#63:  Subcontractor or Supplier: A Potentially Crucial Distinction

On most building contracts the contractor is called upon to provide labor, materials and equipment. He will often hire subcontractors to furnish various portions of the labor and materials, and either he or they will purchase equipment (such as a boiler or a well pump) for installation at the job site. On high end commercial projects the required equipment can be quite large and specialized (say, a gas turbine for a utility power plant). Is the seller of that equipment considered a subcontractor, or a mere manufacturer/supplier?
The distinction can be important on many levels. For one thing, the Uniform Commercial Code rather than general contract law governs the sale of goods, and employs different legal rules, including special warranty provisions and a longer statute of limitations. For another, payment bond rights and mechanic’s lien rights were held unavailable for suppliers to suppliers (as opposed to suppliers to subcontractors) in Lyle Signs, Inc. v. Evroks Corp., 132 N.H. 156 (1989). Third, general contractors will often be expressly liable under their contracts for the mistakes of their subcontractors. If they are obliged to install particular equipment (and even directed as to which manufacturers they may buy that equipment from), characterizing the equipment supplier as a subcontractor can be the owner’s only shot at holding the contractor responsible when the equipment whose characteristics the owner itself has specified proves deficient!
The Lyle Signs case offers some rough guidance on when an entity is considered a subcontractor, admonishing that “courts should look, in part, to the following factors: (1) Whether the entity constructs a definite and substantial part of the work or improvement called for in the original contract; (2) whether the work is performed in accordance with plans and specifications of the original contract; and (3) whether the plans and specifications call for a unique product and not a product readily available on the open market. Lastly, we note that the work need not be done at the job site for one to be considered a subcontractor. The above list, however, is not intended to be a comprehensive list of the factors which may be considered by courts. Furthermore, in applying these factors to their determinations, courts should consider the totality of the circumstances surrounding the contractual relationship of the parties.”
The following year In re Trailer & Plumbing Supplies, 133 N.H. 432, 436 (1990), considered two tests for whether a mixed sales and services contract was governed by the UCC. The first is the “predominant factor” test, which inquires “whether their predominant factor, their thrust, their purpose, reasonably stated, is the rendition of service, with goods incidentally involved (e.g., contract with artist for painting) or is a transaction of sale, with labor incidentally involved (e.g., installation of a water heater in a bathroom).” The second is the “gravamen of the action” test, which “simply asks whether the underlying action is brought because of alleged defective goods or because of the quality of the service rendered. If the gravamen of the action focuses on goods, then the UCC governs. If the focus is on the quality of the services rendered, then common law applies.” Ultimately the Court in that case applied the “predominant factor” test – as has virtually every court case since then.
Can a manufacturer/supplier who is subject to the UCC under the “predominant factor” test also be a subcontractor under the Lyle Signs factors? Theoretically, yes; the two tests are not wholly inconsistent. A 2015 New Hampshire Superior Court case, Hooksett Sewer Commission v. Penta Corporation, ruled a general contractor to be subject to the UCC under the “predominant factor” test when it purchased and installed specified equipment and related items that together comprised two thirds of the cost of the entire contract. There was no mention of Lyle Signs factors, nor reason to consider them, but the GC in Hooksett Sewer would have satisfied all three.
Original Article

Comments are closed.