Nanakuli Paving and Rock Company, a Division of Grace Brothers, Ltd., a Hawaii Corporation v. Shell Oil Company, Inc., a Delaware Corporation, Nanakuli Paving and Rock Company, a Division of Grace Brothers, Ltd., a Hawaii Corporation v. Shell Oil Company, a Delaware Corporation

Edwin L. Doernberger, Cades Schutte Fleming & Wright, Honolulu, Hawaii, argued, for plaintiff-appellant; James S. Campbell, Honolulu, Hawaii, on brief.

George L. Saunders, Jr., Sidley & Austin, Chicago, Ill., Harold S. Levy, New York City, argued, for defendant-appellee; John A. Hoskins, Hoddick, Reinwald, O'Connor & Marrack, Honolulu, Hawaii, on brief.

Appeal from the United States District Court for the District of Hawaii.

Before BROWNING, Chief Judge, and KENNEDY, Circuit Judge, and HOFFMAN,* District Judge.

Appellant Nanakuli Paving and Rock Company (Nanakuli) initially filed this breach of contract action against appellee Shell Oil Company (Shell) in Hawaiian State Court in February, 1976.1 Nanakuli, the second largest asphaltic paving contractor in Hawaii, had bought all its asphalt requirements from 1963 to 1974 from Shell under two long-term supply contracts; its suit charged Shell with breach of the later 1969 contract.2 The jury returned a verdict of $220,800 for Nanakuli on its first claim, which is that Shell breached the 1969 contract in January, 1974, by failing to price protect Nanakuli on 7200 tons of asphalt at the time Shell raised the price for asphalt from $44 to $76.3 Nanakuli's theory is that price-protection, as a usage of the asphaltic paving trade in Hawaii, was incorporated into the 1969 agreement between the parties, as demonstrated by the routine use of price protection by suppliers to that trade, and reinforced by the way in which Shell actually performed the 1969 contract up until 1974. Price protection, appellant claims, required that Shell hold the price on the tonnage Nanakuli had already committed because Nanakuli had incorporated that price into bids put out to or contracts awarded by general contractors and government agencies. The District Judge set aside the verdict and granted Shell's motion for judgment n. o. v., which decision we vacate. We reinstate the jury verdict because we find that, viewing the evidence as a whole, there was substantial evidence to support a finding by reasonable jurors that Shell breached its contract by failing to provide protection for Nanakuli in 1974. Quichocho v. Kelvinator Corp., 546 F.2d 812, 813 (9th Cir. 1976). We do not believe the evidence in this case was such that, giving Nanakuli the benefit of all inferences fairly supported by the evidence and without weighing the credibility of the witnesses, only one reasonable conclusion could have been reached by the jury. Cockrum v. Whitney, 479 F.2d 84, 85-86 (9th Cir. 1973).

Nanakuli offers two theories for why Shell's failure to offer price protection in 1974 was a breach of the 1969 contract. First, it argues, all material suppliers to the asphaltic paving trade in Hawaii followed the trade usage of price protection and thus it should be assumed, under the U.C.C., that the parties intended to incorporate price protection into their 1969 agreement. This is so, Nanakuli continues, even though the written contract provided for price to be "Shell's Posted Price at time of delivery," F.O.B. Honolulu. Its proof of a usage that was incorporated into the contract is reinforced by evidence of the commercial context, which under the U.C.C. should form the background for viewing a particular contract. The full agreement must be examined in light of the close, almost symbiotic relations between Shell and Nanakuli on the island of Oahu, whereby the expansion of Shell on the island was intimately connected to the business growth of Nanakuli. The U.C.C. looks to the actual performance of a contract as the best indication of what the parties intended those terms to mean. Nanakuli points out that Shell had price protected it on the two occasions of price increases under the 1969 contract other than the 1974 increase. In 1970 and 1971 Shell extended the old price for four and three months, respectively, after an announced increase. This was done, in the words of Shell's agent in Hawaii, in order to permit Nanakuli's to "chew up" tonnage already committed at Shell's old price.4

Nanakuli's second theory for price protection is that Shell was obliged to price protect Nanakuli, even if price protection was not incorporated into their contract, because price protection was the commercially reasonable standard for fair dealing in the asphaltic paving trade in Hawaii in 1974. Observance of those standards is part of the good-faith requirement that the Code imposes on merchants in performing a sales contract. Shell was obliged to price protect Nanakuli in order to act in good faith, Nanakuli argues, because such a practice was universal in that trade in that locality.

