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Western Systems Power Pool, Inc.
Introduction to the Law of Contracts
A. Contract Formation
Three elements are required: Offer – Acceptance –
Consideration
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
confusion whether offer was revoked.
create
 Rejection of an offer terminates the offer, even
ahead of a deadline.
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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.
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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
circumstances.
 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
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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
offer.
 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
utopia?
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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).
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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.
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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
minds
 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
term.
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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
Mutuality.
 Generally, bargained for promises need not be
of equal value. A “peppercorn” or a dollar is
enough.
 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.
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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., allrequirements 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.
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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
payment)).
 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 2305).
 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)).
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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
Frauds.
 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 2201(2)). WSPP methodology?
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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)
2.
 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.
Obligation to Perform in Good Faith: Under
modern contract law, each party is obligated to
perform in good faith.