UCC Issues for Contractors

IS THE UNIFORM COMMERCIAL CODE GOVERNING SALES IMPORTANT TO CONTRACTORS AND SUBCONTRACTORS?

Although in our litigation experience it is not typical for someone to assert that a contractor's contract to "furnish and install" is subject to the Uniform Commercial Code ("UCC") governing sales of goods, we have seen lawyers do it. Significant consequences can flow from the legal conclusion that a contract is governed by the UCC rather than by common law contract rules. For example, the standard for whether a contract has been breached is different under the UCC than it is under the common law, and the UCC implies into contracts (reads into contracts) warranties that the common law does not (and vice versa). So, a party vying for an advantage (to the disadvantage of the other party) in a breach of contract action might assert that the contract is subject to the UCC.

So, how is it determined whether a contract is governed by the UCC or not? At first blush, whether a contract involves the sale of goods might sound obvious. But, consider a typical subcontract pursuant to which the subcontractor is to "furnish and install" any given materials, such as windows, steel, roofing tiles, or electrical conduit. Is the subcontract one for the sale of goods? What if the value of the goods constitutes more than half of the contract price?

In Florida, as in many other states, when a contract involves both the aspects of a sale of goods and the performance of services, the test to determine whether the UCC should apply is the "predominant factor" test, i.e., whether the goods or the services element of the contract is the predominant factor. "Under this test, the court determines 'whether their predominant factor, their thrust, their purpose, reasonably stated, is the rendition of service, with goods incidentally involved . . . .'" BMC Indus., Inc. v. Barth Indus., Inc., 160 F.3d 1322, 1329-30 (11th Cir. 1998). If the sale of goods is the predominant factor of the contract, the UCC will apply.

With respect to construction contract in particular, the courts have generally found that the services component is the predominant factor and, therefore, most construction contracts will not be governed by the UCC, even though they involve furnishing materials. So, for example, in a case involving a contract in which the "seller" was in the business of selling and installing equipment and canopies for gas stations and the contract required the "seller" to remove the existing fuel tanks, furnish and install new ones, and construct islands and canopies for a gas station owner, the owner's sought to have the court apply the UCC apparently because of its "perfect tender" rule that would require complete performance as opposed to the "substantial performance" rule applied to construction contracts under the common law. Applying predominant factors test, the court determined that the UCC did not apply. In re Sunshine-Jr. Stores, Inc., 240 B.R. 788 (bankruptcy. M.D. Fla., 1999).

Nevertheless, UCC law governing sales of goods is very important to contractors because in order for them to furnish materials, they must purchase those materials. Those transactions with suppliers and manufacturers will most likely be governed by the UCC, not the common law.