Shell presents three arguments for upholding the judgment n. o. v. or, on cross appeal, urging that the District Judge erred in admitting certain evidence. First, it says, the District Court should not have denied Shell's motion in limine to define trade, for purposes of trade usage evidence, as the sale and purchase of asphalt in Hawaii, rather than expanding the definition of trade to include other suppliers of materials to the asphaltic paving trade. Asphalt, its argument runs, was the subject matter of the disputed contract and the only product Shell supplied to the asphaltic paving trade.5 Shell protests that the judge, by expanding the definition of trade to include the other major suppliers to the asphaltic paving trade, allowed the admission of highly prejudicial evidence of routine price protection by all suppliers of aggregate.6 Asphaltic concrete paving is formed by mixing paving asphalt with crushed rock, or aggregate, in a "hot-mix" plant and then pouring the mixture onto the surface to be paved. Shell's second complaint is that the two prior occasions on which it price protected Nanakuli, although representing the only other instances of price increases under the 1969 contract, constituted mere waivers of the contract's price term, not a course of performance of the contract. A course of performance of the contract, in contrast to a waiver, demonstrates how the parties understand the terms of their agreement. Shell cites two U.C.C. Comments in support of that argument: (1) that, when the meaning of acts is ambiguous, the preference is for the waiver interpretation, and (2) that one act alone does not constitute a relevant course of performance. Shell's final argument is that, even assuming its prior price protection constituted a course of performance and that the broad trade definition was correct and evidence of trade usages by aggregate suppliers was admissible, price protection could not be construed as reasonably consistent with the express price term in the contract, in which case the Code provides that the express term controls.

We hold that the judge did not abuse his discretion in defining the applicable trade, for purposes of trade usages, as the asphaltic paving trade in Hawaii, rather than the purchase and sale of asphalt alone, given the unusual, not to say unique, circumstances: the smallness of the marketplace on Oahu; the existence of only two suppliers on the island; the long and intimate connection between the two companies on Oahu, including the background of how the development of Shell's asphalt sales on Oahu was inextricably linked to Nanakuli's own expansion on the island; the knowledge of the aggregate business on the part of Shell's Hawaiian representative, Bohner; his awareness of the economics of Nanakuli's bid estimates, which included only two major materials, asphalt and aggregate; his familiarity with realities of the Hawaiian marketplace in which all government agencies refused to include escalation clauses in contract awards and thus pavers would face tremenduous losses on price increases if all their material suppliers did not routinely offer them price protection; and Shell's determination to build Nanakuli up to compete for those lucrative government contracts with the largest paver on the island, Hawaiian Bitumuls (H.B.), which was supplied by the only other asphalt company on the islands, Chevron, and which was routinely price protected on materials. We base our holding on the reading of the Code Comments as defining trade more broadly than transaction and as binding parties not only to usages of their particular trade but also to usages of trade in general in a given locality. This latter seems an equitable application of usage evidence where the usage is almost universally practiced in a small market such as was Oahu in the 1960's before Shell signed its 1969 contract with Nanakuli.7 Additionally, we hold that, under the facts of this case, 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 with Nanakuli rather than being a waiver by Shell of those terms.8

Lastly we hold that, although 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. We reach this holding for several reasons. First, we are persuaded by a careful reading of the U.C.C., one of whose underlying purposes is to promote flexibility in the expansion of commercial practices and which rather drastically overhauls this particular area of the law. The Code would have us look beyond the printed pages of the contract to usages and the entire commercial context of the agreement in order to reach the "true understanding" of the parties. Second, decisions 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. Third, the delineation by thoughtful commentators of the degree of consistency demanded between express terms and usage is that 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. We believe the usage here falls within the limits set forth by commentators and generally followed in the better reasoned decisions. The manner in which price protection was actually practiced in Hawaii was that it only came into play at times of price increases and only for work committed prior to those increases on non-escalating contracts. Thus, it formed an exception to, rather than a total negation of, the express price term of "Shell's Posted Price at time of delivery." Our decision is reinforced by the overwhelming nature of the evidence that price protection was routinely practiced by all suppliers in the small Oahu market of the asphaltic paving trade and therefore was known to Shell; that it was a realistic necessity to operate in that market and thus vital to Nanakuli's ability to get large government contracts and to Shell's continued business growth on Oahu; and that it therefore constituted an intended part of the agreement, as that term is broadly defined by the Code, between Shell and Nanakuli.

