Takeaway
In short, this case shows the UCC’s contextual approach to commercial contracts: a written price term may be qualified by established trade usage and course of performance, and a merchant’s pricing conduct must also satisfy commercially reasonable standards of good faith.
Nanakuli, a major Hawaiian paving contractor, bought its asphalt requirements from Shell under long-term supply agreements. Their 1969 contract stated that the price would be “Shell’s Posted Price at time of delivery.” Nanakuli contended that this written term was qualified by a well-established Hawaiian asphalt-paving practice known as price protection: when suppliers raised prices, they would either give advance notice or continue the former price for work the paving contractor had already bid or committed to perform under fixed-price, non-escalating contracts.
Shell had price protected Nanakuli when it raised asphalt prices in 1970 and 1971. In late 1973, however, Shell announced an increase from $44 to $76 per ton effective January 1, 1974, without meaningful advance notice and refused to protect Nanakuli on 7,200 tons of asphalt tied to jobs Nanakuli had already committed to perform. Nanakuli claimed that Shell’s refusal breached the contract and Shell’s UCC duty of good faith.
A jury awarded Nanakuli $220,800 on its price-protection claim. The federal district court, after removal from Hawaii state court, entered judgment notwithstanding the verdict for Shell. The Ninth Circuit vacated that judgment and directed entry of judgment on the jury’s verdict for Nanakuli.
Issue #1
Whether the evidence was sufficient to support the jury’s verdict, making judgment notwithstanding the verdict improper.
Holding
Yes. Substantial evidence permitted reasonable jurors to find that Shell breached its agreement with Nanakuli by refusing price protection in 1974.
Reasoning
In reviewing judgment notwithstanding the verdict, the court had to give Nanakuli the benefit of all reasonable inferences and could not weigh witness credibility. The verdict could stand unless the evidence permitted only one reasonable conclusion, and the record did not meet that demanding standard.
The evidence supported both of Nanakuli’s theories: price protection could be an implied term of the parties’ agreement through trade usage and Shell’s course of performance, and Shell’s abrupt implementation of the 1974 increase could independently violate the UCC obligation of good faith. Because either theory could support the verdict, the district court could not displace the jury’s factual conclusions.
Issue #2
Whether the relevant trade usage could include pricing practices of suppliers to the Hawaiian asphaltic-paving trade, including aggregate suppliers, rather than only practices in the sale of asphalt.
Holding
Yes. The district court reasonably defined the relevant trade as the Hawaiian asphaltic-paving trade and properly admitted evidence of price protection by suppliers of the principal paving materials.
Reasoning
Under UCC section 1-205, a usage of trade may arise from regular practices in a place, vocation, or trade. The statutory language and comments permit consideration of broadly local commercial practices of which a party knew or should have known; they do not confine usage evidence to the exact commodity named in the contract.
Oahu’s unusually small and integrated market made the broader definition especially appropriate. Shell’s Hawaiian representative closely followed Nanakuli’s business, understood that asphalt and aggregate were the two major inputs into paving, knew that public contracts generally lacked escalation clauses, and knew that a sudden material-price increase could cause a paving contractor serious losses.
The evidence permitted the jury to find that price protection was regularly, and perhaps universally, practiced by aggregate suppliers and by Chevron, the other significant asphalt supplier. The UCC does not require an ancient or universal custom; regular observance sufficient to justify an expectation of compliance is enough. The proof also described the practice with enough specificity for the jury to award damages based on the protected tonnage.
Issue #3
Whether Shell’s price protection of Nanakuli in 1970 and 1971 was necessarily a waiver of the written price term rather than a course of performance interpreting the contract.
Holding
No. A jury could reasonably find that the two instances were a course of performance showing Shell’s understanding that the contract required some form of price protection.
Reasoning
A course of performance consists of repeated conduct under the contract that the other party accepts or acquiesces in, and it is especially important under the UCC because the parties’ own conduct is strong evidence of what they understood their agreement to mean. Although one isolated act is insufficient, the 1970 and 1971 increases were the only pre-1974 occasions when Shell’s performance would have called for price protection.
The UCC comment favoring a waiver characterization applies when the meaning of conduct is genuinely ambiguous. Here, Shell’s conduct was not necessarily ambiguous. A Shell official who had participated in the contractual relationship described the need to bargain with Nanakuli over the extent of protection for already committed work, which a jury could view as recognizing an existing obligation rather than granting a discretionary concession.
Shell’s later conduct reinforced that inference. It gave Nanakuli advance notice and effectively provided carryover pricing on later price increases, making it reasonable for the jury to regard the earlier protection as an established mode of performing the parties’ agreement rather than as isolated waivers.
Issue #4
Whether a trade usage and course of performance requiring price protection could be reasonably reconciled with the express term setting the price at Shell’s posted price at the time of delivery.
Holding
Yes. Price protection could operate as a limited exception to, rather than a total negation of, the posted-price-at-delivery term.
Reasoning
The UCC defines an agreement more broadly than its printed language. The parties’ bargain includes applicable trade usage, course of dealing, and course of performance, all of which help establish the commercial meaning of the written words. Such evidence is admissible even when the written language appears facially clear; ambiguity is not a prerequisite.
The court was required to construe express terms and usage consistently whenever reasonable. The relevant practice did not replace Shell’s posted-price term across the board. It applied only when Shell increased prices, and only to work already committed at the lower price under non-escalating contracts. In all ordinary transactions, Shell’s then-current posted price still governed.
The evidence also supported the conclusion that the asserted practice was genuinely part of this commercial relationship, not a post hoc effort to rewrite the contract. Chevron used price protection under a similar long-term asphalt contract, other material suppliers used it in the same market, and Shell itself had repeatedly protected Nanakuli. In that setting, a jury could treat price protection as a significant but limited qualification of the express price provision.
Issue #5
Whether Shell’s implementation of the 1974 price increase could independently breach the UCC duty of good faith.
Holding
Yes. The jury could find that Shell failed to observe commercially reasonable standards of fair dealing by imposing a $32-per-ton increase without adequate advance notice or protection for previously committed work.
Reasoning
When a merchant fixes a price under the UCC, it must act in good faith, which includes observing reasonable commercial standards of fair dealing in the relevant trade. A posted price ordinarily satisfies that requirement, but the dispute here concerned not merely the amount Shell charged, but the manner in which Shell put the increase into effect.
Nanakuli presented evidence that advance notice and protection for work already bid were normal pricing practices in the Hawaiian asphaltic-paving market. Chevron, for example, gave substantial advance notice when it raised its asphalt price to the same $76 level in 1974. Shell, by contrast, announced its increase at year’s end and left Nanakuli with no practical opportunity to adjust bids or obtain protection for fixed-price work already undertaken.
The jury could therefore conclude that Shell’s conduct departed from commercially reasonable standards of fair dealing. This good-faith theory provided an alternative basis for the verdict even if price protection were not treated as an implied contract term.