Nanakuli Paving & Rock Co. v. Shell Oil Co.

Court of Appeals for the Ninth Circuit
1981 U.S. App. LEXIS 15022, 32 U.C.C. Rep. Serv. (West) 1025, 664 F.2d 772 (1981)

ELI5:

Rule of Law:

Under the Uniform Commercial Code (U.C.C.), trade usage and course of performance can be used to interpret a contract's terms. These unwritten terms can be incorporated into the agreement so long as they can be construed as reasonably consistent with the express terms, meaning they form an exception to rather than a total negation of the written language.

Facts:

Nanakuli Paving and Rock Company, a major asphaltic paving contractor in Hawaii, entered into a long-term asphalt supply contract with Shell Oil Company in 1963, which was renewed in 1969.
The 1969 written contract specified the price for asphalt would be 'Shell's Posted Price at time of delivery'.
In the Hawaiian asphaltic paving trade, it was a universal and necessary practice for material suppliers to provide 'price protection' to contractors, honoring the old price for a period of time on projects that contractors had already bid on using that price.
Shell's main competitor, Chevron, and all major aggregate suppliers in Hawaii consistently provided price protection.
On the only two occasions Shell raised asphalt prices between 1969 and 1974 (in 1970 and 1971), it granted price protection to Nanakuli by holding the old price for several months.
In 1973, Shell's asphalt sales management underwent a complete personnel change, and the new managers were unfamiliar with the company's past practices in Hawaii.
On December 31, 1973, Shell informed Nanakuli of a price increase from $44 to $76 per ton, effective immediately, and refused to offer any price protection for the 7,200 tons of asphalt Nanakuli had already committed to projects at 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, awarding $220,800 in damages.
The District Court Judge granted Shell's motion for judgment notwithstanding the verdict (JNOV), setting aside the jury's verdict.
Nanakuli, as appellant, appealed the District Court's JNOV decision to the United States Court of Appeals for the Ninth Circuit.

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Issue:

Under the Uniform Commercial Code, can a trade usage and a prior course of performance establishing price protection be incorporated into a contract and be construed as reasonably consistent with an express price term stating the price will be the 'Seller's Posted Price at time of delivery'?

Opinions:

Majority - Hoffman, District Judge

Yes. A trade usage and course of performance establishing price protection can be incorporated into the agreement because they are reasonably consistent with the express price term. The U.C.C. directs courts to look beyond the written words to the entire commercial context, including trade usages and course of performance, to find the 'true understanding' of the parties. The relevant trade was broadly defined as the Hawaiian asphaltic paving trade, not just asphalt sellers, because Shell knew or should have known of the universal practices affecting its primary customer in a small, unique market. Shell’s two prior instances of granting price protection constituted a course of performance, not mere waivers, as they were the only two times the situation arose before 1974. The practice of price protection is reasonably consistent with the 'posted price at delivery' term because it does not totally negate it; rather, it creates a commercially understood exception that applies only during price increases for work already committed. Alternatively, Shell's failure to provide advance notice and some form of price protection breached its duty of good faith, which requires observing the 'reasonable commercial standards of fair dealing in the trade.'

Concurring - Kennedy, Circuit Judge

Yes. While concurring with the result, the holding should be interpreted narrowly. Importing a specific term like price protection into a contract is only permissible where it is based on a well-established custom and usage or other objective standards that the parties were, or should have been, aware of. A general, subjective concept of 'good faith' is insufficient on its own. In this case, the evidence of the trade usage regarding price protection was so strong and uncontradicted that it met this high standard, justifying the jury's verdict under either the contract interpretation or good faith theory.

Analysis:

This is a landmark case in U.C.C. contract interpretation that exemplifies the Code's departure from the rigid common law parol evidence rule. The decision demonstrates the power of commercial context—trade usage and course of performance—to supplement and qualify even seemingly unambiguous contract terms. By adopting a lenient 'reasonably consistent' standard that allows for significant exceptions short of 'total negation,' the court greatly expanded the ability of parties to prove unwritten terms are part of their actual bargain. This case is crucial for understanding that under the U.C.C., a contract is not just the four corners of a document but a dynamic agreement shaped by industry practices and the parties' own actions.

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