The Experts:
Doug Holthus, Partner, Freeman, Mathis & Gary LLP
Eric M. Coglianese, Associate, Freeman, Mathis & Gary LLP
QUESTION: What are some claim and defense considerations to keep in mind when it comes to modular construction?
A: While the use of prefabricated components may have benefits (e.g., accelerated project schedules), the process is not a fail-safe. 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 to the project plans, drawings, specifications, and applicable industry standards. However, when prefabricated components are called for, the general contractor may receive components that are either 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 Uniform Commercial Code (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 for the sale of goods, Article 2 of the 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. 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.