Consideration is part of what defines a contract. Learn what it implies and why it matters when drafting a legal agreement between two parties.
What you’ll discover:
What is the definition of consideration in a contract?
What are the criteria for consideration?
What is appropriate contract consideration?
Is it always necessary to consider money?
What is an example of contract consideration?
Resources
You’re certain to hear the phrase “consideration” bandied about no matter what sort of contract you’re engaging into. This is because, in addition to offer and acceptance, “consideration” is an important component of a contract. So what exactly does it mean?
Table of Contents
What is the definition of consideration in a contract?
The notion of a “bargained-for transaction” underpins the legal definition of consideration. This indicates that both sides obtain what they agreed to, generally something of worth in exchange for something of value.
Assume that your neighbor admires your bicycle. You know you’re going to be moving soon, so you offer (an “offer” is a contract term) to sell it to her for $100. (consideration). She accepts your offer (acceptance is also a contract requirement), but she can’t pay you until she gets to the bank. So you draft a brief message outlining both of your intents to engage into this arrangement and give her a copy. Since all of the ingredients of a contract are in place, including this “bargained-for” transaction, you now have an enforceable contract.
If, on the other hand, you tell your neighbor that you would give her the bicycle if you are unable to sell it at your garage sale, there is no consideration since she has not promised to pay you anything. Your commitment to give her the bicycle is an enforceable promise, but it is not a contract. A gift does not generally include consideration.
What are the criteria for consideration?
A legal contract with its own conditions requires consideration. In order for consideration to be legitimate, each party to the contract must normally perform one of the following:
Form an agreement with the other side.
Act out a scene (such as provide a service).
Make a decision not to do anything.
The promise, performance, or agreement not to do something made by one party is generally in return for the promise, performance, or agreement not to do something made by the other party.
Anything a party promises, does, or agrees not to do must usually have some legal value attached to it. The worth does not have to be monetary or something that most people would consider valuable. In general, if a party accepts a promise, performs it, or refrains from doing (agrees not to do) something they have a legal right to do, the promise, performance, or forbearance may be determined to have some legally recognized value.
This wide interpretation of “value” is compatible with the notion of “contract freedom” as stated in Article I, Section 10, Clause 1 of the United States Constitution: “No State may make any Law impairing the Obligation of Contracts.” This provision, known as the “Contracts Clause,” typically prohibits any state from enacting legislation that might interfere with the ability to enter into a contract.
What is appropriate contract consideration?
Money is a popular kind of consideration, but it is not the only one. Several categories of consideration are recognized by the law, including:
Giving a service.
Land. Items. Products.
Giving up a current benefit.
Refusing to engage in a certain activity or behavior.
In most circumstances, it is irrelevant whether a side receives or seems to get any direct profit from the contract. So long as there is no fraud involved, if one party agrees to take a specific type of compensation that the other party commits to supply, that is nearly usually enough to establish the foundation of a legally enforceable contract – with few exceptions.
Is it always necessary to consider money?
There are several lengthy court judgments and articles on the question of what constitutes contemplation. To summarize, there are two additional critical points to understand. First and foremost, consideration does not have to be monetary. It might be anything valuable, such as another item or a service.
Second, what you negotiate for does not have to fit anybody else’s value criteria, and courts have routinely declined to weigh in on this issue. In other words, it doesn’t matter if you offered to sell your bicycle to your neighbor and asked for her collection of antique cigar tins in return, and your neighbor agreed to pay that amount (i.e., give you her collection of cigar tins in exchange for the bicycle). You made an offer for the bicycle, your neighbor accepted it for consideration, and you both meant to engage into this arrangement; consequently, it is a valid contract. It makes little difference if someone else thinks it’s fair or not, as long as it’s not outrageous.
What is an example of contract consideration?
Consideration may take many different forms, both tangible and abstract. Here are a few such examples:
An employer agrees not to terminate an employee if the employee has done nothing wrong and delivers services to the employer.
A party promises not to engage in dangerous activities (such as skiing, car racing, motorcycle racing, or skydiving) in return for the compensation and perks granted to them as a professional baseball player in addition to giving services as a professional baseball player.
Homeowners agree to sell their house to a buyer who agrees to pay them a certain amount of money for the residence.
An uncle pledges to give his nephew $5,000 if he does not consume alcohol or use cigarettes until the age of 21.
Delaying career pursuit (along with the inability to prepare for retirement during that time) and being responsible for home upkeep were exchanged for a portion of the other party’s retirement benefits and other assets obtained during that specified period.
A dentist’s widow sold his late wife’s business to another dentist, who agreed to pay $4,000 for the goodwill associated with operating a dental office in the same site where the dead dentist had worked, among other contractual stipulations.
These are only a few examples of things to think about; this is not a complete list. These examples are just intended to demonstrate the wide variety of promises, performances, and forbearances that might constitute legally-recognized compensation for entering into a contract. Always with a lawyer if you are unsure if a promise, performance, or forbearance would be deemed acceptable compensation.
Resources
While we have tried to convey the fundamentals of consideration in contracts here, the subject may be rather complicated.
Please utilize our online resource to acquire free customisable lawyer-drafted contracts for general services, contracts for specialized services, or general contracts for items if you want to ensure that the agreements you engage into on a personal or company basis have all of the necessary features.