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

United States Court of Appeals for the Ninth Circuit · Contracts

ContractsU.C.C.usage of tradecourse of performancegood faithparol evidenceposted price at time of deliveryprice protection

Facts

Nanakuli, a major paving contractor on Oahu, bought all of its asphalt from Shell under a long-term 1969 supply contract stating the price was "Shell's Posted Price at time of delivery." Nanakuli claimed that in Hawaii's asphaltic paving trade suppliers routinely gave "price protection" on work already committed at the old price because government contracts did not allow escalation clauses, and that this usage was reinforced by Shell's own price protection of Nanakuli in 1970 and 1971. In late 1973 Shell announced a price increase from $44 to $76 effective January 1, 1974, but gave no meaningful advance notice and refused to protect Nanakuli on 7,200 tons already committed. Evidence showed close commercial ties between the parties, Shell's knowledge of Nanakuli's bidding practices, and widespread price protection by aggregate suppliers and Chevron in the same local paving market.

Issue

Whether the jury could reasonably find that Shell breached the 1969 contract by refusing to price protect Nanakuli in 1974 despite the contract's express term of Shell's posted price at time of delivery. Relatedly, whether trade usage, Shell's course of performance, and the U.C.C.'s good-faith requirement could qualify that express price term.

Rule

Under the U.C.C., an agreement includes not only its express terms but also applicable usage of trade and course of performance. A usage or course of performance may supplement or qualify an express term if it can reasonably be construed as consistent with that term; it need not be universal, only regularly observed enough to justify an expectation that it will be followed, and a party may be bound by usages of a locality or related trade of which it is or should be aware. For merchants, good faith in performance requires observance of commercially reasonable standards of fair dealing in the trade.

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Crescent Ridge Surfacing, a paving contractor in Anchorage, signs a seven-year requirements contract with North Glacier Petro for liquid binder. The writing states that price is North Glacier Petro's posted price at delivery. In the Anchorage municipal paving market, suppliers regularly hold the old price for quantities already committed on fixed-price public jobs when prices rise, and North Glacier Petro had followed that practice during the only two prior increases under this contract.

If North Glacier Petro later raises its posted price and refuses to protect Crescent Ridge on previously committed public work, which argument for Crescent Ridge is strongest?

Explanation. Under the majority's rule, express terms are not the whole agreement. Usage of trade and course of performance may supplement or qualify an express term if they can reasonably be construed as consistent with it. A practice like price protection for previously committed, fixed-price work during increases can operate as an exception rather than a total negation of a posted-price-at-delivery term, so the buyer has a strong argument for breach. (Derived from Nanakuli Paving & Rock Co. v. Shell Oil Co. (n.d.).)