The Uniform Commercial Code: Does It Apply to Construction Contracts and Why Does It Matter? The Uniform Commercial Code: Does It Apply to Construction Contracts and Why Does It Matter?

The Uniform Commercial Code: Does It Apply to Construction Contracts and Why Does It Matter?

The Uniform Commercial Code (UCC) is a unified set of statutes designed to harmonize state laws governing commercial transactions. Every state has either adopted the UCC or some variation of it. Section 2 of the UCC applies to sales of goods, and courts have applied it to some construction-related contracts. The application of the UCC has significant ramifications, so you should be cognizant of when it applies and how it could impact your legal position.
 
Does the UCC Apply?
 
The UCC applies to sales of goods, which are defined by Indiana law as “all things (including specially manufactured goods) which are movable at the time of identification to the contract for sale.” Ind. Code § 26–1–2–105. Identification occurs “when the contract is made if it is for the sale of goods already existing and identified” or “if the contract is for the sale of future goods, ... when goods are shipped, marked or otherwise designated by the seller as goods to which the contract refers.” Ind. Code § 26–1–2–501.
 
Many contracts, especially construction-related agreements, are not solely for goods; instead, they involve a mix of both goods and services. Indiana applies the “predominant thrust test” when determining whether such contracts are subject to the UCC. “Under the predominant thrust test, the applicability of the UCC to a mixed transaction is determined by considering whether the transaction's ‘predominant factor, [its] thrust, [its] purpose, reasonably stated, is the rendition of service, with goods incidentally involved ... or is a transaction of sale, with labor incidentally involved....’ ” Insul–Mark Midwest, Inc. v. Modern Materials, Inc., 612 N.E.2d 550, 553–54 (Ind.1993).
 
Indiana courts examine three factors to determine whether the sale of goods is the predominant thrust and, therefore, the UCC applies. First, courts look “to the language of the contract ... in light of the situation of the parties and the surrounding circumstances.” Id. In this regard, courts review “the terms describing the performance required of the parties, and the words used to describe the relationship between the parties.” Id. Second, courts look “[b]eyond the contractual terms themselves ... to the circumstances of the parties, and the primary reason they entered into the contract.” Id. at 555. In doing so, they consider “the final product the purchaser bargained to receive, and whether it may be described as a good or a service.” Id. Third, courts examine “the costs involved for the goods and services, and whether the purchaser was charged only for a good, or a price based on both goods and services. If the cost of the goods is but a small portion of the overall contract price, such [a] fact would increase the likelihood that the services portion predominates.” Id.
 
A few examples are illuminating. In Baker v. Compton, a contractor agreed to sell and install furnaces, air conditioners, and water heaters in a building. 455 N.E.2d 382, 385 (Ind. Ct. App. 1983). The court, after noting this was a mixed contract, noted “the presence of design or engineering services, rather than mere installation services, may tip the thrust of the contract toward the services side.” Id. at 386. Finding no such services in this matter, the court focused on the fact that the cost of the equipment represented the majority of the total contract price. Id. at 386. Overall, the court concluded the UCC applied, because the “contract was primarily for the sale of equipment and the installation services, though not unimportant, were incidental to that sale.” Id. at 387.
 
A different conclusion was reached in Peltz Const. Co. v. Dunham, 436 N.E.2d 892 (Ind. Ct. App. 1982). In this case, a contractor supplied and installed waterproofing for a homeowner. Id. at 893. The court determined that, while the contractor provided pipes and tiles, this was primarily a services contract, and thus, the UCC did not apply. Id. at 894. See also Stephenson v. Frazier, 399 N.E.2d 794 (Ind. Ct. App. 1980) (construction and installation of a septic system and foundation for a modular home did not constitute a sale of goods).
 
