Authored By: Kenneth Neuman and Matthew Smith
Does a contract provide for the sale of goods or for the provision of services? This is, of course, the threshold question attorneys are faced with in determining whether their client’s contract dispute is governed by common law or the strictures of Article 2 of Michigan’s Uniform Commercial Code. For decades, Michigan law has followed the “predominant purpose test,” adopted by the Michigan Supreme Court in Neibarger v Univ Coop, Inc, 439 Mich 512 (1992). But even with this guidance, room for debate exists concerning what is, in fact, the predominant purpose of a blended or “mixed” contract – the sale of goods or provision of services? A recent example resides in the Michigan Court of Appeals January 26, 2023, for-publication, per curiam opinion in Challenge Mfg Co, LLC v Metokote Corp.
Challenge Mfg Co, LLC, entered into a life-of-part contract with MetoKote Corp., to provide an anti-corrosion “e-coating” for a structural component sold by Challenge in the automotive supply chain to General Motors. This arrangement involved Challenge shipping raw parts to MetoKote, which were then “e-coated” by MetoKote and shipped back to Challenge. The e-coating process was extensive and involved the application of an “e-coating” material supplied by MetoKote’s parent company. After a pricing dispute arose, Challenge filed a complaint for breach of contract against MetoKote, contending the parties’ contract was governed by the UCC. Thereafter, Challenge issued a revised purchase order “under protest,” in which it agreedto pay MetoKote its increased pricing-demand. MetoKote disputed that the UCC governed the parties’ contract, asserting it was predominantly a contract for services rather than for the sale of goods. Ultimately, the trial court granted Challenge summary disposition under MCR 2.116(C)(10), finding that the parties’ contract was predominantly for the sale of goods governed by Michigan’s UCC. MetoKote appealed.
In its per curiam and for-publication opinion, the Michigan Court of Appeals reversed the trial court’s finding that the parties’ contract was governed by the UCC. Applying the predominant-purpose framework set forth in Neibarger, the Court held that, “[a]lthough the e-coating material itself may be characterized as constituting a good, it was incidental to the larger service MetoKote supplied, its application.” Relying on the Indiana Supreme Court’s opinion in Insul-Mark Midwest, Inc v Modern Materials, Inc, 612 NE2d 550 (Ind. 1993), the Court reasoned that “Challenge was not concerned with the ingredients used in the coating or the coating process, as long as the coatings met GM’s specifications.” Furthermore, “MetoKote only had one type of e-coat material, which was provided by [its parent company],” and “MetoKote did not formulate the material or alter that material on the basis of customer specifications.” In addition, “[t]here were not separate charges for the material and labor,” provided by MetoKote.
In concluding that MetoKote’s e-coating was predominantly a service, the Court distinguished its December 27, 2012 unpublished opinion in PFG Enterprises v Dep’t of Treasury, (Docket No. 305948). That case dealt with a dispute over the characterization of an automotive supplier’s coating products and services for tax purposes. In that case, the Michigan Court of Appeals had reached a seemingly opposite result, holding that “plaintiff’s application services were incidental to the sales of its proprietary coatings.” In declining to follow its holding in PFG Enterprises, the Court found this case to be “distinguishable because the plaintiff in that case produced ‘proprietary coatings,’ and those unique coatings were sought by its customers.” This was unlike MetoKote’s “e-coating” because, “the evidence indicates that Challenge did not seek a unique coating by MetoKote, but instead simply sought a coating that would satisfy its other contractual obligations.” The reasoning in Challenge Mfg. Co. may prove more useful to Michigan litigators than its express holding. In addition to its consideration of the parties’ contract, Challenge Mfg. Co. reveals that a focus of the predominant purpose inquiry includes consideration of the parties’ motivations and needs in entering into a blended contract for goods and services. Further, the Court’s emphasis on whether the materials utilized in performing a service were proprietary and specifically sought out by the purchaser sheds light beyond its express holding concerning coating services.