American Contract Law for a Global Age, 2017a

NANAKULI PAVING AND ROCK CO. v. SHELL OIL CO.
United States Court of Appeals for the Ninth Circuit
664 F.2d 772 (9th Cir. 1981)
HOFFMAN, D.J. 1
[Nanakuli was the smaller of the two major paving contractors in Hawaii. To
make asphalt paving, it had to purchase “paving asphalt”—in reality, a thick, black,
sticky petroleum byproduct technically called “bitumen” —from an oil company and
“aggregate,” a mixture of rock and sand, from local quarries. As of 1969, there were
two paving asphalt suppliers on Oahu, Shell (which supplied Nanakuli) and Chevron
(which supplied Nanakuli’s chief competitor, HB).
In the years leading up to 1969, Shell and Nanakuli developed a close
relationship, since Nanakuli was Shell’s only big customer in Hawaii and was very
interested in helping it to grow. In 1969, Shell and Nanakuli entered into a 7-year
contract under which Nanakuli agreed to buy all of its requirements of paving asphalt
from Shell, and Shell agreed to sell Nanakuli as much as it needed. The contract
provided that Nanakuli would pay Shell’s “posted price”—i.e., the price Shell would
generally charge customersCless a specific discount per ton negotiated with
Nanakuli. Because paving asphalt is derived from oil, and oil prices fluctuate, Shell’s
posted price would fluctuate more or less directly with crude oil prices. For the few
decades before 1969, oil prices had been steadily declining in inflation-adjusted
terms, and had generally moved in the $2 to $3 per barrel range.
In the wake of the Yom Kippur War, the Organization of Petroleum Exporting
Countries—in retaliation for the U.S. government’s support of Israel—unilaterally
imposed a 70% price increase in crude oil in the fall of 1973, raising it to over $5 a
barrel. The price continued to rise steadily; within the year the price would be $12.
Prior to this “oil crisis” Nanakuli had bid on major public works projects at a fixed
price, and those contracts did not permit price adjustments for any higher costs
Nanakuli might incur. Thus, when Shell in January 1974 raised its posted price from
$44 to $76 a ton (a 72% increase) Nanakuli was faced with substantial losses on these
government contracts for which it had not yet purchased paving asphalt. It demanded
that Shell afford it “price protection,” that is, that Shell would continue to provide all
the paving asphalt necessary to perform these contracts at the old price. Shell
1 [While all cases reprinted in casebooks are more or less trimmed, please note that the surgery done
on this opinion was unusually extensive. The unedited opinion would have run more than five times
as long, and would have had 44 footnotes. The phrase “Shell and Nanakuli developed a close
relationship” in the factual summary that follows, for example, condenses nearly ten pages of detailed
facts and bits of evidence that occurred over more than a decade and that are spread in various places
throughout the opinion. A full understanding of the case requires that it be read in its entirely,
preferably in a comfortable chair in an area free from interruptions and with an appropriate beverage
close at hand. For present purposes, we are giving you the key points here.—Eds.]
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408 CHAPTER VI: TERMS AND INTERPRETATION