664 F.2d 772 (9th Cir. 1991)
Nanakuli Paving and Rock Company, the second largest asphaltic paving contractor in Hawaii, entered into long-term supply contracts with Shell Oil Company in 1963 and 1969 for all its asphalt requirements.1
Nanakuli began paving operations on Oahu in 1948 and expanded into Honolulu in the mid-1950s, initially handling small jobs before competing for larger government contracts.2 In the early 1960s, Nanakuli negotiated with Shell to secure a guaranteed asphalt supply and discount in exchange for committing to Shell, which sought to expand its market share on the island through a half-million-dollar investment in terminals.3 The 1963 contracts included a supply agreement and distributorship providing a $2 commission, later supplemented in 1969 with additional volume discounts to finance plant upgrades at Nanakuli's Halawa quarry.4
The 1969 agreements, signed April 1 and lasting until at least July 1976, consisted of a supply contract, distributorship, and volume discount letter paralleling a bank loan amortization for plant expansion.5 Nanakuli officials understood the price term Shell’s Posted Price at time of delivery to incorporate price protection at increases, based on negotiations with Shell representatives like Bohner, who maintained close weekly contact with Nanakuli, attended bid openings, and knew of projects awarded.6 Shell's Hawaiian representative Bohner was aware of Nanakuli's bidding economics involving asphalt and aggregate, and the companies painted trucks with Shell logos as a symbol of their partnership-like relationship.7
In the Oahu asphaltic paving market, government agencies at all levels refused escalation clauses in contracts, leading aggregate suppliers like H.C. & D. and P.C. & A., as well as Chevron supplying competitor Hawaiian Bitumuls, to routinely price protect pavers by extending old prices for committed work or providing months of advance notice.8 Shell itself price protected Nanakuli during 1970 and 1971 increases, holding the old price for four and three months respectively after announcements, allowing Nanakuli to purchase committed tonnage at the prior rate.9 Nanakuli presented evidence of these practices through witnesses Grosjean and Nihei, and an affidavit from Chevron's Jameyson documenting protection on 12,000 tons in 1969.10
Organizational changes at Shell in 1973 shifted asphalt sales to a new department with new management unfamiliar with the Hawaiian market or prior Nanakuli relations, coinciding with the Arab oil embargo's effects on petroleum prices.11 On December 31, 1973, Shell announced a price increase from $44 to $76 effective January 1, 1974, without advance notice or price protection for Nanakuli's 7,200 tons of committed work, despite Nanakuli's requests and meetings with Shell officials in California.12 Nanakuli filed suit in Hawaiian state court in February 1976 alleging breach of the 1969 contract, resulting in a jury verdict of $220,800 on the price protection claim, which the district judge set aside by granting Shell's motion for judgment notwithstanding the verdict. Nanakuli appealed to the Ninth Circuit, which reversed the judgment n.o.v. and reinstated the jury verdict.13
Whether the trade for purposes of trade usage evidence included the asphaltic paving trade in Hawaii rather than being limited to asphalt sales?14
Under Haw.Rev.Stat. § 490:1-205(2), usage of trade is any practice or method of dealing having such regularity of observance in a place, vocation or trade as to justify an expectation that it will be observed with respect to the transaction in question, and parties can be bound by a usage common to the place they are in business even if it is not the usage of their particular vocation or trade.15
Yes. The court held that the judge did not abuse his discretion in defining the trade as the asphaltic paving trade in Hawaii rather than the purchase and sale of asphalt alone given the smallness of the Oahu marketplace with only two suppliers on the island and the long intimate connection between the companies. Government agencies refused escalation clauses so all suppliers including aggregate companies routinely price protected pavers making Shell's knowledge of the broader trade usage reasonable under the Code's locality-based standard. Bohner maintained close weekly contact and knew of Nanakuli's bidding economics involving both asphalt and aggregate.16
The trade for trade usage evidence included the asphaltic paving trade in Hawaii.17
Whether Shell's price protections in 1970 and 1971 constituted a course of performance of the 1969 contract or mere waivers?18
