Micro-Managers, Inc. v. Gregory

• Decision Date: 10 November 1988
• Docket Number: MICRO-MANAGER,No. 87-1506,INC,87-1506
• Citation: 434 N.W.2d 97,147 Wis.2d 500
• Parties: , 7 UCC Rep.Serv.2d 1375 , A Wisconsin Corporation, Plaintiff-Respondent, v. Stanley Oren GREGORY, Defendant-Appellant, Terry Coleman, Defendant.
• Court: Wisconsin Court of Appeals

Page 97

434 N.W.2d 97

147 Wis.2d 500, 7 UCC Rep.Serv.2d 1375

MICRO-MANAGERS, INC., A Wisconsin Corporation, Plaintiff-Respondent, v. Stanley Oren GREGORY, Defendant-Appellant Terry Coleman, Defendant.

No. 87-1506.

Court of Appeals of Wisconsin.

Submitted on Briefs Aug. 2, 1988.

Opinion Released Nov. 10, 1988.

Opinion Filed Nov. 10, 1988.

[147 Wis.2d 503] Bruce Gillman and Tomlinson, Gillman & Travers, S.C., Madison, for defendant-appellant.

Nicholas J. Seay and Kenneth B. Axe, and Isaksen, Lathrop, Esch, Hart & Clark, Madison, for plaintiff-respondent.

Before DYKMAN, EICH and SUNDBY, JJ.

DYKMAN, Judge.

Stanley Gregory d/b/a Consulting Engineers appeals from a judgment requiring him to pay Micro-Managers, Inc., (MMI) $24,503.68. MMI had sued Gregory for breach of contract after Gregory refused to pay for a computer program he had contracted for and had thereafter sold to a third party. The issues are: (1) whether the contract was a transaction for goods, and thus subject to the Uniform Commercial Code (U.C.C.); (2) whether there was an implied warranty from MMI to Gregory; (3) whether MMI substantially performed the contract; and (4) whether the trial court abused its discretion in denying Gregory's motion to amend his counterclaim. We conclude that: (1) the contract was mainly for services, and that therefore the U.C.C. does not apply; (2) there was no implied warranty; (3) MMI substantially performed the contract; and (4) the trial court did not abuse its discretion by denying Gregory's motion to amend his counterclaim. Therefore we affirm.

FACTS

In the fall of 1982, Oilgear, an industrial manufacturing company in Milwaukee, contracted with Gregory to develop a new programmable controller to replace equipment which Oilgear was using. Gregory contacted Rex Peterson, general manager of MMI, who indicated MMI was interested in designing and developing the software required for the controller. Gregory's technical coordinator, Terry Coleman, met with his counterpart at MMI, Mike Christie to find out whether MMI had the personnel and expertise to design and develop the required software in accordance with Oilgear's specifications. After MMI had prepared certain cost estimates, Gregory told MMI to go ahead with the design and development of the controller software. MMI began work on the project on October 7, 1982.

On October 22, 1982, MMI drafted a letter incorporating what it believed to be the working arrangements between the parties. The letter provided that "all MMI time will be billed by MMI at a rate of $40/hour for software, $50/hour for engineering, and $75/hour for supervision.... Direct expenses will be billed as charged MMI." The letter also provided that MMI was to receive a fifteen percent incentive bonus if it completed the project on an accelerated schedule. The letter further provided that Gregory must give MMI a two-week project termination notice for termination to be effective. The letter ended: "If the terms of this letter meet with your understanding, please sign and return a copy to me no later than October 25, 1982."

On October 25, 1982, Coleman signed the letter, acknowledging receipt of the letter and confirming that the items in the letter had been discussed and agreed upon. During the next two months, the parties agreed to a number of amendments to the agreement. Gregory confirmed all of these changes with Oilgear. In January of 1983, Coleman and MMI agreed that the software was to be completed and ready for final testing by February 1, 1983 for MMI to earn the bonus.

On February 1, the parties from MMI (Sally Peterson, president of MMI, and Mike Christie) were not available. Gregory took the software from MMI but complained that it had not been completed to his satisfaction. However, Gregory did not permit MMI to correct any of the alleged defects in the software, and never communicated any specific objections to MMI regarding the software until legal action began.

Pursuant to the parties' stipulation, the trial court ordered the trial bifurcated because of the complexity of the issues. This was because many of Gregory's counterclaims against MMI would apply only if the parties' contract were one mainly for goods, and thus subject to U.C.C. strictures. ¹ In the first phase, the issue would be whether the contract was governed by the U.C.C., i.e., whether the contract was mainly for services or mainly for goods. Because Gregory's defenses of modification of the contract and failure of consideration would apply even if the contract were mainly for services, the trial court would consider evidence relevant to those issues in the first phase. Only if the trial court determined that the contract was for goods would a second trial be held.

