Mixed transactions for goods and services: the need for consistency in choosing the governing law.

Author:Bodnar, Austin
 
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INTRODUCTION

Imagine you are about to lose your home insurance after your provider contacted you stating that all homes with a pool are required to have a fence around the property. (1) You quickly find a company that sells and installs fences and enter into a contract with them. (2) You pay a fortune for the fence, but your insurance is saved. (3) Shortly thereafter, the fence proves to be faulty, and the company refuses to fix the problem. (4) Now, you sue under certain warranties that are provided by the Uniform Commercial Code ("U.C.C."), but the court finds that the U.C.C. does not apply to your dispute and that the warranty you wish to sue under is not available under common law. (5) Although you argued that the U.C.C. applies to your case based on prior cases providing that the sale and installation of a fence falls under the U.C.C. as a sale of goods, the court disagrees and finds that the contract seems to be mainly for services, falling under common law. (6) Should there be a better standard for the court to apply in sale of goods and services transactions or is it fair that you are barred from recovery when others in your situation have been able to recover based on similar facts? (7)

This comment begins by discussing the background of the U.C.C. and the predominant purpose doctrine in Part II. (8) Part III of this comment examines the various tests courts have used to determine the governing law of a transaction. (9) Further, Part III.a considers the method of separating the transaction. (10) Part III.b details the application of the U.C.C. to any mixed contract. (11) Part III.c provides a discussion of the gravamen standard, which some courts use as their method of choice. (12) Lastly, Part IV discusses the need for a uniform standard in these situations, provides a view of a recent case where the court developed an efficient set of factors to be applied, and argues how to make those factors even more effective in order to promote widespread adherence to one standard, which will create consistent and just outcomes in cases of tricky mixed transactions. (13)

  1. BACKGROUND OF ARTICLE 2 AND THE PREDOMINANT PURPOSE TEST

    The National Conference of Commissioners on Uniform State Laws, now known as the Uniform Law Commission ("ULC"), works to create uniform state laws for areas of the law where consistency is needed. (14) The ULC is nonprofit and has existed for more than a century, as it was established in 1892 and is now the oldest state government association. (15) The commission has always worked closely with the American Bar Association and consists of state commissioners from each state in the United States. (16) These commissioners are lawyers, law professors, judges, and legislators, who have passed their state bar exam and have been selected by state governments. (17) When there are various laws governing an area of law, the ULC drafts a set of laws to be used as a replacement, which will achieve consistency and uniformity in the law to be applied throughout the various jurisdictions that choose to adopt the ULC's laws. (18)

    One of the reasons for creating this consistency is the fact that people are frequently moving and traveling to other states, which have different laws for every day occurrences such as sale transactions. (19) This difference in law can deter traveling persons from entering into agreements and, in doing so, disturb economic development and the flow of commerce in society, which may lead to the federal government's involvement with state activity. (20) To avoid this, "[t]he ULC improves the law by providing states with non-partisan, carefully-considered, and well-drafted legislation that brings clarity and stability to critical areas of the law." (21)

    The process of drafting an act consists of several steps.22 First, the drafted act must be approved at no less than two annual meetings with state commissioners. (23) A vote is taken, and if the majority of the states approve the act (there are certain requirements as to how many states must be present), (24) it is then approved and each state's legislature can review the act to decide whether it wishes to enact it as state law. (25) The ULC has created more than 300 acts in various areas, including commercial law, estates, family law, and alternate dispute resolution, but one of the most broadly adopted acts is the U.C.C. (26)

    The U.C.C. was a joint effort between the ULC and the American Law Institute ("ALI"). (27) Somewhat similar to the ULC, the ALI's main purpose is to make the law more current and to explain it. (28) The ALI is a nonprofit organization consisting of judges, attorneys, and law professors, and is well known for creating the Restatements of the Law, model codes, and statutes, among other works. (29) The ALI formed because the law in the United States is often uncertain and complex. (30) "[P]art of the law's uncertainty stemmed from the lack of agreement on fundamental principles of the common law, while the law's complexity was attributed to the numerous variations within different jurisdictions of the United States." (31) Similar to the ULC, once the ALI chooses an area of law as a project it wishes to undertake, the institute must go through several required steps, including having its work reviewed by multiple experts, practitioners, law professors, and judges, before the work can be prepared for publication. (32)

