Do Express Terms Really Control?

Before leaving the current discussion of Section 1-303 [we will see it again], I want to take a moment to focus on Section 1-303(e).  I do so because of a very important potential issue raised in the text of that section. As noted in the last post, this section creates the hierarchy among course of performance, course of dealing and usage of trade.  The first sentence to Section 1-303(e) states this hierarchy and specifically directs the court as to the manner it is to interpret the express terms and other elements of agreement:

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. [Emphasis added]

So, the court is given a specific mandate on how to construe a conflict between express language of an agreement and the items stated in Section 1-303(e). This is in addition to the general mandate of Section 1-103(a), so I consider it particularly important.  Section 1-303(e) tells the court that it must construe them as consistent wherever reasonable to do so. If however, such construction is ‘unreasonable’, Section 1-303(e) states that express terms prevail:

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.

            The majority of reported cases have found that where the express language of the agreement and the course of performance, course of dealing and trade usage are inconsistent with one and other, express terms control. What has not been discussed in these opinions is whether the express provision in question can reasonably be construed in a manner consistent with course of performance, course of dealing and usage of trade.  Rather, courts have generally looked at the express language, determined that it is inconsistent with the course of performance or other elements of agreement, and therefore the express terms control.      

Taken literally, as these courts have, the result would be that course of performance, course of dealing and trade usage will not be considered if the express terms of the agreement are different than any of those elements. I disagree with that result. My difficulty with such a reading is that it dramatically limits the impact of course of performance, course of dealing and usage of trade in the precise area that those concepts are designed to address—trying to figure out what the parties meant when they entered into their agreement.  In effect, such a result is a statement to that, where express terms exist and cover a contested issue, those terms will control, every time, thus eliminating the elements of course of performance, course of dealing and usage of trade from consideration. I consider this result illogical and inconsistent with the essence of the definition of agreement.

            The solution to the potential conflict is squarely within the statute. The challenge stated is:  How to utilize course of dealing, course of performance and trade usage when the express terms differ from those concepts?  For this endeavor, I suggest the key focus be on the last clause in the first sentence of Section 1-303(e), noted above, particularly that the court must construe course of performance, course of dealing and usage of trade ‘consistent with the express terms whenever reasonable’ to do so. The challenge therefore, is to convince the court that, even though the express terms differ from the course of performance, course of dealing or usage of trade, the manner of construction being presented is ‘reasonable’, and therefore, the supplemental concepts apply with full force.  There are enough cases and definitions from which to draw a definition of reasonable that would fit almost any situation.

            There is case law support for a non literal reading and application of Section 1-303(e)..  Celebrity, Inc. v. Kemper, 1981-NMSC-084, 96 N.M. 508, 632 P.2d 743 the court addressed a situation where the course of dealing for rejecting goods was different than the express language of the written agreement.  At issue was the manner in which seller and buyer treated situations where goods have been rejected.  Under the terms of the invoices supplied by Celebrity, Kemper was required to return goods within five days after receipt, and further that these goods would be accepted only with prior written authorization.  The course of dealing between the parties however was that typically Kemper would set aside defective items, and Celebrity’s salesman would check the items and if defective would make an adjustment accordingly.  In the matter being contested, the salesman refused to make the adjustment when notified of the defective goods.

            The court distinguished between those rejections which occurred prior to the salesman’s refusal to follow the course of dealing, and those which occurred thereafter.  As to the former, the court found that:

… Kemper was justified in acting according to the established course of dealing until notified of a change, [and] we find that only those items set aside and presented to the salesman were properly rejected. In Celebrity Inc at 744.

The court therefore recognized that even though the invoice, which it treated as part of the contract, required a specific protocol for returning goods, the course of dealing between the parties dictated a different result.  The court went on to state, however, that once notice was given to Kemper that the written terms were going to be followed, the course of performance would not override the written terms.

            In Nanakuli Paving & Rock Co. v. Shell Oil Co., 664 F.2d 772 (9th Cir. 1981), the court was faced with a term in a written agreement which contained a specific price term designed to ‘price protect’ a paving contractor if the supplier raised its price for asphalt.   On two prior occasions, Shell had protected the contractor, but refused to do so on the third price raise.  The price term in question for the asphalt was “Shell’s posted Price at time of delivery,” F.O.B. Honolulu. In addressing this issue, the court stated:

…[W]e hold that, although the express price term 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 reasonable with the express term.  In Nanakuli Paving & Rock Co. at 780.

The court thus treated the question of whether the written price term could be reasonably construed as consistent with the trade usage was a question of fact for the jury.

            I believe that Celebrity Inc. and Nanakuli Paving and Rock Company reach the correct results by giving course of performance and usage of trade appropriate consideration as to what the parties’ agreement was.  To exclude course of performance, course of dealing and usage of trade summarily because there are express terms in the agreement to the contrary is, in my opinion, inconsistent with the purposes of the expanded definition of agreement.

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