History Of Nanakuli-Shell Relations Before 1973

Nanakuli, a division of Grace Brothers, Ltd., a Hawaiian corporation, is the smaller of the two major paving contractors on the island of Oahu, the larger of the two being Hawaiian Bitumuls (H.B.). Nanakuli first entered the paving business on Oahu in 1948, but it only began to move into the largest Oahu market, Honolulu, in the mid-1950's. Until 1964 or so, Nanakuli only got small paving jobs, such as service stations, driveways, and small subdivision streets; it was not in a position to compete with H.B. for government contracts for major roads, airports, and other large jobs. In the early sixties Nanakuli owner Walter Grace began to negotiate a mutually advantageous arrangement with Shell whereby Shell, which had a small market percentage and no asphalt terminals in Hawaii,9 would sign a long-term supply contract with Nanakuli that would commit Nanakuli to buy its asphalt requirements from Shell. On the other hand, Nanakuli would be helped to expand its paving business on Oahu through a guaranteed supply and a discount on its asphalt prices. Nanakuli's growth would expand the market for Shell's asphalt on the island, which would justify Shell's capital investment of a half a million dollars on Oahu, to which asphalt would be brought in heated tankers from Shell's refinery in Martinez, California.10

Shell signed two five-year contracts in 1963: a supply contract with Nanakuli itself and a distributorship with Grace, which provided for a $2 commission on all Nanakuli's sales. In fact, almost all Nanakuli's sales were to itself and thus the commission operated, according to Shell's Hawaiian representative, Bohner, primarily as a discount mechanism. Lennox, who succeeded Grace as president in 1965 at Grace's death,11 testified that its purpose was "to make us competitive in our paving operation with our competitor (H.B.) who is much larger than ourselves because they were a distributor for the Standard Oil Company's asphalt operation." Lennox and Smith, who joined Nanakuli as vice-president in 1965 and eventually succeeded Lennox, both saw Nanakuli's and Shell's relationship as that of partners. That characterization was not denied by Bohner, Shell's Hawaiian representative from 1964 to 1978, who, in fact, essentially corroborated their description of the close relations between the two companies. As a symbol of that relationship, Nanakuli painted its trucks "Shell white," placed Shell's logo on those trucks, chose the same orange as used by Shell for its own logo, and put the Shell logo on its stationary.

In 1966 Pacific Cement and Aggregates (P.C. & A.), Nanakuli's landlord at its rented rock quarry at Halawa, was bought by Lone Star Cement Corporation, which later became Lone Star Industries. Lone Star requested that Nanakuli upgrade its plant facilities at the quarry, which Nanakuli estimated would cost between $250,000 to $300,000. Nanakuli, knowing Shell was eager to build up its paving business on Oahu, approached Shell for direct financing of the plant, an idea to which Shell was initially receptive. Lennox testified that Shell "had a sizeable installation at Iwilei and they didn't think we were selling enough of their product and they wanted us to sell more and that's why we enlarged our plant." Shell management philosophy later changed and it was decided not to finance the plant directly but rather to offer Nanakuli an additional $2 volume discount on all sales over five thousand tons to help finance the plant, according to Bohner. Lennox testified that Shell authorized Nanakuli to tell Lone Star that Shell, with a million-dollar investment in Hawaii, fully supported Nanakuli's plant expansion plans. In 1968 two top Shell asphalt officials came from the mainland to discuss Nanakuli's expansion: Blee from San Francisco and Lewis from New York.12 Together with Bohner and Nanakuli's Lennox and Smith, they met with officials of Nanakuli's bank to discuss the loan and repayment schedule. The three contracts were finally signed after long negotiations on April 1, 1969. They were to parallel the amortization schedule of the bank loan for the plant: a supply contract, a distributorship contract, and volume discount letter, all three to last until December 31, 1975, at which point each would have the option to cancel on six-months' notice, with a minimum duration of over seven years, April 1, 1969, to July 1, 1976. Such long-term contracts were certainly unusual for Shell and this one was probably unique among Shell's customers, at least by 1974.13