Under Haw.Rev.Stat. § 490:2-208(1), a course of performance is a sequence of conduct after the agreement accepted or acquiesced in without objection that is relevant to determine the meaning of the agreement, and where acts are not ambiguous the jury may find they constitute a course of performance rather than waivers.19
Yes. The court held that a jury could reasonably have found that Shell's acts on two occasions to price protect Nanakuli were not ambiguous and therefore indicated Shell's understanding of the terms of the agreement rather than being a waiver by Shell of those terms.20 Shell price protected Nanakuli in 1970 by holding the old price for four months after the increase from $35 to $40.21 Shell did the same in 1971 for three months after the increase to $44.22
These were the only occasions calling for such conduct before 1974.23 Bohner described the actions as allowing Nanakuli to chew up committed tonnage.24 This supported the jury's finding of course of performance under the Code.25
Shell's price protections in 1970 and 1971 constituted a course of performance of the 1969 contract.26
Whether a trade usage of price protection could reasonably be construed as consistent with the contract's express term of Shell's posted price at time of delivery?27
Under Haw.Rev.Stat. § 490:1-205(4), the express terms of an agreement and an applicable course of dealing or usage of trade shall be construed wherever reasonable as consistent with each other, and a usage should be allowed to modify the apparent agreement as long as it does not totally negate the express term.28
Yes. The court held that although the express price term of Shell's posted price at delivery may seem inconsistent with a trade usage of price protection, a closer reading shows that the jury could have reasonably construed price protection as consistent with the express term.29 The usage only came into play at times of price increases and only for work committed prior to those increases on non-escalating contracts.30 This formed an exception rather than a total negation of the posted price term.31
The conclusion was reinforced by Shell's own 1970 and 1971 price protections.32 It was also reinforced by the universal practice by all suppliers in the small Oahu market.33 The Code's policy of flexibility in commercial practices supported the result.34
A trade usage of price protection could reasonably be construed as consistent with the contract's express term of Shell's posted price at time of delivery.35
Whether good faith required Shell to provide price protection or advance notice of the 1974 price increase under commercially reasonable standards in the Hawaiian asphaltic paving trade?36
Under Haw.Rev.Stat. § 490:2-103(1)(b), for a merchant good faith means the observance of reasonable commercial standards of fair dealing in the trade. Under Haw.Rev.Stat. § 490:1-203, every contract or duty within this chapter imposes an obligation of good faith in its performance or enforcement.
Yes. The court held that the jury could have found that good faith obliged Shell to at least give advance notice of a $32 increase in 1974 because the commercially reasonable standards of fair dealing in the trade in Hawaii in 1974 were to give some form of price protection.37 Chevron gave at least six weeks’ advance notice when raising its price to $76.38 All suppliers routinely provided price protection or advance notice.39
Shell gave no notice in the December 31, 1973 letter and refused protection on 7,200 tons despite Nanakuli's requests.40 New Shell management acted without knowledge of prior practices or the Hawaiian market context.41
Good faith required Shell to provide price protection or advance notice of the 1974 price increase under commercially reasonable standards in the Hawaiian asphaltic paving trade.42
Related opinions on this issue
Kennedy concurred to emphasize that the case involves specific pricing practices rather than an allegation of unfair dealing generally.43 The opinion should not be interpreted to permit juries to import price protection or a similarly specific contract term from a concept of good faith that is not based on well-established custom and usage or other objective standards of which the parties had clear notice.44 Evidence of custom and usage regarding price protection in the asphaltic paving trade was not contradicted in major respects.45
The jury could find that the parties knew or should have known of the practice at the time of making the contract.46 These are necessary predicates for either theory of the case, namely interpretation of the contract based on the course of its performance or a finding that good faith required the seller to hold the price.47