CONTRACTS I
11.3.09
Class Notes
CLASS SLIDES
§ 1-303 Course of Performance, Course of Dealing, and Usage of Trade
A. A “course of performance” is a sequence of conduct between the parties to
a particular transaction that exists if:
1. the agreement of the parties with respect to the transaction involves
repeated occasions for performance by a party; and
2. the other party, with knowledge of the nature of the performance
and opportunity for objection to it, accepts the performance or
acquiesces in it without objection
B. A “course of dealing” is a sequence of conduct concerning previous
transactions between the parties to a particular transaction that is fairly to
be regarded as establishing a common basis of understanding for
interpreting their expressions and other conduct
C. A “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. The existence and scope of such a usage must be proved as facts. If
it is established that such a usage is embodied in a trade code or similar
record, the interpretation of the record is a question of law.
D. A course of performance or course of dealing between the parties or usage
of trade in the vocation or trade in which they are engage or of which they
are or should be aware is relevant in ascertaining the meaning of the parties’
agreement, may give particular meaning to specific terms of the agreement,
and may supplement or qualify the terms of the agreement. A usage of trade
applicable in the place in which part of the performance under the
agreement is to occur may be so utilized as to that part of the performance.
E. Except as otherwise provided in subsection (f), the express terms of an
agreement and any applicable course of performance, course of dealing, or
usage of trade must be construed whenever reasonable as consistent with
each other. If such a construction is unreasonable:
1. Express terms prevail over course of performance, course of dealing,
and usage of trade
2. Course of performance prevails over course of dealing and usage of
trade; and
3. Course of dealing prevails over usage of trade.
F. Subject to Section 2-209, a course of performance is relevant to show a
waiver or modification of any term inconsistent with the course of
performance
G. Evidence of a relevant usage of trade offered by one party is not admissible
unless that party has given the other party notice that the court finds
sufficient to prevent unfair surprise to the other party.
Hierarchy
1. Express Terms
2. Course of performance (post K)
o Sequence of conduct
o To a particular transaction
o Involves repetitive performance
o The other party accepts
performance
3. Course of dealing (pre K)
o Sequence of conduct
o Concerning a previous transaction
o Establishes a common basis of
understanding for interpreting
expressions of conduct
4. Usage of trade
o Practice or method of dealing
o Having such regularity of
observance in a place, vocation
o To justify an exception
Nanakuli Paving & Rock Co. v. Shell Oil Co. (p.418)

PROCEDURAL HISTORY
o Hawaiian State Court in Feb 1976 held in favor of Nanakuli Paving () for
$220,800 for the following reasons:
 Shell breached the 1969 contract in Jan 1974 by failing to price
protect  on 7200 tons of asphalt at the time Shell raised the
price for asphalt from $44 to $76.
 Price Protection (Nanakuli claims) required that Shell hold
the price on the tonnage  had already committed
because  had incorporated that price into bids put out to
or contracts awarded by general contractors and
government agencies
o The district court Granted Shell’s countermotion for judgment of n.o.v.
o The appeals court reversed Shell’s verdict in favor of Nanakuli for the
amount of $220,800 plus interest

ISSUE
o Was the evidence of trade usage properly admitted?
o Was the evidence of course of performance properly admitted?

FACTS
o Appellant entered into a supply contract with Appellee. Appellee agreed
to supply Appellant with all of its asphalt requirements. Appellant claims
that Appellee breached the contract by not offering price protection.
Appellant alleges that all suppliers in the trade use price protection and
that price protection is the "commercially reasonable standard for fair
dealing" in the trade. In support of the claim, Appellant presented
evidence of trade usage of price protection. In addition, Appellant
provided evidence of two prior instances where Appellee provided price
protection under the contract.

HOLDING
o Yes. The UCC allows the admission of extrinsic evidence of trade usage
and course of performance.
o A reasonable jury could have found that price protection was
incorporated into the 1969 agreement between Nanakuli and Shell and
that price protection was reasonably consistent with the express term of
seller’s posted price at delivery
o Shell could not have exercised good faith in carrying out its 1969 contract
with  when it raised its price by $32 on just a few days notice
 The code provides that “a price to be fixed by the seller or by the
buyer means a price for him to fix in good faith.”
 Shell’s manner of carrying out the price increase of 1974 did not
conform to commercially reasonable standards

RULE/STATUTE
o In commercial transactions good faith is required in the performance and
enforcement of all agreements or duties.
o Despite the Parol Evidence rule, the UCC allows the admission of Course
of Performance, Course of Dealing, and Trade Usage evidence

REASON
o ’s two theories for why Shell established price protection and their
abandonment in 1974 was a breach of the 1969 contract
 All material suppliers to the asphaltic paving trade in Hawaii
followed the trade usage of price protection
 Shell was obliged to price protect Nanakuli in order to act in good
faith because such a practice was universal in that trade in that
locality
o Shell’s defense for Judgment n.o.v.
 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


