William P. Wells D/B/A Recmart, Cross-Appellant v. 10-X Manufacturing Company, Cross-Appellee , 609 F.2d 248 ( 1979 )

WILLIAM K. THOMAS, District Judge

(concurring).

I concur in the majority’s conclusion that the agreement of 10-X to “cut, make and finish” 550 dozen chamois cloth hunting shirts for Wells was one for the “rendition of services ... to which the Code is not applicable.”

In this diversity case, the majority concludes “that the Michigan Supreme Court would not view the contract in this case as coming within the purview of the Code.” In reaching this conclusion the majority generally interprets the pertinent sections of the Uniform Commercial Code, there being no declaration of the Supreme Court of Michigan to “which we can turn in determining whether this type of transaction is within the contemplation of the Code.”

While I concur with its result, I believe it is important to separately state why I believe that the Code does not apply to this contract even though, as the majority states, “performance under the terms of the contract would have resulted in the special manufacture of goods.”

In determining that there was a “contract for the sale of goods” and “that the contract for the Welmark shirt is governed by the Uniform Commercial Code,” the district court called attention to section 2-102,

Unless the context otherwise requires, this Article applies to transactions in goods,

and to section 2-105(1), which defines “goods” to mean:

all things (including specially manufactured goods) which are moveable at the time of identification to the contract for sale .

The district court then reasoned:

Not only does the primary definition of goods expressly include “specially manufactured goods,” but other sections of the Code detail the relationship between buyers and sellers of specially manufactured goods. See, for example, Section 2-201(3).^[1] Commentators agree that the text of the Code as well as its intent cover specially manufactured goods; moreover, no case or commentary has indicated that the furnishing of materials by the buyer in any way affects the application of the Code. To the contrary, such cases as Vitromar Piece Dye Works v. Lawrence of London, 119 Ill.App.2d 301, [256 N.E.2d 135] (1970), extend the ambit of the Code to service-type contracts much less clearly “sales” than the Wells-10X agreement.

Reading section 2-102 in pari materia with section 2-105(1), the district court appears to have concluded that a contract for the production of specially manufactured goods is governed by the Code because section 2-102 brings “transactions in goods” within the application of the Code. However, section 2-102 qualifies the application of the Code to “transactions in goods” by specifying “unless the context otherwise requires.” I conclude that the context of this transaction does otherwise require as later discussion shows. Further limiting the term “transaction in goods” is that the “goods (including specially manufactured goods)” must be identifiable to “the contract for sale.” Hence, only contracts for sale of specially manufactured goods would qualify as “transactions in goods” under sections 2-105(1) and 2-102.²

Moreover, while the term is not expressly defined in the Code, “specially manufactured goods” must possess the conditions, clearly indicative of a contract for sale, which are specified in section 2-201(3)(a) of the Statute of Frauds provision of the Code. The “goods” must be “specially manufactured for the buyer and are not suitable for sale to others in the ordinary course of the seller’s business.”

This language of section 2 — 201(3)(a), revising similar language of the Statute of Frauds provision of the Uniform Sales Act,³ had its origin in the Massachusetts Rule, which, rather than the English Rule or the New York Rule, was adopted as the American Rule. For full discussion see section 2.02[4] Specially Manufactured Goods, Duesenberg & King, Vol. II, pp. 25-27 (1978), Bender’s Uniform Commercial Code Service.⁴

The previous analysis of sections 2-102, 2-105(1), and 2-201(3)(a) tested against the sense of the commentary in the margin leads to these rules. A contract for specially manufactured goods is a term of art that provides for the production of goods by rendition of services and for the sale of those goods. Because of the sales component, it is treated as a contract for sale of goods subject to the other provisions of the Code, but excepted from the Statute of Frauds by section 2-201(3)(a).

On the other hand, a contract that provides for the production of specially manufactured goods but not for the sale of those goods is a contract for work and labor.⁵ As a contract for work and labor it is not a contract for sale and therefore it is not within the provisions of the Code. As a contract for work and labor it is also outside the Statute of Frauds.