(4-6) Lennox' testimony, which was partially stricken by the court as inadmissible, was that Shell's agreement with Nanakuli in 1969 included a commitment by Shell never to charge Nanakuli more than Chevron charged H.B., in order to carry out the underlying purpose of the agreement to make Nanakuli competitive with H.B. and thus expand its and Shell's respective businesses on Oahu. This testimony was ruled inadmissible as parol evidence.14 Shell, itself at the end of the trial, read in parts of Smith's earlier deposition in which he made a similar point.15 Smith's deposition testimony was that, although no written provision was included on price protection, he was led to believe by Shell's Bohner that he would get price protection. "I think there was a thought running between the two parties at that time that something would be done." It was only after the fact, he added, that Bohner told Nanakuli that he had to get permission for price protection from the mainland at the time of price increases; before that, "we had no idea how the pricing was done." Smith's comments on additional terms agreed to were not as probative as those of Lennox, who was president and chief negotiator for Nanakuli of the 1969 contract. Nanakuli's offer of proof by Lennox was that Shell agreed "to sustain that price during those contracts in the same way in which Standard Oil Company (Chevron) sustained its price to the principal paving contractor on the island, Hawaiian Bitumuls, if there was any price increase" and to "not exceed Standard Oil's (Chevron's) posted price for asphalt sold to Hawaiian Bitumuls." It was agreed that Nanakuli would have to submit bids on a fixed-price basis and be price protected to compete with H.B. "We understood that Shell gave us the same protection in our bidding and our purchase of asphalt from them to incorporate in our work," Lennox did testify, adding that by that means Nanakuli could compete with H.B. and Shell would thereby benefit. He said Nanakuli understood the price term to mean that Shell would not increase prices without advance notice and would hold the price on work bid for enough time to allow Nanakuli to use up the tonnage bid at the old price. Smith's testimony backed up that of Lennox: the price was to be "posted price as bid as was understood between the parties," further explaining that it was to be Shell's price at time and place of delivery, except for price increases, at which point the price was time and place of bid for a period of time or a specified tonnage.16

Much information relevant to the "commercial context" of the agreement, essential to an understanding of the meaning of the terms, was contained in the testimony of Smith and Lennox. See Haw.Rev.Stat. § 490:2-202, Comment 2. None of it was flatly contradicted by the evasive responses of Bohner to such inquiries. Smith testified that Bohner was in Nanakuli's offices at least weekly, sometimes was involved in the preparation of bids, and knew when a bid had been submitted or a contract awarded, at times attending the awards himself. The amount of time he spent following Nanakuli's progress was understandable; as he explained, in the 1960's and 1970's Nanakuli "was basically ... our only customer at this time." Thus Nanakuli felt it had no need to notify Shell in writing of projects awarded; Lennox testified he was only told to do so on one occasion, the award of its first big contract on August 17, 1970. Due to the long shipping time from California, Bohner had to know well in advance Nanakuli's supply needs. Lennox testified that Bohner was "as close to us as any person could be as far as the asphalt supply was concerned. He had to know what we were doing ...." Lennox said Bohner was not only aware of Nanakuli's day-to-day progress but knowledgeable about the broader asphaltic paving marketplace in which Nanakuli was competing. Bohner denied having closely delved into the economics of the aggregate trade or even knowing much about the asphalt prices of its chief competitor, Chevron, but he admitted he was interested in Chevron's prices; made inquiries of Chevron's customers, including H.B.; and had a ballpark estimate of aggregate prices. The jury could have inferred that he knew more about Chevron's and the aggregate suppliers' prices than he admitted. The jury could have looked to the importance of aggregate prices to Nanakuli's success in getting large contracts; Bohner's statements that he was "very definitely interested in the construction trades," especially asphaltic paving; his subscription to a local construction journal that listed paving as well as other construction projects on Oahu; his membership in an asphaltic paving institute; and his knowledge about the use of aggregates as a component of asphaltic paving.

