A construction contract is generally defined as an agreement between a builder and an owner for the construction or improvement of a building, structure, or other infrastructure. Because the work under a construction contract is primarily for the provision of services (building something at the owner’s project site), construction contracts are typically governed by common law. Common law is the body of law based on judicial decisions by courts in the applicable state, whether the project location or governing state law as defined in the parties’ contract.
But what if the construction is completed off-site, away from the project, and intended to be delivered to the project site and then installed? In this scenario, the constructed item is movable, and possibly subject to Article 2 of the Uniform Commercial Code (“UCC”), which is different from common law. Under the UCC, the item—a “good”—need only be movable at the time of identification to the contract. That an item is subsequently attached to or installed in a larger facility is irrelevant under the UCC so long as the item was movable at the time of identification.
This type of movable construction is becoming more prevalent as the construction industry continues to utilize modular construction. Modular construction involves the manufacturing and fabrication of standardized components of a structure in an off-site, controlled environment. Once those components are fabricated, they are then transported to the project site and installed. There are numerous advantages to modular construction including better quality control, assembly line manufacturing efficiencies, and centralized labor forces.
When the construction contract concerns a “good” like those used in modular construction there are certain legal consequences caused by the UCC that would otherwise not arise under common law. This article will first briefly explain when a construction contract is subject to the UCC and then examine two specific legal issues resulting from the UCC that differ from common law: (1) contract formation and (2) implied warranties. The legal issues addressed in this article are not an exhaustive list of the different legal issues and outcomes resulting from construction contracts governed by the UCC versus those governed by common law.
When is a construction contract governed by the UCC?
As referenced above, the UCC defines “goods” as something that is both tangible and movable at the time of the transaction. But that is not the end of the analysis for whether a contract is governed by the UCC. A construction contract—as the name implies—includes services to construct said good, and in many instances, also install it. And when considering specialty manufactured goods, there is often design and engineering to be completed prior to constructing the good. So how do courts distinguish between the services to construct (and sometimes install) the good from the good itself?
In these cases where services are part of the construction contract for a good, courts classify the contract as “mixed” and apply a “predominant purpose” test to determine whether the UCC governs the contract. This test weighs whether the purpose of the contract is primarily the rendition of services, with goods incidentally involved or is a transaction for a sale of goods, with labor incidentally involved. Courts consider several factors in determining a contract’s predominant purpose, including, (1) the language and structure of the contract, (2) the way in which the parties themselves characterize the contract, (3) the relative value of the goods and services, (4) the business of the seller, and (5) whether the sale of goods is a prerequisite to or the motivation for the provision of services (or vice versa).
Why does this matter? It matters because these factors can sometimes lead to surprising results that impact available remedies if there is a dispute. For example, in Ctr. Ice v. Burley’s Rink Supply, a contract between an owner and “contractor” to install two ice skating rinks was found to be for the sale of goods.[1] In that case, numerous sections of the contract indicated it was for a sale of goods when applying may of the factors noted above. The contract specifically referenced the delivery of the equipment, assigned the risk of loss to the owner upon acceptance of the material, that legal title to the items would be retained by the contractor until payment was made, and if there was a default, the contractor could retake the “goods.” Similar terms are often found in construction contracts for modular construction.
Forming a Contract under the UCC
Under common law, contract formation is governed by the ‘mirror image’ rule. The ‘mirror image’ rule requires that one party makes an offer, and the other party accepts every single term of that offer to form a contract. If the terms of acceptance do not match the exact, precise terms of the offer, it is not acceptance because the terms were not a ‘mirror image.’ The differing acceptance is, therefore, only a counteroffer. This ‘battle of forms’ between offer and acceptance under common law can sometimes mean that no enforceable contract was ever formed.
The UCC makes it easier to create a binding contract and courts will enforce an agreement governed by the UCC despite discrepancies between a written offer and acceptance. The UCC abandons the requirement that acceptance must ‘mirror’ or precisely match the offer to result in a binding contract. Any expression of acceptance, even if it states terms additional to or different from those agreed upon, constitutes acceptance. Further, these additional terms become enforceable terms of the contract. However, additional terms are not enforceable if the offer expressly limits acceptance to the terms of the offer, if the additional terms materially alter the contract, or if a party objects to the additional terms within a reasonable time.
Ultimately, the UCC accommodates the practicalities of commercial negotiations and seeks to find an agreement in a less rigid manner than the common law ‘mirror image’ rule. Each state has its own body of law addressing the circumstances of contract formation and the applicable terms agreed-to for contracts formed under the UCC.
Implied Warranties under the UCC
Under a typical construction contract governed by common law, contractors regularly provide a warranty to cover the contractor’s workmanship that lasts for one-year after substantial completion of the project. Construction contracts governed by the common law are generally not subject to implied warranties except for the rule that contractors perform services in a good and workmanlike manner.
Construction contracts governed by the UCC, however, will have additional implied warranties that are set forth in the UCC’s Article 2. Under the UCC, a seller provides an express warranty by any affirmation or promise to the buyer which relates to the capabilities or use of the goods and becomes part of the basis of the bargain creating a warranty that the goods will conform to the affirmation or promise. Moreover, under the UCC, there are also implied warranties. One of these is an implied warranty of merchantability, which is a warranty the goods will be fit for ordinary use and their intended purpose.
One outcome for characterizing a mixed good, like in modular construction, as one for the sale of goods is parties may sue for breach of the implied warranty under the UCC, a defensive remedy when a party delivers non-conforming goods. Under common law, courts have barred owners from asserting implied warranty claims when a contractor’s faulty design, installation work, or fabrication was of no use for its ordinary, intended purpose.
However, with some exceptions, parties can modify or disclaim warranties under the UCC and common law. In some states, like Texas, the common law implied warranty of good workmanship, focusing on the builder’s conduct, cannot be disclaimed. But the UCC allows for the disclaimer of the implied warranty of merchantability if the exclusion is in writing and conspicuous. The UCC implied warranty of merchantability can also be excluded through the course of dealing or the buyer’s examination of the goods before entering the contract where any defects would have been revealed.
Conclusion
A construction contract governed by the UCC can lead to different legal outcomes than a contract governed by common law based on an otherwise identical set of facts. As a result, contractors should recognize if they are potentially dealing for a “good” versus “services” so they know from the outset what set of rules will determine the rights and obligations under their construction contracts.
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[1] Ctr. Ice v. Burley’s Rink Supply, 1997 U.S. Dist. LEXIS 768 (N.D. Ill. Jan. 21, 1997).