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

664 F.2d 772 (9th Cir. 1981)

United States Court of Appeals for the Ninth Circuit · 1981

Rule

Under the UCC, trade usage and course of performance may be used to explain or supplement express terms unless the express terms cannot reasonably be construed to be consistent with them. A trade practice of 'price protection' may inform a posted-price contract for asphalt.

Learning outcomes

By the end of working with this case, you can:

Facts

Nanakuli, a Hawai’i paving contractor, purchased its asphalt requirements from Shell under a long-term supply agreement at Shell’s “posted price at time of delivery.” For many years, both Shell and competing asphalt suppliers in Hawai’i practiced “price protection,” meaning that when prices rose suddenly, the supplier honored the prior price for asphalt committed under outstanding paving contracts. Shell had price-protected Nanakuli on two prior occasions. When the OPEC-era price spike hit, Shell raised its posted price and refused to honor pending Nanakuli commitments at the prior price. Nanakuli sued.

Holding

The Ninth Circuit reversed judgment notwithstanding the verdict and reinstated the jury’s verdict for Nanakuli. Trade usage and the parties’ course of performance supplied an obligation of price protection that supplemented the express “posted price” term, and the jury could find that Shell breached that obligation.

Reasoning

The court walked through the UCC’s hierarchy of evidence for contract meaning. Express terms control, but they are read together with trade usage, course of dealing, and course of performance, each of which can supplement express terms unless they cannot reasonably be construed consistently with the express terms. Trade usage need not have universal observance; it need only be regular enough that the parties could reasonably expect adherence. Shell’s two prior price protections of Nanakuli, combined with the industry-wide practice in Hawai’i, supplied a basis for the jury to find a binding obligation. The court also tied this to Article 2’s good-faith principles: a posted-price term in a long-term supply contract is not a license to abandon the trade’s established price-protection practice.

Why it matters

Nanakuli is the leading federal case on the use of trade usage and course of performance to fill in an apparently complete express term. The case is taught for its careful methodological structure (the hierarchy of usage, dealing, and performance) and for the practical lesson that long-term commercial contracts must be read in light of the industry in which they operate. It is the natural pair to Wood v. Lucy in the chapter on extrinsic evidence: both cases use context to give the writing operational meaning.

The trap

Students treat 'posted price' as obviously unambiguous and conclude that the express term ends the analysis. Under the UCC, an express term is read together with trade usage and course of performance unless it cannot reasonably be construed consistently with them. Unambiguity is not the test; irreconcilable inconsistency is.

The operational intuition the case is designed to break. Naming the trap is what the Socratic exchange is for.

Socratic ladder

The professor's scaffold for the in-class exchange. Each rung is a stage; the questions are scripted prompts, not the punchline.

Surfacing · 60 sec

Q. Shell agrees to sell Nanakuli asphalt at 'Shell's posted price at time of delivery.' OPEC hits, the posted price jumps from $44 to $76 a ton on 7,200 tons already committed to Nanakuli's road projects. Should Shell get the higher price?

Look for: Operational instinct that posted-price means posted-price. The contract says what it says. A few students may know about price-protection custom and pull the other way.

Holding · 45 sec

Q. What did the Ninth Circuit hold?

Look for: Nanakuli wins. Trade usage and course of performance supplemented the express term and supplied a price-protection obligation. Jury verdict for Nanakuli reinstated.

Reasoning · 135 sec

Q. Shell argued the contract was unambiguous on its face and that parol evidence cannot vary an express term. The Ninth Circuit allowed the evidence anyway. Under what theory?

Trap: Students treat 'unambiguous' as a binary fact about the words. Under the UCC, that is not the test. The test is whether the express term can be read consistently with the usage. The student needs to move from 'is it ambiguous?' to 'is it reconcilable?'

Board: Express term + usage + course of performance = read consistently if reasonable (UCC § 1-303(d)).

Push back: Read UCC § 1-303(d). What is the standard for when usage gives way to the express term? Is it ambiguity, or something else?

Push to: UCC § 1-303(d): express terms, course of performance, course of dealing, and trade usage are construed as consistent with each other whenever reasonable. Only when reconciliation is unreasonable does the express term displace the usage. The court found price protection 'did not totally negate' posted price; it qualified it for committed work. Shell's two prior price protections of Nanakuli supplied course of performance; the Hawaii asphalt trade supplied usage.

Hypothetical · 90 sec

Vary. Same facts, but Shell had never price-protected Nanakuli before, and no other asphalt seller in Hawaii had ever done it. The 'posted price' clause stands alone.

Point: Strip out the two context tiers and the express term controls. Tests whether students see which fact was actually carrying the Ninth Circuit's reasoning. Course of performance was concrete (Shell did it twice); trade usage was industry-wide. Remove both and Shell wins.

Integration · 60 sec

Q. R2d § 222 takes a narrower view of trade usage than UCC § 1-303. Why does the UCC, drafted with merchants in mind, push further than the Restatement?

Land: UCC § 1-303 is a *takanah* — a code-level intervention to fix what Llewellyn and the drafters thought was the common law's under-recognition of merchant custom. The case sits at that fault line. Long-term commercial contracts live inside a trade; the UCC reads them that way by default. The drafting lesson on the Shell side: if you want the express term to defeat the usage, you must carefully negate it in the writing.

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