Contracts for Services Vs. for the Sale of Goods
by Kylie Barfield
April 15, 2022
Contracts for Services vs. Contracts for the Sale of Goods: What’s the Difference?
Different laws govern contracts for services and contracts for the sale of goods. While some statutes apply to particular portions of a contract for services, common law principles (i.e., case law, not statute) govern contracts for services. In contrast, Article 2 of the Uniform Commercial Code (“UCC”) governs contracts for the sale of goods. Article 2 defines “goods” to mean all things (including specially manufactured goods) which are movable at the time of identification to the contract for sale. Tex. Bus. & Com. Code § 2.105. For example, the UCC would govern a contract under which a lumber supplier agrees to provide the lumber used by the framer in framing a building. The contract for the labor to frame the structure, on the other hand, would be a contract for services that is mostly governed by case law and not the UCC.
Mixed Goods-Services Contracts: The Predominant Purpose Test
Construction transactions often involve a hybrid of goods and services. So, when a contract requires a party to furnish goods and services, which set of laws apply? Determining which set of laws apply requires an analysis of whether the predominant purpose of the transaction is for services or for the sale of goods.
Courts implement the “predominant purpose test” (also known as the “dominant factor test”) to determine whether common law or the UCC applies to mixed goods-services contracts. Under the “predominant purpose test,” the applicability of either common law or the UCC hinges on whether the predominant purpose of the transaction requires either (1) the performance of services with goods incidentally involved; or (2) the sale of goods with labor incidentally involved.
When legal disputes arise as to whether the UCC or common law applies to a contract, Texas Courts have implemented the “predominant purpose test” under two styles of analysis. First, some Texas Courts have looked at the actual nature of the dispute to determine which aspect of the transaction the issue most closely pertains. Montgomery Ward & Co. v. Dalton, 665 S.W.2d 507, 511 (Tex. App.—El Paso 1983). In other words, is the dispute more about the good or more about the labor? Under this style of analysis, the language in the pleadings often dictates the applicable law. In other cases, Texas Courts have relied on the language of the contract itself and have not looked to the nature of the dispute to determine whether the UCC applies. Freeman v. Shannon Constr., Inc., 560 S.W.2d 732, 737 (Tex. Civ. App.—Amarillo 1977). Under this alternant analysis, Texas Courts have looked at the transaction as a whole and the wording of the contract to determine if the essence of the contract is furnishing of services or supplying of goods.
Navigating Mixed Goods-Services Contracts
While the analysis may be far from black-and-white, it is important to know when to utilize contracts for services and contracts for the sale of goods. These two forms of agreements can be, and should be, vastly different. For example, if a services form agreement is used for a sale of goods transaction, the warranty provision may not comply with the UCC and may be deemed void. Unintended results such as this can be the harsh consequence of not utilizing the correct form of agreement. Construction professionals must consider whether the essence of the transaction is for services or the sale of goods when determining which type of contract to implement. Alternatively, to avoid the harsh results of using the wrong form of contract, construction professionals may consider separating the transaction into different agreements, one covering the services and the other covering the sale of goods. Understanding the differences between contracts for the sale of goods and contracts for the labor is critical whether you are the purchaser or seller in the transaction.
To discuss how these contract laws could impact your business, please consult with one of our transactional lawyers at (972) 392-8900.