Nanakuli Paving & Rock Co. v. Shell Oil Co

Brief Fact Summary.

Plaintiff, Nanakuli Paving & Rock Co., sued Defendant, Shell Oil Co., for breach of a supply contract when Defendant failed to provide price protection on a delivery of asphalt as it had done in the past. The jury returned a verdict in favor of the Plaintiff, which was set aside by the trial judge. Plaintiff appealed, and the Court of Appeals reversed.

Synopsis of Rule of Law.

Under the Uniform Commercial Code, a trade usage or course of dealing may be used to explain or supplement the express terms of a written contract. A trade usage will be binding on a person who is either a member of the trade or is a person who knows or should know of the trade usage.

Facts.

Plaintiff, a large paving contractor in Hawaii, purchased all of its requirements for asphalt from Defendant under two supply contracts between 1963 and 1974. The written contract provided that the price for the asphalt would be the price posted at the time of delivery. Asphaltic paving contractors in Hawaii bid work at fixed prices and commonly received price protection from their suppliers because government agencies would not accept price escalation clauses in their contracts with the pavers. In 1970 and 1971, Defendant raised its price for asphalt, but protected Plaintiff from the price increase for several months after each announced increase. In 1974, Defendant raised its price for asphalt with one day notice to Plaintiff, and did not offer price protection. Plaintiff sued for breach of its 1969 contract with the Defendant. The jury found in favor of the Plaintiff, but the trial court set aside the verdict. The Court of Appeals reversed and reinstated the jury’s verdict.

Issue.

Whether a trade usage or course of dealing can be used to modify or supplement the express terms of a written commercial contract?
How broad is the trade? Should Defendant be bound to the usages of trade of the entire asphaltic paving industry in Hawaii or of only trade in asphalt?
Did the price protection offered by Defendant to Plaintiff in 1970 and 1971 constitute waivers of the price provision of the contract as a matter of law, or were they a course of performance?
Was it possible for the jury to find that a trade usage or course of performance providing for price protection was consistent with an express price provision in the parties’ written contract?
As an alternative theory of recovery, did Defendant have a good faith obligation to provide advance notice of the price increase or some form of price protection to Plaintiff?

Held.

Yes. There was sufficient evidence for the jury to find that a usage of the asphaltic trade in Hawaii required Defendant to provide price protection to Plaintiff.
The trial court did not err in defining the relevant trade as the entire asphaltic paving industry. A person will be bound by a trade usage if he/she is a member of the trade at issue or is a person who knows or should know of the trade usage. A person should know of a trade usage if he/she has regular dealings with members of the specific trade. A person should also know of a trade usage if he/she is a member of another trade that has some dealings with the relevant trade (e.g., “farmers should know something of seed selling). Although Defendant did not deal in all asphaltic materials, it regularly dealt with Plaintiff, who was a major asphaltic paving contractor. Therefore, Defendant should have known of the practice of price protection in Plaintiff’s industry.
Whether an act is ambiguous is a question for the jury. In commercial contracts, if acts are ambiguous, there is a preference to interpret them as a waiver of a contract term rather than as a course of performance if it is necessary to prevent surprise or hardship, or to protect the flexible nature of the contract. If the jury finds that an act is unambiguous, it may also decide whether an act is a course of performance or a waiver. One instance of conduct will not constitute a course of conduct, but how many more occurrences are required will depend on the circumstances. In this case, Defendant previously raised its prices under the contract with the Plaintiff only twice, and offered price protection both times. The jury could find that those two instances constituted a course of performance.
Under the UCC, a commercial contract is broader in scope than its express provisions, and will also include trade usages, courses of dealing, and actual performance of the contract. Whenever it is reasonable, express terms will be read as consistent with courses of dealing and trade usages; otherwise, an express term will control. There must be evidence of a definite trade usage in order for it to be allowed to modify an agreement. In this case, price protection was a prevalent trade usage in the asphaltic paving industry, and the jury could reasonably find that this exception was consistent with the posted price provision of the agreement.
Contracts governed by the UCC carry a duty of good faith in performance and enforcement. For merchants, this duty requires following commercially reasonable standards of fair dealing within that trade. In this case, there was evidence that advance notice of price increases for asphalt was a well-established practice in the paving industry. Therefore, a reasonable jury could find that Defendant breached its duty of fair dealing to Plaintiff when it provided only one day’s notice.
Concurrence. Juries should be allowed to add a specific term to commercial contracts on a good faith theory only when it is based on evidence of a well-established usage or custom, or some other objective standard.

Discussion.

Under the UCC, a commercial contract is much broader in scope than the express written provisions of the agreement. This case demonstrates that courts will look outside the written agreement to industry practices, the parties’ dealings with each other in business, and to how the parties perform their contracts with each other to determine the terms of their agree