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          Western Systems Power Pool, Inc.

         Introduction to the Law of Contracts

A. Contract Formation
    Three elements are required: Offer – Acceptance –
    1. Offer
         Offer and Acceptance = Agreement (Meeting of
          the Minds)
         ―A‖ must have offered to buy/sell something in
          order for ―B‖ to accept the offer.
         If Offer is revoked before Acceptance, there is
          no contract.
         But, conduct or statements, e.g., that an offer
          would be outstanding for specific period of time,
          can limit right to revoke.
         Ambiguous     communications     can      create
          confusion whether offer was revoked.
         Rejection of an offer terminates the offer, even
          ahead of a deadline.

Offer, cont’d

More specifically,
  What Constitutes an Offer: A manifestation
   of willingness to enter into a bargain,
   communicated such that a reasonable
   recipient of the communication would believe
   that the bargain could be concluded by giving
   assent -- i.e., by accepting the Offer.
   Requirement of lntent to Make a Bargain:
    Offers must be distinguished from invitations
    to negotiate. Intent is reflected by language
    and the surrounding circumstances. Even if
    an important term is omitted, a statement can
    be an offer if the omission does not indicate a
    lack of intent to conclude a bargain and the
    missing term is implied by, e.g., custom or
    other evidence.
   RFPs: Solicitation of bids/proposals is not an
    offer, but responding bids usually are offers.
   Definiteness of terms: A statement will
    usually not be considered an offer unless it
    makes clear the subject matter of the
    proposed bargain, the quantity involved, and
    the price, i.e., material terms.

Offer, con’d

 Legal Significance of an Offer: An offer
  creates a power of acceptance in the
  addressee, i.e., the power to conclude a bargain
  and bind the offeror by acceptance.
 Termination of Offer: The termination of the
  offeree's power of acceptance may result from
  any of the following causes:
   Expiration or lapse: Per stated expiration
    time, or after a time reasonable under the
   Rejection by the Offeree: Offeree's rejection
    terminates his power of acceptance even
    though the power of acceptance would
    otherwise not have lapsed.
   Counteroffer: by Offeree is a rejection of the
    offer and terminates the power of acceptance.
    Distinguished from:
   Inquiries (test is whether the inquiry is an
    inquiry or a rejection)
   Counteroffer during option period (not
    terminate offer because there is contractual
    right to open-offer period

  Offer, con’d

   Example – Minneapolis & St. Louis
    Railway Co. v. Columbus Rolling-Mill Co.,
    119 U.S. 149 (1886). When defendant offered
    to sell plaintiff two to five thousand tons of
    steel, plaintiff rejected the offer by placing an
    order for twelve hundred tons of steel. By
    accepting defendant's offered price, but
    ordering less than the specified quantity,
    plaintiff made a ―qualified acceptance‖ of
    defendant's offer—in law a rejection of that
 UCC Variant: The UCC provides that a definite
  and seasonable expression of acceptance is
  acceptance, even if it states terms additional to
  or different from those offered or agreed upon,
  but if acceptance to the additional or different
  terms is made subject to assent, it is a
  counteroffer (UCC 2-207(1)).
 What is the UCC? An attempt at commercial

Offer, con’d
 UCC Effect of additional terms consistent
  with offered terms (Merchants): If the parties
  are both merchants, proposed additional terms
  become part of the contract unless (i) the offer
  expressly limits acceptance to the offered terms
  offer; (ii) the additional terms would materially
  alter the contract; or (iii) the offeror notifies the
  offeree within a reasonable time of objection to
  the additional terms (UCC 2-207(2)).
   But, terms that contradict offer provisions do
    not become part of the contract; the contract
    is the offer, the terms agreed in the
    acceptance, plus terms implied by the UCC to
    replace conflicting terms (UCC 2-207(2)).
   Firm offers under Common law: Offer that by
    its terms is to remain open to a fixed date.
    Some jurisdictions permit revocation despite
    firmness. Others preclude revocation if there
    was reliance.
   So, under UCC a signed written offer by a
    merchant to buy or sell goods, which gives
    assurance that it will be held open, is not
    revocable for lack of consideration during the
    time stated (or if no time stated, for a
    reasonable time), provided that the period of
    irrevocability can in no event exceed three
    months (UCC 2-205).

2.   Acceptance
      Acceptance is effective only of an outstanding
       (un-expired, un-rejected, un-revoked) offer.
      Acceptance must be timely, in accordance with
       any deadlines of offer.
      Counteroffer- is a rejection of other party’s offer
       and itself is an offer.
      Cannot counteroffer, but then later accept the
       initial offer. Why not?
      Counteroffer has same legal status as an offer.
      Communication    of    acceptance:    When
       acceptance is made by a communicated
       promise, the communicated promise is usually
       the acceptance.
      Mailbox rule: Where the mail is a reasonable
       method of communicating acceptance, the
       acceptance is usually effective on date of
       mailing, even though the acceptance does not
       reach the offeror until later date.

