Hybrid Transactions
Prof. Bill Long 1/25/05
At the end of class on 1/20, I introduced the problem of "hybrid transactions and to what extent they are covered under Article 2. As you will recall, a hybrid transaction is one in which there are both goods and services provided to a person. In such a case it is essential to know how your jurisdiction treats this problem so that you know under which theory to sue if your client has been harmed. Hybrid transactions are all around us. When a dentist replaces a tooth, an ophthalmologist examines your eyes and fits you with contacts, a roofer replaces your roof, a rug person installs a rug, a heating person installs a water heater....all of these transactions partake both of goods and services. Does Article 2 apply to them? I think the best way to introduce the issue is to present a fairly recent case that discusses the issue.
Pass v. Shelby
This 2000 case from the Tennessee Court of Appeals (avaialble online), concerned a suit brought by plaintiffs who were executors of the estate of a husband and wife killed in a private airplane crash over Alabama. Defendant was a company that services aircraft. The estate sued the company on a theory of breach of warranty (an Article 2 issue), arguing that the parts replaced by Shelby in an inspection a few months before the crash (Shelby replaced some fittings by the wings--"rear wing attach point brackets") gave out, thus causing the crash. The trial court refused to grant Shelby's MSJ. The Ct of Appeals considered an interlocutory appeal and reversed on the theory that the predominant purpose of Shelby's work for Mr. and Mrs. Pass was services and not goods. In its opinion, the court had to review the law of hybrid transactions.
The Law of Hybrid Transactions
I will lift the analysis from the court's opinion (with my emphasis). "Article 2 of the Uniform Commercial Code, adopted by Tennessee, governs the sale of goods. Many contracts, however, like the one at bar, involve a mixture of both goods and services. The problem in such "mixed" transactions is to determine whether Article 2 governs the contract. Most jurisdictions follow one of two different approaches to address the problem. Neibarger v. Universal Cooperatives, Inc., 486 N.W.2d 612, 622 (Mich.1992). The first approach, sometimes called the "gravamen test," looks to that portion of the transaction upon which the complaint is based, to determine if it involved goods or services. In re Trailer and Plumbing Supplies, 578 A.2d 343, 345 (N.H.1990); Anthony Pools v. Sheenan, 455 A.2d 434, 441 (Md.1983). The other approach, known as the "predominant factor" or "predominant purpose test," looks at the transaction as a whole to determine whether its predominant purpose was the sale of goods or the provision of a service. Insul-Mark Midwest, Inc. v. Modern Materials, Inc., 612 N.E.2d 550, 554 (Ind.1993). In Hudson v. Town and Country True Value Hardware, 666 S.W.2d 51 (Tenn.Ct.App.1984), a mixed transaction involving a contract for the sale of both goods and real estate, Tennessee elected to follow the predominant factor approach, finding it "preferable to adopt a test that views the transaction as a whole." Id. at 54.
"The predominant factor test, as applied to a mixed transaction of goods and services, was described by the Eighth Circuit Court of Appeals in Bonebrake v. Cox, 499 F.2d 951 (8th Cir.1974): The test for inclusion or exclusion [in the U.C.C.] is not whether they [contracts] are mixed, but granting that they are mixed, whether their predominant factor, their thrust, their purpose, reasonably stated, is the rendition of services 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). Id. at 960."
The "Tests" of the Predominant Factor Test
After defining the two tests, and declaring which test the jurisdiction adopts, the court then went on to declare how you determined the "predominance" of goods or services. What do you examine? The court said, "We examine the language of the parties' contract, the nature of the business of the supplier of goods and services, the reason the parties entered into the contract (i.e., what each bargained to receive), and the respective amounts charged under the contract for goods and for services." None of the factors alone is dispositive, and the party seeking the application of the UCC bears the burden of proof to show that the predominant purpose is actually the sale of goods. In this case, the court determined that services were the predominant factor in Shelby's work for Pass. Since it is an "all or nothing" transaction, the predominant purpose was services. Thus, the transaction was taken out of Article 2.
What if the Gravamen Test was Used?
If Tennessee had adoped the gravamen test, the results might have been different. Recall that the gravamen test focuses on the nature of the complaint that would be brought. If after an investigation the results showed that it was the failure of a particular part of the plane that was installed by Shelby, and not the failure of installation, the claim would be against the manufacturer of the part and Shelby for breach of warranty under Article 2. That is, in this case, the gravamen test might have provided an additional cause of action.
Conclusion
For purposes of this class, I want you to know the difference between the two tests and the factors considered when you are in a "predominant factor" jurisdiction.
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