Nanakuli Paving & Rock Co. v. Shell Oil Co. – Case Brief

Nanakuli Paving & Rock Co. v. Shell Oil Co., 664 F.2d 772 (9th Cir. 1981).

Facts: Nanakuli Paving (P) entered into two long term contracts to purchase its requirements of asphalt from Shell Oil (D). The contract was a fully integrated writing and gave the price term as “Shell’s Posted Price at time of delivery.” For several years Shell Oil charged the same price for the asphalt despite increasing the cost to other customers. D finally increased to cost to P and P sued, claiming that under customary trade practice there was an implied requirement for D to protect prices. P pointed to the routine use of price protection by asphalt suppliers. D claimed that no such trade practice existed and that the price terms under the contract controlled. The jury awarded $220,800 to P for D’s failure to price protect. The court set aside the verdict and entered judgment notwithstanding the verdict for D and P appealed.

Issue: Under what circumstances can trade usage and course of performance be implied into contracts?

Holding and Rule (Hoffman): Trade usage and course of performance will be implied into contracts if there is evidence that it is not inconsistent with the terms of the contract, and they are so prevalent that the parties would have intended to incorporate them.

The manner in which price protection was actually performed in Hawaii was that it only occurred when prices increased, and only for work committed prior to those increases on non-escalating contracts. The court’s decision was reinforced by the overwhelming nature of the evidence that price protection was routinely practiced by all suppliers in the small Oahu market and was therefore known to D, that it was a realistic necessity to operate in the market and to get large government contracts. This evidence along with D’s past performance were sufficient to allow the jury to find that those terms were incorporated into the contract.

There is no clear statement in the UCC of just how many acts are necessary to constitute course of performance. The court noted that in the only two times that D could have made a decision related to this contract, D opted for price protection for P.

Evidence of usage is always admissible, although the express term controls in the event of inconsistency, which is a jury question. Under the UCC custom can be used to contradict the written agreement and usage may be used to qualify the agreement and modify express terms although not to negate them entirely.

Disposition: Reversed.

Concurring (Kennedy): Our opinion should not be interpreted to permit juries to import price protection or a similarly specific contract term from a concept of good faith that is not based on well-established custom and usage or other objective standards of which the parties had clear notice. Here, evidence of custom and usage regarding price protection in the asphalt paving trade was not contradicted in major respects. This is a necessary predicate for interpreting the contract based on the course of performance or for a finding based on good faith that the seller was required to price protect.

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