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Micro-Managers, Inc. v. Gregory

Court of Appeals of Wisconsin
7 U.C.C. Rep. Serv. 2d (West) 1375, 147 Wis. 2d 500, 434 N.W.2d 97 (1988)
ELI5:

Rule of Law:

A contract for the custom design and development of computer software is predominantly a contract for services, not goods, when the primary thrust of the agreement is the rendition of the developer's skill and labor, making it subject to common law rather than the Uniform Commercial Code (UCC).


Facts:

  • Oilgear, an industrial company, contracted with Stanley Gregory to develop a new programmable controller.
  • Gregory then engaged Micro-Managers, Inc. (MMI) to design and develop the custom software required for the controller.
  • On October 22, 1982, the parties memorialized their agreement in a letter stating that MMI would bill for its time at specified hourly rates for software development, engineering, and supervision.
  • Gregory's technical coordinator signed the letter on October 25, 1982, confirming the terms.
  • The parties later agreed that the software was to be completed by February 1, 1983, for MMI to earn an incentive bonus.
  • On February 1, 1983, Gregory took possession of the software but complained it was not complete, though he did not permit MMI to correct any alleged defects or provide specific objections.
  • An agent for Gregory acknowledged in a letter that of the projected total cost of approximately $59,828, the portion attributable to labor was $55,968.

Procedural Posture:

  • Micro-Managers, Inc. (MMI) sued Stanley Gregory in the trial court for breach of contract to recover unpaid fees.
  • Gregory filed counterclaims against MMI, alleging breach of implied warranty under the Uniform Commercial Code (UCC).
  • The parties stipulated to a bifurcated trial, with the first phase dedicated to determining whether the contract was for goods (governed by the UCC) or services (governed by common law).
  • After the first phase of the trial, the trial court concluded that the contract was predominantly for services, so the UCC did not apply.
  • The trial court entered judgment in favor of MMI for $24,503.68.
  • Gregory, as the appellant, appealed the trial court's judgment to the Wisconsin Court of Appeals.

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Issue:

Does the Uniform Commercial Code (UCC) apply to a mixed contract for the custom design and development of computer software where the cost of labor significantly outweighs the cost of any physical deliverable?


Opinions:

Majority - Dykman, J.

No. A contract for custom software development is predominantly one for services, not goods, and therefore the UCC does not apply. The court applies the 'predominant factor' test, which examines whether the contract's primary thrust or purpose is the rendition of a service or a transaction of sale. Here, several factors indicate a service contract. First, the contract's language speaks in terms of 'man-days,' 'development,' 'time,' and 'design,' all of which connote services. Second, the billing structure was based on time and materials, with evidence showing that labor constituted the overwhelming majority of the total cost. The court concluded that what Gregory bargained for was MMI's skill and expertise in developing a custom system, and the physical software was merely the incidental means by which that service was transmitted. Because the UCC does not apply, its implied warranties are inapplicable, and under common law for professional services, an implied warranty is not recognized without a showing of negligence.



Analysis:

This decision is significant for classifying custom software development contracts as services rather than goods. By applying the predominant factor test and emphasizing the nature of the labor and skill involved, the court removes such transactions from the purview of the UCC. This means that UCC-specific protections, most notably the implied warranties of merchantability and fitness for a particular purpose, do not automatically apply. Consequently, clients seeking recourse for allegedly defective custom software must rely on common law theories like breach of contract or negligence, which often require proving a failure to perform with due care rather than simply showing a defective end product.

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