Thursday, July 5, 2018
A recent Indiana case demonstrates the continued necessity of distinguishing between the common law and the UCC. Nothing too new in the case legally as I see it, but it lends itself well to classroom use.
A medical center entered into two contracts with a medical billing services company for records-management software and related services. In Indiana and elsewhere, “where a contract involves the purchase of preexisting, standardized software, courts treat it as a contract for the sale of goods governed by the UCC. However, to determine whether the UCC applies to a mixed contract for both goods and services, Indiana uses the “predominant thrust test.” Courts ask whether the predominant thrust of the transaction is the performance of services with goods incidentally involved or the sale of goods with services incidentally involved. Id. To determine whether services or goods predominate, the test considers (1) the language of the contract; (2) the circumstances of the parties and the primary reason they entered into the contract; and (3) the relative costs of the goods and services.
In the case, the contractual language was neutral. Next, the primary reason for executing the agreements was to obtain billing services. The software was merely a conduit to transfer claims data to the billing services company in order to allow it to perform those services. The goods – the software – were incidental. The third and final factor—the relative cost of the goods and services—also pointed toward that conclusion. As the Indiana Supreme Court has explained, “[i]f the cost of the goods is but a small portion of the overall contract price, such fact would increase the likelihood that the services portion predominates.” Under the agreement, the medical center paid a one-time licensing fee of $8,000 for software; a one-time training fee of $2,000; and $224.95 each month for services and support for about nine years. Thus, for the life of the Practice Manager agreement, the services totaled approximately $26,294—more than three times the $8,000 licensing fee for the software. Under the agreement, the medical center also paid a one-time licensing fee of $23,275 for the software; a one-time training fee of $4,000; and $284 per month for services and support for about six years. Thus, the services totaled about $24,448—slightly more than the $23,275 software licensing fee. The relative-cost factor reinforces the conclusion that services predominated. Thus, the ten-year common-law statute of limitations and not the four years under the UCC applied.
Interestingly, the case also shows that because the UCC did not apply, plaintiff’s claim for good faith performance under the UCC dropped out too. In Indiana, a common-law duty of good faith and fair dealing arises “only in limited circumstances, such as when a fiduciary relationship exists,” which was not the case here. The parties were thus not under a duty to conduct their business in good faith. Yikes! This should allow for some good classroom discussions.