After the first phase, the trial court concluded that the October 22 letter was the contract, that it was mainly for services rather than goods, and that therefore the U.C.C. did not apply. The court also concluded that, although the parties had modified the original contract, this had no effect on Gregory's liability to compensate MMI for all services performed. In addition, the trial court concluded that there was no failure of consideration. This was because the parties' mutual promises, i.e., MMI's promise to use its expertise and skill in the design and development of the controller software and Gregory's promise to pay for these services, were sufficient consideration for each other. The court further concluded that MMI had made no express or implied warranty that the end product of the services agreement would meet certain specifications. The court granted MMI judgment against Gregory for $24,503.68, which represented MMI's unpaid invoices to Gregory plus interest to date of judgment minus the fifteen percent bonus, which MMI had waived.

CONTRACT FOR GOODS OR SERVICES?

Although at trial Gregory contested MMI's claim that the October 22, 1982 letter was the parties' contract, he does not argue on appeal that the trial court's conclusion is erroneous. The interpretation of an unambiguous contract presents a question of law which we review de novo. Schmitz v. Grudzinski, 141 Wis.2d 867, 871, 416 N.W.2d 639, 641 (Ct.App.1987). It is undisputed that this was a mixed contract, i.e., a contract for both goods and services. Van Sistine v. Tollard, 95 Wis.2d 678, 684, 291 N.W.2d 636, 639 (Ct.App.1980). The issue is whether the mixed contract was predominantly for goods or for services.

The test for inclusion or exclusion [within the U.C.C.] is not whether [contracts] are mixed, but, granting that they are mixed, whether their predominant factor, their thrust, their purpose, reasonably stated, is the rendition of service, 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).

Bonebrake v. Cox, 499 F.2d 951, 960 (8th Cir.1974)(footnotes omitted), quoted in Van Sistine, 95 Wis.2d at 684, 291 N.W.2d at 639.

Gregory cites many cases which he alleges support construing the contract as one primarily for goods. Nevertheless, we conclude that Data Processing v. L. H. Smith Oil Corp., 492 N.E.2d 314 (Ind.App.), aff'd on rehearing, 493 N.E.2d 1272 (Ind.App.1986) is on point and more compelling. In that case, as here, the parties contracted for custom computer programming. Id. at 316. The trial court had reasoned that the contract was for the development and delivery of a "program," which it concluded was a specially manufactured good covered by U.C.C. warranty provisions. Id. at 317. The appellate court phrased the issue as "whether a contract to provide computer programming is a contract for the sale and purchase of goods and thus subject to the provisions of article 2 of the UCC, or one for the performance of services, and thus subject to common law principles." Id. at 318. The court noted that "DPS was to act with specific regard to Smith's need. Smith bargained for DPS's skill in developing a system to meet its specific needs." Id. (Emphasis in original.) The court concluded the contract was for services, and not subject to U.C.C. warranty provisions. The court held that the "mere means by which DPS's skills and knowledge were to be transmitted to Smith's computers was incidental." Id. at 319. Accord Liberty Fin. Mgmt. v. Beneficial Data, 670 S.W.2d 40, 48-49 (Mo.App.1984).

In the present case, the contract provided that all MMI charges to Gregory would be on the basis of time, at stated rates, and materials. Under Bonebrake, we must determine whether the contract's predominant factor, thrust and purpose is the rendition of a service or the transaction of a sale. 499 F.2d at 960. As we did in Van Sistine, we may look to evidence of billing to determine this issue. 95 Wis.2d at 685, 291 N.W.2d at 639. On January 18, 1983, Terry Coleman, an agent for Gregory, wrote the following in a letter to Sally Peterson, president of MMI: "3. The projected total, excluding bonus, is therefore approximately $59,828, of which $55,968 is labor." In addition, we may look to the language of the contract to determine whether it is more in accord with services instead of sales. Id. The contract speaks in terms of "man-days," "development," "time," "design," etc. These words connote the rendition of services and not a sales transaction.

Based on this evidence, we conclude that this was primarily a service contract. The method by which MMI transmitted that service was merely incidental. Therefore the transaction is not subject to the provisions of the U.C.C. ²

WARRANTIES

On January 3, 1985, MMI served Gregory with requests for admissions. One of these provided "as a matter of law, if the contract between the plaintiff and the defendants was for services rather than goods, there were no express warranties whatsoever made to the defendants in connection with the provision of those services to the defendants by the plaintiff...