Nanakuli Paving & Rock Co. v. Shell Oil Co.,
664 F. 2d 772 (1981)
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Rule of Law:
Under the Uniform Commercial Code (UCC), a contract's express terms must be read in light of its commercial context, and evidence of trade usage and course of performance may be used to qualify an express price term, provided the usage can be reasonably construed as consistent with that term.
Facts:
- Nanakuli Paving and Rock Company (Nanakuli), an asphaltic paving contractor, had a long-term requirements contract to purchase all its asphalt from Shell Oil Company (Shell).
- The written contract, signed in 1969, stated the price for asphalt would be 'Shell's Posted Price at time of delivery.'
- In the Hawaiian asphaltic paving trade, there was a widespread and routine practice of 'price protection,' where material suppliers would honor the old price for a period of time on tonnage previously committed by contractors in bids.
- This trade usage was vital for pavers like Nanakuli, as government agencies, their largest customers, did not permit escalation clauses in contracts.
- On two occasions prior to 1974, when Shell raised its asphalt price, it provided Nanakuli with price protection by holding the old price for several months.
- In January 1974, following the Arab oil embargo and an internal reorganization, Shell drastically increased its asphalt price from $44 to $76 per ton with almost no advance notice.
- Shell refused Nanakuli's request for price protection on 7,200 tons of asphalt that Nanakuli had already committed to projects based on the old price.
Procedural Posture:
- Nanakuli Paving and Rock Company filed a breach of contract action against Shell Oil Company in Hawaiian State Court.
- Shell removed the case to the United States District Court for the District of Hawaii.
- Following a trial, the jury returned a verdict in favor of Nanakuli for $220,800 on its price protection claim.
- The District Judge granted Shell's motion for judgment notwithstanding the verdict (j.n.o.v.), setting aside the jury's verdict.
- Nanakuli, as appellant, appealed the District Court's judgment to the United States Court of Appeals for the Ninth Circuit.
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Issue:
Under the Uniform Commercial Code, may evidence of trade usage and course of performance be used to prove a price protection term that qualifies an express price term in a contract?
Opinions:
Majority - Judge Hoffman
Yes. Evidence of trade usage and course of performance may be used to prove a price protection term because, under the UCC, the complete agreement between parties is found not just in the written words, but also in the commercial context, which includes such evidence. The court found that price protection did not completely negate the contract's express price term but rather qualified it, creating a reasonable exception that applied only at times of price increases for pre-committed tonnage. The court reasoned that the UCC favors a liberal interpretation to promote the expansion of commercial practices and requires courts to construe express terms and usage as consistent whenever reasonable. Here, the overwhelming evidence of price protection as a universal practice in the small Oahu market, coupled with Shell's own prior course of performance in protecting Nanakuli in 1970 and 1971, demonstrated that it was an intended part of the parties' true bargain.
Concurring - Judge Kennedy
Yes. This holding is proper but should be interpreted narrowly, as it is based on a specific pricing practice supported by well-established and uncontradicted custom and usage. A jury should not be permitted to import a specific contract term like price protection from a general concept of good faith unless it is based on objective standards, such as a clear trade usage, of which the parties had or should have had clear notice. Because the evidence of the price protection practice in the asphaltic paving trade was so strong, the jury's finding was permissible in this specific instance.
Analysis:
This case is a landmark decision in UCC contract interpretation, solidifying the move away from the rigid 'four-corners' rule of the common law. It establishes that extrinsic evidence like trade usage and course of performance is not just for clarifying ambiguity but can actively supplement and qualify even seemingly unambiguous contract terms. The decision broadens the definition of a relevant 'trade' to include related industries in a specific locality, holding parties accountable for customs they 'should have known.' This precedent significantly empowers courts to look at the 'true understanding' and commercial reality of an agreement, but also creates uncertainty by allowing juries to find implied terms that modify explicit written ones.
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