The two prior occasions on which it price protected Nanakuli,
constituted mere waivers of the contract’s price term, not a
course of performance of the contract
 UCC in support:
o When the meaning of acts is ambiguous, the
preference is for the waiver interpretation, and
o That one act alone does not constitute a relevant
course of performance
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:
I. History of Nanakuli-Shell relations before 1973
o 1963:
  negotiated a 5 year contract with shell,
which provided  with a guaranteed supply
of asphalt at reduce prices
o 1968:
  increases its cement plant at a cost of
$300,000 through indirect financing with 
 $2 discount on all sales of asphalt over 5000
tons
o 1969:
  borrows funds to finance expansion
  and  enter into long term supply
contract to run through 1976
 The 1969 contract included
 Commitment by shell to never
charge  more than Chevron
charged H.B., but the trial court
ruled this evidence as inadmissible
under parol rule because the terms
in the contract were not ambiguous
II. Trade usage before and after 1969
o The largest paving contracts were let by
government agencies and non the three levels of
government—local, state, or federal—allowed
escalation clauses for paving materials
o Extensive evidence was presented that, as a
consequence, aggregate suppliers routinely price
protected paving contracts in the 1960s and 1970s,
as did the largest asphaltic supplier in Oahu,
Chevron
III. Shell’s course of performance of the 1969 contract
o The Code considers actual performance of a
contract as the most relevant evidence of how the
parties interpreted the terms of that contract
IV. Shell-Nankuli Relations, 1973-74
o Two factors important to the 1974 failure by Shell
to price protect
 Arab oil embargo
 Complete change of command and policy in
Shell’s asphalt management
V. Scope of trade usage
o The validity of the jury verdict depends on 4 legal
questions
 How broad was the trade to whose usages
Shell was bound under its 1969 agreement
with ?
 The UCC’s purpose 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
 Usages “in the vocation or trade in
which they are engage or of which a
they are or should be aware give
particular meaning to and
supplement or qualify terms of an
agreement
 Were the two instances of price protection
of  by  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?
 Even if  did not regularly deal with
aggregate supplies, it did deal
constantly and almost exclusively on
Oahu with one asphalt paver
 There should have been an
awareness for business and the
appeals court does not find the
lower court abused its discretion or
misread the Code as applied to the
peculiar facts and ruling of the case

Could the jury have construed an express
contract term of  s posted price at delivery
as reasonably consistent with a trade usage
and ’s course of performance of the 1969
contract of price protection?
 Express terms do not constitute the
entire agreement, which must be
sought also in evidence of usages,
dealings and performance of the
contract itself
 Could the jury have found that good faith
obliged  to at least give advance notice of
a $32 increase in 1974?
 There clearly was enough proof for a
jury to find that the practice of price
protection was regular enough in its
observance to rise to the level of a
usage that would be binding on the
two parties
VI. Waiver or course of performance
o Course of performance- The action of the parties in
carrying out the contract at issue
 This consisted of Shell’s price protection of
Nanakuli in 1970 and 71.
o Course of dealing- Relations between the parties
prior to signing that contract
 This was excluded by the district judge
o Two instances of price protection (1970, 1971)
could not have amounted to a course of
performance in its 1969 contract because:
1. One instance does not constitute a course
of performance
2. The preference for waiver only applies
where acts are ambiguous
VII. Express terms as reasonably consistent with usage and
course of performance
o Under the UCC, an agreement goes beyond the
written words on a piece of paper. “Agreement
means the bargain of the parties in fact as found in
their language or by implication from other
circumstances including course of dealing or usage
of trade or course of performance
 Express terms, then, do not constitute the
entire agreement, which must be sought
VIII.
also in evidence of usages, dealings and
performance of the contract itself
 Express terms are meant to help
understand the entire agreement
Good faith in setting price
o Shell could not have exercised good faith in
carrying out its 1969 contract with  when it raised
its price by $32 on just a few days notice
 The code provides that “a price to be fixed
by the seller or by the buyer means a price
for him to fix in good faith.”
o Shell’s manner of carrying out the price increase of
1974 did not conform to commercially reasonable
standards
Contradiction with final expression
 You can explain or supplement if A or B is true below
o UCC § 2-202 Final Expression in a record: Parol or Extrinsic Evidence
 Terms with respect to which the confirmatory records of the
parties agree or which are otherwise set forth in a record
intended by the parties as a final expression of their
agreement with respect to such terms as are included therein
may not be contradicted…but may be explained or
supplemented
o (a) By course of dealing or usage of trade or by course
of performance (§ 1-303); and
o (b) By evidence of consistent additional terms unless
the court finds the writing to have been intended also
as a complete and exclusive statement of the terms of
the agreement
o Important Comments
 Comment 1 (C): The UCC does not require a
preliminary finding of ambiguity before allowing
course of dealing, usage of trade or course of
performance to be used to interpret terms in the
agreement;
 Comment 3: “If the additional terms [i.e., the parol]
are such that, if agreed upon, they would certainly
have been included in the document in the view of the
court, then evidence of their alleged making [via the
parol] must be kept from the trier of fact.”
 If something is so substantial that it sways
your decision to agree to a

contract/purchase, then it is assumed that
it will be in the contract
If it is not in the contract, then the courts
assume it was not agreed upon and
excluded under the parol