Tuesday, March 25, 2014

Determining Predominate Purpose in Multiple Transaction Dealings

Its the time of the year for the ABA's Sales Survey that will come out by August.  Each year, there are noteworthy cases involving the scope of Article 2.  Deciding whether Article 2 of the U.C.C. applies, of course, rests on whether the transaction involves a sale of goods under 2-105.  In many cases this determination is pretty straightforward, but is complicated when there the transaction is one with mixed goods and services.  In such cases, most courts employ the predominate purpose test to see whether the goods or services aspect of the transaction eclipses the other.  See, Predominate Purpose Test Still Predominates.  This inquiry is more complicated, though, when the dealings of the parties involves multiple transactions.

Such was the case in Whitecap Investment Corp. v. Putnam Lumber & Export Company,  where the District Court for the Virgin Islands considered whether certain transactions involving lumber were sales of goods.   Great Southern Wood Preserving, Inc. (“GSWP”) and Putnam Lumber & Export Company (“Putnam”) contracted for the treatment of lumber by GSWP, which Putnam would resell to others, including Whitecap Investment Corp. (“Whitecap”).   As there was no overriding contract, GSWP and Putnam would enter into each transaction independently, with GSWP providing treatment services only in nearly all cases.  Putnam would purchase wood and provide it to GSWP for treatment in accord with the customer’s specifications.  In some transactions, GSWP would also sell to Putnam its own lumber, treated according to industry specifications.   Following a dispute over the premature decay of the lumber, Whitecap filed suit against Putnam for breach of contract and breach of warranty, and Putnam filed a cross–claim against GSWP for indemnity and contribution.   On GSWP’s motion for summary judgment, it argued that it was entitled to summary judgment on any breach of warranty claim that arose under Article 2 because GSWP claimed it sold no goods to Putnam.   The court denied the motion, holding that since the parties did not have one overriding agreement, the court would need to examine each transaction separately to determine if the sale of goods predominated.    As some of the contracts did involve the sale of lumber governed by Article 2, summary judgment was improper.

The lesson of this case is that the structuring of the parties overall arrangement can make a difference in coverage by Article 2 in mixed goods/sales transactions.  Surely, those transactions that involved only sales of treated lumber would be sales of goods for purposes of Article 2.  It would seem on the facts at summary judgment that the other transactions that involved lumber treatment only would not be transactions in goods under Article 2.  Viewing the transactions independently is more time consuming from a fact perspective and may lead to a different outcome on than if the parties had one overriding contract under which there were isolated sales, but predominantly treatment services contemplated and delivered by the provider. 


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