    For over fifty years, the ULC and ALI have worked together to create and update the U.C.C. (33) Both organizations have recommended to state legislators that they enact the U.C.C. as state law, and the legislators who chose to do so have either enacted it in full or in part with modifications to fit the needs of the specific state. (34) After adoption, it is codified into that state's statutes, and the U.C.C. becomes the law. (35)

    In 1930, the Committee on Compacts and Agreements Between States produced a report regarding whether "world commercial law" was desired. (36) After the committee discussed the matter, it decided that it was not something desirable at that time and did not pursue the matter further. (37) It was not until the 1950s that the decision was made to actively look into creating a uniform commercial code. (38) When the U.C.C. was finally created, it was intended to fix common flaws that the judiciary often faced and to update a wide area of law. (39)

    The U.C.C. is a code addressing various areas of law separated into "articles," including sales, leases, negotiable instruments, bank deposits, funds transfers, letters of credit, bulk sales, documents of title, investment securities, and secured transactions. (40) In other words, the U.C.C. is an all inclusive code attending to most areas of commercial law, focusing on transactions, and has been regarded as one of the most significant improvements in American law based on its wide-range enactment. (41) All states, as well as Puerto Rico, the District of Columbia, and the Virgin Islands, have adopted the U.C.C. or some version of it. (42) Thus, when conducting business transactions, such as leases, sales of goods, loans, and contracts in general, an individual will need to abide by the U.C.C. (43)

    Article 2 of the U.C.C., applicable to transactions in goods, is significant because it has been adopted in whole by forty-nine states and the surrounding territories, not including Louisiana. (44) When transactions involving a mixture of goods and services arise, courts often look to the predominant purpose test. (45) The predominant purpose test provides that the court should apply Article 2 if the contract is predominantly for the sale of goods. (46) If the contract is not primarily for the sale of goods, common law will apply. (47) Article 2 defines goods as "all things (including specially manufactured goods) which are movable at the time of identification to the contract for sale other than the money in which the price is to be paid, investment securities (Article 8) and things in action." (48)

    One of the earliest cases using the predominant purpose test is Bonebrake v. Cox. (49) Bonebrake is a 1974 case, which involved the sale and installation of bowling alley-related equipment. (50) When the seller failed to complete the installation, full payment had not yet been made; therefore, the buyer proceeded to use another seller to complete the installation. (51) The seller sued for the remainder of the contract price. (52) The issue of whether the court should apply the U.C.C. to the transaction arose. (53) The court held that, in cases of mixed transactions involving both the sale of goods and services,

    [t]he test for inclusion or exclusion is not whether they are mixed, but, granting that they are mixed, whether their predominant factor, their thrust, their purpose, reasonably stated, is the rendition of service, with goods incidentally involved (e.g., contract with artist for painting) or is a transaction of sale, with labor incidentally involved (e.g., installation of a water heater in a bathroom). (54) Using this test, despite being a mixed transaction, the court found that the contract was predominantly for the bowling equipment and not the installation services. (55) Thus, the U.C.C. applied and governed the transaction. (56)

    Since Bonebrake, courts consistently continue to have difficulty applying the predominant purpose test in trickier cases. (57) In addition, other courts have used entirely different tests. (58) One test is referred to as the gravamen test, which examines whether the dispute between the parties arose based on the goods or services component of the transaction. (59) Another way courts have solved the mixed transaction problem is by separately applying the U.C.C. to the goods portion of the contract and applying common law to the services portion of the contract. (60) In doing so, it no longer matters what the primary purpose of the contract is; the court can apply the U.C.C. to a dispute even...

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