3.   Meeting of the Minds
      Offer = Acceptance, i.e., did Sam accept what
       Joe offered? Are the communications clear as
       to principal terms of the deal: Product, Price,
       Quantity, Duration of Contract
      Without Meeting of the Minds, there is no
       Agreement- no Contract.
      Contract document (WSPP Confirmation) or
       other binding proof, e.g. electronic recordings,
       will establish whether there was meeting of the
      Objective Theory of Contracts: Whether a
       bargain has been formed by mutual assent of
       the parties is determined by examining what a
       reasonable person in the position of each party
       would be led to believe by the words or conduct
       of the other party at the time. Although modern
       contract law rejects the concept that a
       subjective meeting of the minds is necessary
       (and instead relies on manifested intentions), if
       both parties subjectively attach the same
       meaning to a term, that meaning will govern
       even if it is not a reasonable meaning of the

4.   Consideration: Exchange of Money or other
     Value = Mutuality
      Agreement is enforceable only if supported by
       an exchange of value: money or mutual
       performance obligations, or reliance.
      Consideration is equivalent to a ―bargain‖ (i.e.,
       an exchange of promises or a promise for
       performance where each party views what it
       gives as the price for what it gets)—essence of
      Generally, bargained for promises need not be
       of equal value. A ―peppercorn‖ or a dollar is
        But, gross disparity may be used as evidence
         of defenses such as unconscionability,
         incapacity, fraud, duress, etc. and may be
         relevant to availability of equitable relief such
         as specific performance.
        Examples where nominal consideration is
         typical: options and guarantees. Reliance on
         these undertakings is itself consideration,
         over and above any cash.

Consideration, con’d
         Examples of No Consideration
           Promise is illusory: Illusory promise is a
            statement in form but not substance, because
            it does not limit the speaker's future options.
           Agreements to Agree: Unenforceable –
            ―General Motors‖ agrees to sell its Cadillac
            Division at a price to be negotiated.
           But, if a material term is to be set by an
            objective standard, e.g., CPI or discernible
            market value, that term will be enforced.
            Similarly, quantity can float, e.g., all-
            requirements contracts or all-output contracts.
           Agreement to do what a party already is
            required to do lack consideration, but slight
            changes, e.g. amendments, are enforceable.
           Agreement of creditor to accept lesser
            amount is unenforceable unless accompanied
            by some other value, e.g., payment earlier
            than required, or creditor agrees to refrain for
            filing debtor’s involuntary bankruptcy. By
            statute, however, in some States a creditor’s
            release in return for partial payment will be
            enforceable, even without cash consideration.

Consideration, con’d
        The Uniform Commercial Code
          Uniform statute through States pertaining to
           sale of goods. Is electricity ―goods‖?
          UCC will fill in non-material terms (e.g., UCC
           2-305(1) (price); 2-309 (time for delivery and
           duration of contract); 2-310 (time for
          UCC provides that sale-of-goods contracts
           with unilateral price setting are enforceable.
           This is not an agreement to agree, it is an
           agreement that one party agrees to accept
           the other party’s good faith decision (UCC 2-
          UCC adds a best efforts requirement to any
           lawful agreement for exclusive dealing in
           goods, e.g., ―A‖ is the exclusive agent for ―B‖
           in the Western States (UCC 2-306(2)).

5.   Other Formation Matters: Statute of Frauds
     (Get it in writing)
      Statute of Frauds
        In General: The Statute of Frauds (every
         State) requires that certain types of contracts
         be in writing, or at least evidenced by a
         signed, written memorandum of essential
         terms. The basic purpose is to prevent fraud
         and perjury.
        UCC Contracts for the sale of goods:
         Contracts for the sale of goods priced at $500
         or more must be written (UCC 2-201). WSPP
         Agreement provides that electronically
         recorded telephone calls satisfy the Statute of
          Some Exceptions:
            Buyer accepts and receives all or part of
             the goods (result: enforceable contract as
             to accepted goods) (UCC 2-201(3)(c));
            The contract is between merchants and
             within a reasonable time a written
             confirmation (which satisfies the Statute
             as to the sender) is sent and the
             receiving party does not dispatch a
             written objection within 10 days (UCC 2-
             201(2)). WSPP methodology?

B.   Performance and Breach
     1. Contract Interpretation Concepts
           Plain meaning, the touchstone
           Each word given meaning
           Provisions construed harmoniously, in context
            of other provisions
           Industry terms given customary meaning (e.g.,
            firm, non-firm, capacity, demand, energy)
            (sometimes meaning not evident)
           Parole Evidence Rule: no evidence inconsistent
            with written terms is admissible to determine
            contract meaning. A fine rule that often has no
            effect because written terms are unclear.
     2.   Obligation to Perform in Good Faith: Under
          modern contract law, each party is obligated to
          perform in good faith.