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United States Court of Appeals for the Ninth Circuit - 664 F.2d 772
tl;dr:
Defendant had price protected Plaintiff on two previous occasions, but then refused to price protect Plaintiff from a price increase on the third occasion.Video Summary
Case Summary
In the 1981 case of Nanakuli Paving and Rock Co. v. Shell Oil Company, the plaintiff, a Hawaiian paving contractor, sued the defendant, an oil company, over a breach of contract regarding asphalt sales. The plaintiff alleged that the defendant didn't provide price protection when they increased the asphalt price without sufficient notice, as previously done. The defendant claimed that the contract didn't mandate price protection and allowed price changes based on market conditions.
The jury supported the plaintiff, but the trial court overturned the verdict, favoring the defendant. The plaintiff appealed, and the Court of Appeals reinstated the jury's decision. The court applied the Uniform Commercial Code (UCC), stating that trade usage or a course of dealing can clarify or supplement contractual terms. They found adequate evidence of price protection usage in Hawaii's asphalt industry, which both parties should've known. The court also noted that the defendant previously provided price protection to the plaintiff, which altered the contract terms.
This case demonstrates how courts use the UCC to interpret contracts considering trade usages and courses of dealing. It also emphasizes looking into external circumstances and market conditions to identify parties' intent while stressing the significance of good faith and fair dealing in commercial transactions.
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The Court of Appeals upheld the jury verdict that found Shell Oil Company guilty of breaching the contract with Nanakuli Paving and Rock Company by failing to provide price protection on 7200 tons of asphalt. The court defined the applicable trade as the asphaltic paving trade in Hawaii due to the unique circumstances of the small marketplace on Oahu, the limited number of suppliers, and the long-standing relationship between the two companies. The court found that the usage of price protection in the small Oahu market of the asphaltic paving trade was known to Shell, necessary to operate in that market, and therefore constituted an intended part of the agreement between Shell and Nanakuli. The court held that the U.C.C. defines an agreement as more than just the written words on a piece of paper and includes the bargain of the parties in fact, as found in their language or by implication from other circumstances, including course of dealing, usage of trade, or course of performance. Extrinsic evidence, such as trade usage and prior dealings, can modify or explain express terms of a contract, as long as it is consistent with the express terms. The Uniform Commercial Code requires a seller or buyer to fix a price in good faith, which means observing reasonable commercial standards of fair dealing in the trade. The principle of good faith is required in the performance and enforcement of all agreements or duties in commercial transactions. The court found that Shell breached the obligation of good faith by raising its price without advance notice, contrary to the universal practice of advance notice in the asphaltic paving trade. The jury verdict for Nanakuli is reinstated, and the case is remanded with directions to enter final judgment.
The case deals with specific pricing practices instead of general unfair dealing, and the court's decision does not allow juries to consider contract terms based on a vague notion of good faith. There was evidence of an established custom regarding price protection in the asphaltic paving industry that was unchallenged, making it possible for the jury to determine that the parties knew about or should have known about the practice when forming the contract. These factors are necessary for interpreting the contract based on its performance or finding that good faith required the seller to maintain the price.
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