Opinion ID: 2157724
Heading Depth: 1
Heading Rank: 3

Heading: Applicability of the U.C.C.

Text: The Sales chapter of the Indiana U.C.C., Ind. Code § 26-1-2, applies to transactions in goods, unless the context otherwise requires. Ind. Code Ann. § 26-1-2-102 (West Supp. 1992). The code defines goods as all things (including specially manufactured goods) which are movable at the time of identification to the contract for sale. Ind. Code Ann. § 26-1-2-105(1) (West Supp. 1992). An agreement solely for the performance of services is not subject to the sales provisions of the U.C.C. Wells v. 10-X Mfg. Co., 609 F.2d 248 (6th Cir.1979). Many modern commercial transactions cannot be classified as transactions purely for goods or for services, but are mixed, involving both goods and services. E.g., Bonebrake v. Cox, 499 F.2d 951, 960 (8th Cir.1974) (cases involving non-divisible mixed contracts are legion). The coating transactions in this case between Kor-It [5] and Modern Materials are indeed mixed, involving both goods (the coating material) and services (the application of coating). Kor-It did not purchase the coating material directly from Modern Materials, but provided Modern Materials its screws for application of coating (a service). Given that the transaction is mixed, we must determine whether it falls within the U.C.C., or falls outside of the code and is thus governed by the common law. The Indiana Court of Appeals has formulated and applied tests for determining the applicability of the U.C.C. to mixed transactions. In Baker v. Compton (1983), Ind. App., 455 N.E.2d 382, the Second District adopted the predominant thrust test. The Third District also applied the predominant thrust test in this case to conclude that the code does not apply to the transactions between Kor-It and Modern Materials because the thrust of the transactions was predominately for services. Insul-Mark, 594 N.E.2d at 462. Under the predominant thrust test, the applicability of the U.C.C. 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 (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). Bonebrake, 499 F.2d at 960 (footnotes omitted). In contrast, the Fourth District has adopted a bifurcation approach for determining the applicability of the U.C.C. in mixed transactions. Data Processing Serv. v. L.H. Smith Oil Corp. (1986), Ind. App., 492 N.E.2d 314, 318, on rehearing, 493 N.E.2d 1272; Stephenson v. Frazier (1980), Ind. App., 399 N.E.2d 794. Under that approach, the portion of a transaction involving goods is governed by code principles, while those parts relating to the provision of services are controlled by the common law. Id. at 797. We conclude that the predominant thrust test is the best and most workable approach for determining the applicability of the U.C.C. to mixed transactions. [6] Under the predominate thrust test, courts look to the agreement between the parties to determine their understanding about the predominant purpose of the contract. In focusing on the goals of the contracting parties, the predominant thrust approach preserves parties' expectations regarding their agreement. The bifurcation approach seems less sensitive to parties' expectations. Rather, the effect of such approach is to break an agreement into two contracts, with one governed by the U.C.C. and one by the common law. Such an outcome in some cases might drastically alter the legal effect of the agreement as intended by the parties. See Gerald L. Bepko, VI. Contracts, Commercial Law, and Consumer Law, 14 Ind.L.Rev. 223, 224 (1981). Dean (now Chancellor) Bepko suggests that bifurcation could lead to difficulties when the substantive issue at trial is not related to performance, but is related to the enforceability of the agreement. Id. For example, when the issue is the Statute of Frauds, bifurcating an oral goods/services contract might lead to enforcement of only the services portion of the contract, with the goods portion held unenforceable. Id. Such a result would defeat the intentions of parties who sought to create a unitary contract. Id. Moreover, the bifurcation test would be difficult to apply in cases where the goods and service components of a transaction are essentially intertwined. Id. Bifurcation would be unworkable where an agreement is not easily divisible, or where the problem with the transaction is not easily traced to solely the goods or services portion. [7] To determine whether the predominant thrust of a mixed contract is to provide services or goods, one first looks to the language of the contract, see Wells, 609 F.2d at 255, in light of the situation of the parties and the surrounding circumstances. Standard Structural Steel Co. v. Debron Corp., 515 F. Supp. 803, 808 (D.Conn. 1980), aff'd, 657 F.2d 265 (2d Cir.1981). Specifically, one looks to the terms describing the performance required of the parties, and the words used to describe the relationship between the parties. See id. at 808-10. Beyond the contractual terms themselves, one looks to the circumstances of the parties, and the primary reason they entered into the contract. See Bonebrake, 499 F.2d at 957 (primary purpose of mixed contract was to replace goods). One also considers the final product the purchaser bargained to receive, and whether it may be described as a good or a service. Finally, one examines 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 fact would increase the likelihood that the services portion predominates. See Baker, 455 N.E.2d at 386.