The majority stresses that “10-X agreed to ‘cut, make, and finish’ for Wells 550 dozen hunting shirts,” and that except for the thread furnished by 10-X, “all other materials involved in the production of the shirt were to be provided by Wells.” The words “cut, make, and finish” appear in two letters exchanged between William P. Wells and president Blume of 10-X, which letters are part of the contract. On May 10, 1973, Wells wrote Blume, in part, “Our immediate requirements are cut, make and finish of approximately 550 dozen shirts.” The shirts were to be “made of a 9-ounce woven double-napped cotton suede, known also as chamois cloth or moleskin.” He went on to say that “these are to be quality shirts, made according to our sample and specifications.” Responding with a quote “on your needs for the chamois cloth shirts for this year,” Blume told Wells:

Your cost for us to cut, make, and finish including thread and freight from our Des Moines plant would be $3.30 per unit complete.

Although finished hunting shirts were the intended end products of the contract, it was the labor and not the end product that was purchased. As the majority states, the contractual language

bespeaks the intention of the parties that 10 — X’s obligation under the contract was essentially to provide the manpower and machine capabilities for production of the hunting shirt.

The contract item “3.30 per unit complete” fixed a per-unit cost of labor as the contract price. It did not specify a unit sale. Moreover, since the shirt materials, except for the thread, originated with Wells, it can hardly be said that Wells was buying shirts and not services from 10-X.

Thus the contract called for manufacturing services to produce specially manufactured goods, but a sales component was lacking. Within the above-formulated rules relating to “specially manufactured goods,” the contract is determined to be for work and labor. As such, as the majority concludes, it is not within the Code.

[1] 1. Section 2-201 in pertinent part provides:

(1) Except as otherwise provided in this section a contract for the sale of goods for the price of $500.00 or more is not enforceable by way of action or defense unless there is some writing sufficient to indicate that a contract for sale has been made between the parties and signed by the party against whom enforcement is sought .

******

(3) A contract which does not satisfy the requirements of subsection (1) but which is valid in other respects is enforceable

(a) if the goods are to be specially manufactured for the buyer and are not suitable for sale to others in the ordinary course of the seller’s business and the seller, before notice of repudiation is received and under circumstances which reasonably indicate that the goods are for the buyer, has made either a substantial beginning of their manufacture or commitments for their procurement; . . .

2 . However, as the majority states in n. 3, “Article 2 sections have been applied in decisions involving transactions that are not sales, but which are used as substitutes for a sale or which have attributes analogous to a sale, such as leases, bailments, or construction contracts.”

3 . Section 4(2) of the Uniform Sales Act provided:

but if the goods are to be manufactured by the seller especially for the buyer and are not suitable for sale to others in the ordinary course of the seller’s business, the provisions of this section [Statute of Frauds] shall not apply.

4 . In an in-depth discussion of “specially manufactured goods,” Duesenberg & King begin by observing that the exception to the Statute of Frauds of contracts for specially manufactured goods is “an application of the rule that contracts for work and labor are not within the statute.” From this beginning, the authors use the term contract for service or contract for work and labor as an alternate meaning for a contract for specially manufactured goods. Under the Uniform Sales Act, the authors label such contracts as mixed contracts for service as well as for the sale of goods, but “such a contract is classified as one either for the sale of goods or for work and labor in assessing its provability under the Statute of Frauds.” Perpetuation of this pre-code attitude, in the minds of the authors, has this “solid justification”:

Though the historical antecedent of the rule was the distinction between sales and service, its contemporary apology is that the special manufacture seller is deserving of greater protection than his non-special manufacturer counterpart. This is because without the rule he might find himself unable to dispose of the goods he has manufactured, or has had manufactured by another party.

Id. at 2-30.

5 . It is this type of contract that it is understood that the majority is describing when it says that “performance under the contract would have resulted in the special manufacture of goods.”