys entered into a contract with MDBS for the provision of a workstation management system designed to be used by the IRS.  MDBS subsequently entered into a contract with Dharma who agreed to adapt its proprietary software program for use in the system MBDS would be providing to Unisys for sale to the IRS.  MBDS agreed to pay a $125,000 licensing fee for the use of the program and an additional $125,000 for adapting the program to meet the requirements of MBDS.

In the opinion, and with respect to the characterization of the transaction, the court noted that the law of the two states involved differed on whether the sale of custom software is a ‘good’ and hence subject to Article 2.  In Indiana, the sale of custom software has been held to be a service, whereas in New Hampshire, the sale of custom software has been held to be the sale of a good.  The court noted that under New Hampshire law the determination hinges on which aspect of the transaction ‘predominates’—the sale or the service. 

In reaching its determination that the contract was for the sale of goods, the court likened the services aspect of the contract to the labor that would attend the manufacture of any product.  In supporting this analysis the court stated:

                   

We doubt that it should even be called a ‘hybrid sale’, for this would imply that every sale of goods is actually a hybrid sale, since labor is a service and labor is an input into the manufacture of every good. Micro Data Base Systems, Inc,.at 655.

            There are cases going both ways on the question of whether developmental software which is later sold is a sale or a service.  The case under discussion is illustrative of the importance of the choice of law provisions of the Code [discussed in an earlier post].  If the parties had contracted for Indiana law to apply which would have been allowable under Section 1-301, the result in the case would have been different.  This is one of the reasons that it is so important to check the law of the various jurisdictions involved in a particular transaction so that parties can intelligently draft contracts which govern their transaction.