A Problem With a Hybrid Contract for Software and Services

Is it a good idea for vendors and customers to enter into a global agreement covering the provision of software, hardware, and software development services?  Perhaps not, if one considers the recent decision of the Appellate Court of Illinois in Bruel & Kjaer v. The Village of Bensenville, No. 2-11-0500 (April 26, 2012).  There, the court had to consider how to treat a customer-vendor contract that covered all of these things -- software, hardware, and software development services -- and to decide whether the contract was for the sale of goods or was an agreement to provide services.  This question was of great moment, because the statute of limitations for actions relating to the sale of goods under the Uniform Commercial Code was four years, whereas a ten-year statute of limitations governed contract actions generally.  The court held that the contract was one for the sale of goods, and thus the plaintiff's breach of contract claim was time-barred.

Under the contract at issue, the plaintiff agreed to “deliver, assemble, install, test and make fully operational” certain radar and noise monitoring systems.  Further, a services component of the agreement “provided that plaintiff would 'provide all software adjustments necessary to insure' that the software for the systems would be accessible to all the member communities of defendant.”  The plaintiff's complaint alleged that the software services were significant, and allowed the defendant to obtain information it could not have obtained from the off-the-shelf product.  The contract provided for a single payment of $227,000.

The plaintiff first submitted its invoice in 2002.  In 2004, the defendants paid $50,000 of the invoice, and no more.  Finally, in 2010, the plaintiff brought suit.  The defendant contended that the UCC's four-year statute of limitations barred the suit.  The plaintiff contended that the 10-year statute of limitations governing contracts applied.

The plaintiff submitted an affidavit from one of its engineers detailing the number of days spent for each of customizing software and developing new software.  However, the trial court determined that the contract was “predominantly” one for the sale of goods because it called for the delivery and installation of goods, and for the plaintiff to provide marketable title to goods.  The provided services were incidental to the delivery of the goods.

Analyzing the trial court's decision, the appellate court explained that “[i]n determining whether a contract is predominantly for goods, a court will review the contractual language relating to the design, installation, or delivery of an identifiable and tangible object.”  The contract here used the terms “buyer” and “seller,” and “[t]he object of the contract was the upgrade of tangible equipment.”  Under the UCC, a “sale” is “the passing of title from the seller to the buyer for a price,” which is what this contract contemplated.  Also, the fact that the contract called for a single payment supported that it was for the sale of goods.  There was no breakdown in price for delivery of goods and services.

In short, this was a contract for the sale of goods, and the plaintiff's claim was time-barred.

Transactions involving services as well as software and/or hardware are often governed by separate agreements directed to each component of the transaction, e.g., by a first contract for services, and by a second agreement that is a software license.  There are a number of reasons for structuring a transaction in this way.  This case illustrates one of them.