Automotive supply contracts usually involve either the sale of goods or the provision of services. For that reason, determining what law applies to such contracts is often pretty simple — the Uniform Commercial Code (UCC) applies to contracts for the sale of goods, and common law applies to service contracts for the provision of services, such as engineering services or coating parts provided by the customer. Recently, however, the automotive industry has seen a rise in the formation of “hybrid” contracts — where suppliers provide both goods and services to their customers. In these situations, determining what law applies can get more complicated.
Unlike traditional supply contracts, there is no particular subset of laws that apply to hybrid contracts. This complicates what is otherwise typically a straightforward determination and can potentially lead to unanticipated results. To determine what subset of laws apply to your hybrid contract, you will need to assess whether the contract’s primary purpose is for the sale of goods (i.e., falling under the scope of the UCC) or for the provision of services (i.e., governed by common law). This analysis is commonly known as the “predominant purpose” test.
Various factors play a role in determining whether a contract is for services or for goods, such as: the language of the contract, the nature of the goods and services involved, and the relative value of the goods and services. The Michigan Court of Appeals in Challenge MFG Company, LLC v. MetoKote Corporation recently identified the following factors as evidence that the services aspect of the contract dominated and that common law therefore applied:
- The buyer was not concerned with the ingredients used by the supplier. Instead, the buyer was concerned with whether the parts met the specifications of its original equipment manufacturer customer.
- When investigating potential suppliers, the buyer was primarily concerned with price and location.
- The supplier did not make alterations on the basis of the buyer’s specifications.
- The supplier’s performance involved an extensive multi-step process.
- The pricing was calculated per part.
- The parties’ contract did not include separate charges for materials and labor.
These factors will likely continue to guide Michigan courts when determining whether a supply contract is one for goods under the UCC or for services under the common law. It is worth noting, however, that the predominant purpose test is not a hard and fast rule. Indeed, in some cases, courts may find that a contract has dual purposes – meaning that it involves both the sale of goods and the provision of services. In these cases, the UCC and the common law may both apply, depending on the specific issues involved.
If you find yourself a party to a hybrid contract, it is essential to understand the legal principles that apply to ensure that your rights and obligations are properly protected. Warner attorneys regularly counsel suppliers on these issues and are experienced in drafting supply contracts that protect our clients’ options and interests. If you have questions or concerns related to this or any other supply chain issue, please contact Ashley Racette or your Warner Automotive Industry Group attorney.