The key to price protection being so prevalent in 1969 that both parties would intend to incorporate it into their contract is found in one reality of the Oahu asphaltic paving market: the largest paving contracts were let by government agencies and none of the three levels of government-local, state, or federal-allowed escalation clauses for paving materials. If a paver bid at one price and another went into effect before the award was made, the paving company would lose a great deal of money, since it could not pass on increases to any government agency or to most general contractors. Extensive evidence was presented that, as a consequence, aggregate suppliers routinely price protected paving contractors in the 1960's and 1970's, as did the largest asphaltic supplier in Oahu, Chevron. Nanakuli presented documentary evidence of routine price protection by aggregate suppliers as well as two witnesses: Grosjean, Vice-President for Marketing of Ameron H.C. & D., and Nihei, Division Manager of Lone Star Industries for Pacific Cement and Aggregate (P.C. & A.). Both testified that price protection to their knowledge had always been practiced: at H.C. & D. for many years prior to Grosjean's arrival in 1962 and at P.C.&A. routinely since Nihei's arrival in 1960. Such protection consisted of advance notices of increases, coupled with charging the old price for work committed at that price or for enough time to order the tonnage committed. The smallness of the Oahu market led to complete trust among suppliers and pavers. H.C. & D. did not demand that Nanakuli or other pavers issue purchase orders or sign contracts for aggregate before incorporating its aggregate prices into bids. Nanakuli would merely give H.C. & D. a list of projects it had bid at the time H.C. & D. raised its prices, without documentation. "Their word and letter is good enough for us," Grosjean testified. Nihei said P.C. & A. at the time of price increases would get a list of either particular projects bid by a paver or simply total tonnage bid at the old price. "We take either one. We take their word for it." None of the aggregate companies had a contract with Nanakuli expressly stating price protection would be given; Nanakuli's contract with P.C. & A. merely set out that P.C. & A. would not charge Nanakuli more than it charged its other customers.

The evidence about Chevron's practice of price protection came in the form of an affidavit by Bery Jameyson, Chevron's Division Manager-Asphalt in California. He stated that Chevron had routinely price protected H.B. on work bid for many years, the last occasion prior to the signing of the 1969 contracts between Nanakuli and Shell being a price increase put into effect on March 7, 1969, with the understanding that H.B. would be protected on work bid, which amounted to 12,000 tons. In answer to Shell's protest that such evidence was not relevant without the contract itself, Nanakuli introduced the contract into evidence. Much like the contract at issue here, it provided that the price to H.B. would be a given percentage of the price Chevron set for a specified crude oil in California. No mention was made of price protection in the written contract between H.B. and Chevron.

In addition to evidence of trade usages existing in 1969 when the contract at issue was signed, the District Judge let in evidence of the continuation of that trade usage after 1969, over Shell's protest. He stated that, giving a liberal reading to Section 1-205, he felt that later evidence was relevant to show that the expectation of the parties that a given usage would be observed was justified. The basis for incorporating a trade usage into a contract under the U.C.C. is the justifiable expectation of the parties that it will be observed. That later evidence consisted here of more price protection by the aggregate companies on Oahu, as well as continued asphalt price protection. Chevron after 1969 continued price protecting H.B. on Oahu and, on raising prices in 1979, price protected Nanakuli on the island of Molokai, where Nanakuli purchased its asphalt from Chevron. Additionally, Shell price protected Nanakuli in 1977 and 1978 on Oahu.17

Shell's Course Of Performance Of The 1969 Contract

The Code considers actual performance of a contract as the most relevant evidence of how the parties interpreted the terms of that contract. In 1970 and 1971, the only points at which Shell raised prices between 1969 and 1974, it price protected Nanakuli by holding its old price for four and three months, respectively, after announcing a price increase. In the late summer of 1970, Shell had announced a price increase from $35 to $40 a ton effective September 1, 1970. When Nanakuli protested to Bohner that it should be price protected on work already committed, Blee wrote Bohner an in-house memo that, if Bohner could not "convince" Nanakuli to go along with the price increase on September 1, he should try to "bargain" to get Nanakuli to accept the price raise by at least the first of the year, which was what was finally agreed upon. During that four-month period, Nanakuli bought 3,300 tons. Shell announced a second increase in October, 1970, from $40 to $42 effective December 31st. Before that increase went into effect, on November 25 Shell increased the raise to $4, making the price $44 as of the first of the year.18 Shell again agreed to price protect Nanakuli by holding the price at $40, which had been the official price since September 1, for three months from January to March, 1971. Shell did not actually raise prices again until January, 1974, but at several points it believed that increases would be necessary and gave several months' advance notice of those possible increases. Those actions were in accord with Shell's own policy, as professed by Bohner, and that of other asphalt and aggregate suppliers: to give at least several months' advance notice of price increases. On January 14, 1971, Shell wrote its asphalt customers that the maximum 1971 increase would be to $46. On July 9, 1971, another letter promised the price would not go over $50 in 1972. In addition, Bohner volunteered on direct the information that Shell price protected Nanakuli on the only two occasions of price increases after 1974 by giving 6 months' advance notice in 1977 and 3 or 4 months' advance notice in 1978, a practice he described as "in effect carryover pricing," his term for price protection. By its actions, Bohner testified, Shell allowed Nanakuli time to make arrangements to buy up tonnage committed at the old price, that is, to "chew up" tonnage bid or contracted. Shell apparently offered this testimony to impress the jury with its subsequent good faith toward Nanakuli. In fact, it also may have reinforced the impression of the universality of price protection in the asphaltic paving trade on Oahu and, by showing Shell's adherence to that practice on every relevant occasion except 1974, have highlighted for the jury what was the commercially reasonable standard of fair dealing in effect on Oahu in 1974.

