Contracts II, Pages 740–748

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

United States Court of Appeals for the Ninth Circuit, 1981

Judgment:

Reversed.

Facts:

Plaintiff, a large asphaltic paving contractor in Hawaii, had bought all of its required goods between 1963 to 1974 from defendant under two long-term supply contracts. They did not have a price-protection clause like most suppliers did for Hawaiian asphaltic paving companies. The contract said that the price was to be "Shell's Posted Price at the time of delivery," although the first two times that defendant raised their prices they gave plaintiff the old rates for three to four months afterwards. Yet defendant's employees who negotiated the contract then left Shell, and the new leadership had a different philosophy toward asphalt pricing. In 1974 defendant then raised the price from $44 to $76, to which plaintiff sued over a breach of the later 1969 contract.

Procedural History:

  • The jury returned a verdict of $220,800 for plaintiff on its first claim but failing to price protect plaintiff on 7200 tons of asphalt when they raised the price from $44 to $76.

  • The District Judge set aside the verdict and granted defendant's motion for judgment notwithstanding the verdict.

Plaintiff's Argument:

Price-protection was used by all material suppliers to the asphaltic paving trade in Hawaii. Defendant had extended its old rates for a few months the last two times it raised its prices.

Issue:

Was the contract's agreement to pay the posted price of delivery overridden by local trade custom?

Rules:

  • The UCC says to look beyond the words of the contract to reach the "true understanding" of the parties.

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    [D]ecisions of other courts in similar situations have managed to reconcile such trade usages with seemingly contradictory express terms where the prior course of dealings between the parties, trade usages, and the actual performance of the contract by the parties showed a clear intent by the parties to incorporate those usages into the agreement or to give to the express term the particular meaning provided by those usages, even at times varying the apparent meaning of the express terms.

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    [A] usage should be allowed to modify the apparent agreement, as seen in the written terms, as long as it does not totally negate it.

  • A trade usage is operative if it is a "regularly observed" practice of which the other party "should have been aware."

Reasoning:

  • The local trade practices are needed because of the number of government contracts without escalation clauses.

    Explanation:

    An escalation clause allows the price to be changed after bidding based on the fluctuation of materials' prices.

  • The local practice was to only lock prices for non-escalating contracts committed to beforehand. This technically makes it an unnamed exception to the contract, not a total negation, as other contracts would be for the list price.

  • Plaintiff and defendant had had close relationship for many years and the form was supplied by defendant. Other suppliers would have done price protection in this situtation.

Holding:

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[A]lthough the express price terms of Shell's posted price of delivery may seem, at first glance, inconsistent with a trade usage of price protection at time of increases in price, a closer reading shows that the jury could have reasonably construed price protection as consistent with the express term.