Columbia Nitrogen Corp. v. Royster Co.

(Nitrogen Producer) v. (Nitrogen Buyer)

451 F. 2d 3 (4th Cir. 1971)

UNDER THE UCC, EVIDENCE OF USAGE OF TRADE AND COURSE OF DEALING SHOULD BE
EXCLUDED WHENEVER IT CANNOT BE REASONABLY CONSTRUED AS CONSISTENT WITH THE
TERMS OF THE CONTRACT

INSTANT FACTS
Royster (D), seller of phosphate, who had a contract with Columbia Nitrogen Corp. (P) for sale
of phosphate, sued the latter for damages for breach of contract when Columbia (P) failed to
buy the amount of phosphate agreed upon under their contract.
BLACK LETTER RULE
Evidence of custom and usage or course of dealings is not admissible where it contradicts the
express, plain, and unambiguous terms of a validly written and fully integrated contract.

PROCEDURAL BASIS
Appeal from action for damages for breach of contract. FACTS In 1966, Royster (D) negotiated
with Columbia Nitrogen Corp. (P) to sell to Columbia (P) a minimum of 31,000 tons of
phosphate per year for three years, with an option to extend the contract. The price of
phosphate per ton was stated in the contract and was subject to an escalation clause
dependent on the cost of producing the phosphate. The contract also contained a merger
clause. Due to a plunge in phosphate prices, Columbia (P) was unable to resell phosphate
competitively and ordered less than one tenth of the tonnage required under its contract with
Royster (D). Royster (D), having sold the phosphate below contract price, sued Columbia (P)
for damages. At trial, Columbia (P) sought to show that due to the uncertainty in crop and
weather conditions, and other factors, price and quantity terms in contracts in the industry
were mere speculations, subject to change based on market conditions. Additionally,
Columbia offered evidence to show that in its prior dealings with Royster (D), where Columbia
(P) sold nitrogen to Royster (D ), there was always substantial deviation from price terms
stated in contracts. The trial court excluded this evidence on the ground that it was in
contradiction to the express terms of the contract. Columbia (P) appeals the ruling of the trial
court.

ISSUE
Is evidence of custom and usage or course of dealings admissible where it contradicts the
express, plain, and unambiguous terms of a validly written and fully integrated contract?

DECISION AND RATIONALE

(Butzner, J.) Yes. Evidence of custom and usage or course of dealings is not admissible where
it contradicts the express, plain, and unambiguous terms of a validly written and fully
integrated contract. In this case, Royster (D) contends that the evidence offered by Columbia
(P) should be excluded as inconsistent with the terms of the contract because the contract
itself has detailed provisions regarding price, its escalation, and quantity of the phosphate to
be bought by Columbia (P). This court believes that such a broad exclusionary rule is not
within the language of the UCC rule. The test of admissibility is not whether the contract
appears on its face to be
complete in every detail, but whether the proffered evidence of course of dealing and trade
usage reasonably can be construed consistent with the express terms of the agreement. In
this case, it is reasonable to construe the terms of the contract with evidence of usage and
course of dealings. In the first place, the contract does not expressly state that course of
dealings and usage of trade can not be used to explain or supplement the written contract.
Additionally, the contract is silent about adjusting prices and quantities to reflect a declining
market. Thus, in such a situation it is reasonable to rely on course of dealing and usage to
supplement the contract and explain its terms. Finally, the default clause of the contract
refers only to the failure of the buyer to pay for delivered phosphate. Both parties during the
contract negotiations failed to state any consequences for Columbias (P) refusal to take
phosphate deliveries, for which Royster (D) is now suing. However, unlike what Royster (D)
contends, before allowing damages for Columbias (P) failure to accept the phosphate
deliveries, this court must determine that Columbia (P) has in fact defaulted on its contract.
This must be done by reliance on evidence of custom and usage and course of dealing that is
consistent with the contracts express terms. The contract also states that verbal agreements
of the parties will not be recognized because the contract expresses all the terms and
conditions of their
contract completely. However, evidence of custom and usage and course of dealing is not
the same as verbal agreements or understandings between the parties. While evidence of
additional terms should be excluded where the contract is complete, no such rule applies to
evidence of custom and usage and course of dealings. The official comment to the UCC notes
that contracts are to be read on the assumption that evidence of custom and usage and
course of dealings were taken for granted when the contract was phrased, unless the terms of
the contact carefully negate them. Consequently, such evidence can not be conclusively
rejected. (Reversed and remanded.)
Analysis:
Under the UCC, evidence of custom and usage and course of dealings between the parties
can be used to supplement and explain the terms of a contract where it is reasonable. In this
case, the contract expressly includes price and quantity requirements. However, the court
indicated that this still does not allow per se exclusion of such evidence. It appears from this
courts broad interpretation of UCC 2 202 that evidence of custom and usage and course of
dealings can be admitted to interpret contracts under all circumstances, except where the
contract clearly negates custom and usage and course of dealing. Remember that under the

parol evidence rule, where a contract is fully integrated, and it is complete (such as in this
case), evidence of prior or contemporaneous oral agreements or understandings of the
parties is not admitted into evidence. However, evidence of custom and usage and course of
dealings can be admitted whenever it is reasonably consistent with the terms of a contract,
regardless of whether the contract is fully integrated.