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By: Doug P. Holthus and Eric M. Coglianese
With increasing frequency, commercial and residential construction projects incorporate modularized or “pre-fab” construction products. Prefabricated modules (smaller components designed to be incorporated into a larger structure, e.g., wall sections, roof sections, floor slab sections) are typically manufactured at some off-site facility and later delivered to the Project site and incorporated into the Project.
While the use of prefabricated components may have benefits (e.g., accelerated project schedules), the process is not a fail-safe. Whereas in a common situation a general contractor typically has the opportunity to oversee the entire construction process, presumably making certain the Project is built according the Project plans, drawings, specifications and applicable industry standards; however when prefabricated components are called for, the general contractor may receive components which either are defective, damaged or not otherwise in conformity with the Project plans, drawings, specifications and applicable industry standards.
Given the nature of prefabricated building components, there is much debate (and no clear guidance) regarding whether the UCC or common law governs situations when claims arise related to such prefabricated components. When a contract concerns “services” – as in a typical construction Project setting – common law generally governs the parties’ responsibilities. However, such prefabricated components may well instead be characterized as “goods” rather than services, and when a contract is one for the sale of goods, Article 2 of the Uniform Commercial Code (UCC) applies. Typically, courts apply the “predominant factor” test to determine governing law, yet the question of whether prefabricated components are goods or services does not appear to have yet been definitively answered by courts around the country.
Whether common law or the UCC applies to claims involving prefabricated building components may become a critical distinction. Under common law, a party to a contract does not materially breach if there is “substantial performance” of its obligations. But under the UCC, the goods or tender of delivery must conform to the obligations precisely lest a party may, among other options, be permitted to reject the goods.
Cases involving contracts related to mobile home and modular home construction suggest a possible application of the UCC in such situations. See, e.g. Clark v. Jim Waters Homes, Inc., 719 F.Supp. 1037, 1044 (11th Cir.1989.) While courts generally have held that completed, prefabricated housing units built to a buyer’s specifications fall within the definition of moveable goods under the UCC, even when the contract requires the manufacturer to arrange for the units’ delivery, foundation setting and finish work (see e.g. Ritz-Craft Corp. v. Stanford Mgmt. Grp., 800 F. Supp. 1312, 1317 (D. Md. 1992)), in such instances, the contract’s sale function was held to predominate. Id. While most courts appear not to have yet considered whether prefabricated individual components are to be deemed goods under the UCC, case law regarding modular home construction suggests contracts for the manufacture and installation of prefabricated components could fall under the UCC.
If courts elect to apply the predominant factor test, prefabricated components may be treated differently based upon the language of a particular subcontract. If the agreement describes the subcontractor as a “manufacturer,” the prefabricated components could be viewed as goods. On the other hand, if described as a “subcontractor,” the assembly “service” analysis may predominate.
Because it appears most courts have not yet definitively weighed in, contractors may wish to revisit the language of their agreements to address such concerns.
For more information on this topic, contact Doug Holthus or your local FMG attorney.