Two important factors form the backdrop for the 1974 failure by Shell to price protect Nanakuli: the Arab oil embargo and a complete change of command and policy in Shell's asphalt management. The jury was read a page or so from the World Book about the events and effect of the partial oil embargo, which shortened supplies and increased the price of petroleum, of which asphalt is a byproduct. The federal government imposed direct price controls on petroleum, but not on asphalt. Despite the international importance of those events, the jury may have viewed the second factor as of more direct significance to this case. The structural changes at Shell offered a possible explanation for why Shell in 1974 acted out of step with, not only the trade usage and commercially reasonable practices of all suppliers to the asphaltic paving trade on Oahu, but also with its previous agreement with, or at least treatment of, Nanakuli.

Bohner testified to a big organizational change at Shell in 1973 when asphalt sales were moved from the construction sales to the commercial sales department. In addition, by 1973 the top echelon of Shell's asphalt sales had retired. Lewis and Blee, who had negotiated the 1969 contract with Nanakuli, were both gone.19 Their duties were taken over by three men: Fuller in San Mateo, California, District Manager for Shell Sales, Lawson, and Chippendale, who was Shell's regional asphalt manager in Houston. When the philosophy toward asphalt pricing changed, apparently no one was left who was knowledgeable about the peculiarities of the Hawaiian market or about Shell's long-time relations with Nanakuli or its 1969 agreement, beyond the printed contract.

Shell had begun rethinking its asphalt pricing policies several years before. Swanson, who succeeded Lewis in New York in 1970, wrote an internal memorandum on April 21, 1970, in which he discussed frankly the advantages and disadvantages of price protection of its asphalt buyers. Such a practice assured Shell of captive-volume sales, he wrote. The practice of granting carry-over pricing at times of price increases, however, had the unfortunate side effect of depressing prices in the asphalt market everywhere else, the memorandum concluded. This rethinking apparently led to a November 25, 1970, letter setting out "Shell's New Pricing Policy" at its Honolulu and Hilo terminals. The letter explained the elimination of price protection: "In other words, we will no longer guarantee asphalt prices for the duration of any particular construction projects or for the specific lengths of time. We will, of course, honor any existing prices which have been committed for specific projects for which we have firm contractual commitments." The letter requested a supply contract be signed with Shell within 15 days of the receipt of an award by a customer.