Various cases across the country have addressed whether the UCC applies to a construction-related contract. The determinations are very fact specific. The UCC was found to apply in the following cases: Wagner-Meinert, Inc. v. EDA Controls Corp., 444 F. Supp. 2d 800 (N.D. Ohio 2006) (design and installation of refrigeration system); Cober v. Corle, 610 A.2d 1036 (Pa. Super. 1992) (pre-fabricated metal building); Mennonite Deaconess Home & Hospital, Inc. v. Gates Engineering Co., 363 N.W.2d 155 (Neb. 1985) (roofing system); Meeker v. Hamilton Grain Elevator Co., 442 N.E.2d 921, 923 (Ill. App. 1982) (provision and installation of grain bins). The UCC was found to not apply in these cases: Frommert v. Bobson Construction Co., 558 N.W.2d 239 (Mich. App. 1997) (replacement of roofing system); Quality Guaranteed Roofing, Inc. v. Hoffmann-La Roche, Inc., 302 N.J. Super. 163, 694 A.2d 1077, 32 U.C.C. Rep. Serv. 2d 1072 (App. Div. 1997) (roofing system); Hunter's Run Stables, Inc. v. Triple H Const. Co., Inc., 938 F. Supp. 166 (W.D. N.Y. 1996) (horse barn).
 
Why it matters
 
There are a number of significant differences between a contract governed by the UCC and a typical construction contract governed by common law. One of the most significant differences is the applicable statute of limitations. In contracts governed by the UCC, the statute of limitations for breach of warranty runs four years from the delivery of the goods. See Ind. Code § 26-1-2-725. In non-UCC construction contracts, the statute of limitations for breach of a written contract or warranty runs ten years from the date the breach is discovered, unless the contract provides otherwise.
 
The outcomes of cases have hinged on this difference. In Ogden Martin Sys. of Indianapolis, Inc. v. Whiting Corp., a contractor supplied and installed two 13-ton cranes to handle solid waste. 179 F.3d 523, 525 (7th Cir. 1999) (applying Indiana law). It delivered the cranes and completed its work in 1988. Id. at 525. An accident occurred in July 1991, and at that time, the owner realized there were problems with the crane. Id. However, the owner did not file its lawsuit against the contractor until June 1997, more than four years since delivery but less than ten years since it discovered the problems. Id. Thus, if the UCC applied, its lawsuit was time barred, but if not, it could proceed.
 
After considering the factors related to the predominant thrust test, the court determined the UCC applied, and thus, dismissal of the complaint was proper. Id. In reaching this conclusion, the court noted the agreement between the parties referred to the owner as “purchaser” and the contractor as “seller,” several paragraphs in the agreement modified provisions within the UCC, and 90% of the total price had to be paid prior to the delivery of the cranes. Id. at 529-31.
 
The UCC differs from the common law in a number of other important respects. Among other things, the UCC provides an implied warranty of merchantability and an implied warranty of fitness for a particular purpose applies to goods. See Ind. Code § 26-1-2-314 and 315. These implied warranties can be disclaimed, but such disclaimers must be in writing and must be conspicuous. See Ind. Code § 26-1-2-316. Also, if a buyer accepts goods with knowledge of their nonconformity with the contract, then the buyer cannot revoke acceptance unless the buyer reasonably assumed the nonconformity would be remedied. See Ind. Code § 26-1-2-607. In addition, if a buyer discovers a breach, it must notify the seller within a reasonable time or “be barred from any remedy.” See id.
 
Conclusion
 
The application of the UCC to a construction-related contract can significantly impact your rights and remedies. In particular, its statute of limitations is much shorter than the statute of limitations for breach of a written contract with which most are used to working when disputes arise. When the provision of goods represents a significant portion of a contract, you should consider whether the UCC applies and how its application could affect you.
 
Gary Dankert and Nate Uhl are attorneys with Ice Miller LLP. Ice Miller's construction practice (www.icemiller.com/construction/) is ranked as a National Tier 1 Practice in U.S. News & World Reports' Best Law Firms. Dankert and Uhl practice construction law with a focus on assisting clients in preparing and negotiating construction and design contracts as well as handling construction disputes. Dankert can be reached at gary.dankert@icemiller.com or (317) 236-2203, and Uhl can be reached at nate.uhl@icemiller.com or (317) 236-2383.
 
This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader must consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances.
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