The District Judge based his grant of judgment n. o. v.20 largely on his belief that, had Nanakuli desired price protection, it should have complied with Shell's request in that 1970 letter, by which we assume he meant Nanakuli should have made a firm contractual commitment with Shell for each project on which its bid was successful within 15 days of award.21 That conclusion, however, ignores several facts. First, compliance by Nanakuli with the letter's demand that a contract be signed within 15 days of an award would have offered Nanakuli little, if any, protection. Nanakuli still would have been stuck with only charging the government the price incorporated into its bid if Shell raised its price between bid and award. The purpose of price protection was to guarantee the price in effect when a paver made a bid because of the often lengthy time span between bid and award. Second, if price protection was a part of Nanakuli's 1969 agreement with Shell, Shell had no right to terminate unilaterally that protection. Third, the letter was addressed to "Gentlemen" with Nanakuli's name typed in at the top; it was apparently addressed to all Shell's Hawaiian customers. Fourth, Nanakuli officials testified that they did not believe the letter was applicable to its unusual situation of already having a long-term contract with Shell. Smith and Lennox both testified that they did not view the letter as applicable to that supply contract but only to sales it might make to third parties under the distributorship contract. Shell characterized that argument as disingenuous, given Nanakuli's infrequent, if not nonexistent, sales to third parties. Nevertheless, the letter does assume that a Shell customer would need to sign a contract or purchase order setting forth the terms of sale as well as the price for any asphalt they would need to buy after an award. Nanakuli, on the other hand, already had a supply contract with all the terms of sales set forth, a point its two officials made repeatedly at trial. For example, Smith testified he saw no need to notify Shell because Bohner knew of each project and because the supply contract was a firm contractual commitment with Shell.22 Shell had added in the 1970 letter: "All previous contractual commitments made prior to the date of this letter will, of course, be honored." Smith's reading of this was that Nanakuli's supply contract with Shell was a firm contractual commitment by Shell and that no further contract was needed. "We felt that this letter was unapplicable (sic) to our supply contract, that we already had a contractual commitment with Shell Oil Company which was not to end before 1975." Smith said he did not discuss with Bohner that part of the letter, which also announced the increase in asphalt prices to $44 on January 1, because "(t)here was no need to. The price had been protected before. He knew it. We knew it." There is an additional reason why Nanakuli might have felt that the letter did not apply to its particular situation. The letter announced that Shell would charge "from this date forward ... the posted selling price on the date of purchase." This was different from the express term of Nanakuli's contract with Shell, which was the price in effect at time of delivery. Either Shell's agreement with Nanakuli embraced price protection, in which case Shell could not unilaterally abrogate Nanakuli's rights by this letter, or, as Shell argues, only the words on the written contract counted, in which case the price to Nanakuli was Shell's price at delivery. In the latter case, Nanakuli could safely ignore any attempt by Shell to change the price to that at purchase. Given Nanakuli's particular agreement, as it understood the agreement to be, the jury could have believed that Nanakuli officials reacted reasonably in believing that parts of the letter dealing with the need to notify Shell of awards won did not apply to Nanakuli.

Nanakuli's strongest argument as to its failure to comply with the letter was that there was no need to notify Shell, as Bohner already knew of each project as it was bid and each award as it was made. Lennox testified, "The Shell Oil representative was in our office frequently and knew what jobs we had successfully bid." At another point Lennox said, "The Shell representative was in the office and was fully aware of what we were doing and what jobs we had gotten. He was familiar and was more or less a partner in this thing; he even attended the bid openings at times. He was fully aware and congratulated us every time we got a nice big job because it was more for Shell." Bohner kept his principals informed of Nanakuli's projects, Lennox said. He added, "(W)e had always been protected and our understanding was that we were protected and it wasn't necessary to keep making notices." Smith in his deposition said that Bohner only told him that he lacked the authority to grant price protection "after the fact." Since he knew nothing about how Shell arrived at its pricing, Smith assumed Bohner could carry out Shell's agreement to price protect Nanakuli each time it was needed without consulting the mainland.

After Shell's December 31, 1973, letter arrived on January 4, 1974, Smith called Bohner, as he had done before at times of price increases, to ask for price protection, this time on 7200 tons. Bohner told Smith that he would have to get in touch with the mainland, but he expected that the response would be negative. Smith wrote several letters in January and February asking for price protection. After getting no satisfaction, he finally flew to California to meet with Lawson, Fuller, and Chippendale. Chippendale, from the Houston office, was acknowledged by the other two to be the only person with authority to grant price protection.23 All three Shell officials lacked any understanding of Nanakuli and Shell's long, unique relationship or of the asphaltic trade in Oahu. They had never even seen Shell's contracts with Nanakuli before the meeting. When apprised of the three and their seven-year duration, Fuller remarked on the unusual nature of Nanakuli's relations with Shell, at least within his district. Chippendale felt it was probably unique for Shell anywhere. Smith testified that Fuller admitted to knowing nothing, beyond the printed page of Nanakuli's agreement with Shell, of the background negotiation or Shell's past pricing policies toward Nanakuli. Chippendale could not understand why Nanakuli even had a distributorship contract giving it a $2 commission on sales; he thought Nanakuli had been paid "illegally." No one had ever heard about Shell giving price protection to Nanakuli before. Instead of asking Bohner directly, Chippendale told Fuller to search the files for something on paper. Fuller testified that Shell would not act without written proof of Shell's past price protection of Nanakuli. He admitted he was unable to find anything in the files before 1972 because the departments had been reorganized in that year, about which he informed Chippendale. Chippendale accordingly decided to deny Nanakuli any price protection and wrote a draft of a letter for Fuller to send Nanakuli. He wrote a note to Fuller that he should adopt the "least said" approach with Nanakuli and check any letters with the legal department. When asked at trial if he had ever simply asked Bohner about Shell's past pricing practices toward Nanakuli, Fuller answered, "No, I didn't know we had it, other than the standard policy if we had one which we didn't."24 Chippendale told Smith in the California meeting that, although 7200 tons represented an infinitesimal amount for Shell, it would set a bad precedent for Shell, since price protection was not Shell's "current policy." (emphasis supplied). Shell people told him, Smith testified from contemporaneously made notes, that "any past practice was inapplicable at the present time."25 Smith testified from those same notes that he had left the meeting under the impression that Shell was going out of business in Hawaii.

We conclude that the decision to deny Nanakuli price protection was made by new Houston management without a full understanding of Shell's 1969 agreement with Nanakuli or any knowledge of its past pricing practices toward Nanakuli. If Shell did commit itself in 1969 to price protect Nanakuli, the Shell officials who made the decisions affecting Nanakuli in 1974 knew nothing about that commitment. Nor did they make any effective effort to find out. They acted instead solely in reliance on the 1969 contract's express price term, devoid of the commercial context that the Code says is necessary to an understanding of the meaning of the written word. Whatever the legal enforceability of Nanakuli's right, Nanakuli officials seem to have acted in good faith reliance on its right, as they understood it, to price protection and rightfully felt betrayed by Shell's failure to act with any understanding of its past practices toward Nanakuli.

The validity of the jury verdict in this case depends on four legal questions. First, how broad was the trade to whose usages Shell was bound under its 1969 agreement with Nanakuli: did it extend to the Hawaiian asphaltic paving trade or was it limited merely to the purchase and sale of asphalt, which would only include evidence of practices by Shell and Chevron? Second, were the two instances of price protection of Nanakuli by Shell in 1970 and 1971 waivers of the 1969 contract as a matter of law or was the jury entitled to find that they constituted a course of performance of the contract? Third, could the jury have construed an express contract term of Shell's posted price at delivery as reasonably consistent with a trade usage and Shell's course of performance of the 1969 contract of price protection, which consisted of charging the old price at times of price increases, either for a period of time or for specific tonnage committed at a fixed price in non-escalating contracts? Fourth, could the jury have found that good faith obliged Shell to at least give advance notice of a $32 increase in 1974, that is, could they have found that the commercially reasonable standards of fair dealing in the trade in Hawaii in 1974 were to give some form of price protection?

We approach the first issue in this case mindful that an underlying purpose of the U.C.C. as enacted in Hawaii is to allow for liberal interpretation of commercial usages. The Code provides, "This chapter shall be liberally construed and applied to promote its underlying purposes and policies." Haw.Rev.Stat. § 490:1-102(1). Only three purposes are listed, one of which is "(t)o permit the continued expansion of commercial practices through custom, usage and agreement of the parties; ...." Id. § 490:1-102(2)(b). The drafters of the Code explain:

This Act is drawn to provide flexibility so that, since it is intended to be a semipermanent piece of legislation, it will provide its own machinery for expansion of commercial practices. It is intended to make it possible for the law embodied in this Act to be developed by the courts in the light of unforeseen and new circumstances and practices....

.... The text of each section should be read in the light of the purpose and policy of the rule or principle in question, as also of the Act as a whole, and the application of the language should be construed narrowly or broadly, as the case may be, in conformity with the purposes and policies involved.

.... (t)he Code seeks to avoid ... interference with evolutionary growth....

This principle of freedom of contract is subject to specific exceptions found elsewhere in the Act.... (An example being the bar on contractual exclusion of the requirement of good faith, although the parties can set out standards for same.) ... In this connection, Section 1-205 incorporating into the agreement prior course of dealing and usages of trade is of particular importance.

Id., Comments 1 & 2 (emphasis supplied). We read that to mean that courts should not stand in the way of new commercial practices and usages by insisting on maintaining the narrow and inflexible old rules of interpretation. We seek the definition of trade usage not only in the express language of the Code but also in its underly