Key Takeaways

  • The consideration contract law definition centers on “bargained-for exchange,” where each party gives or promises something of value.
  • Consideration may involve money, goods, services, promises to act, or refraining from acting—but it cannot be based on past actions or pre-existing duties.
  • Courts do not require consideration to be equal in value; it only needs to be legally sufficient.
  • Contracts lacking consideration—such as those involving gifts, past actions, or unenforceable promises—are generally invalid.
  • Special doctrines like promissory estoppel may enforce a promise without consideration if reliance has occurred.
  • Modern law recognizes different types of consideration, such as executory (future promises) and executed (completed acts).

A consideration is an essential element in contract formation. A consideration is a legal term used to describe the exchange of something of value for something else or for a service. A consideration does not have to be money. The other important factor regarding considerations is that you do not have to meet someone else's standard of value. This means if an agreement has been made between neighbors to exchange a child's bicycle for an antique plate collection, the agreement holds regardless of the value appearing unequal.

In contract law, consideration explains the benefit of what is each party is receiving. To be legally binding, all parties in the contract must receive something from the consideration. A basic example of consideration is when, in exchange for payment, you receive an item of clothing.

What Is Consideration?

The legal definition of consideration is based on the concept of "bargained-for-exchange," where the parties of the contract agree to the exchange of something of value. In a valid contract, the consideration is the portion that explains the legal value that will be exchanged. The term "value" does not mean only money can be exchanged. Consideration can be any of the following:

  • Physical objects.
  • Services.
  • Promised actions.
  • A promise to not partake in future actions.

The value of the consideration can be a right, interest, or benefit going from one party to another party. Conversely, it can be some kind of forbearance, loss, detriment or responsibility that the other party gives, suffers, or undertakes. The value of the consideration only needs to be of adequate value, meaning the parties can make their own bargains. The consideration cannot be based on past actions.

If a pre-existing agreement between the parties exists, this cannot be used as the consideration legally. When the consideration is agreed to by both parties, the contract is considered binding. Most contracts include a statement at the beginning of the contract, like "for good and valuable consideration" or similar. Frequently this statement is incorrectly seen as fulfilling the requirements of contractual consideration. This is true in most states.

A real-world example of a consideration called a "bargained-for-detriment" is if you backed your car into a neighbor's lawnmower, causing damage. Your neighbor has the right to sue you for damages, but if they agree not to sue in exchange for a payment of $600, this constitutes consideration. In this case, your neighbor has given up the right to sue, and you have given up your money.

Elements of Consideration in Contract Law

For consideration to be valid, several elements must be present:

  • Mutuality of Obligation: Both parties must be bound to perform; if only one party has an obligation, the contract may be void.
  • Legal Sufficiency: Each party must give or promise something recognized as having legal value. This can include a right, interest, or forbearance (refraining from doing something one has the legal right to do).
  • Voluntary Exchange: Consideration must result from a voluntary bargain, not coercion or undue influence.
  • Present or Future Value: Consideration may be immediate (payment upon delivery) or executory (a promise to perform later), but it cannot be based solely on past actions.

These elements ensure the exchange has legal enforceability beyond informal promises.

When a Contract Lacks Consideration

There are several instances where a contract won't be upheld because the consideration doesn't meet legal standards. These instances include:

  • If a party of the contract is legally obligated to perform the consideration, it is not seen as a true consideration. For example, a cop is expected to capture and arrest anyone breaking the law. Due to this obligation, the cop could not then claim reward money for capturing a wanted suspect.
  • If the consideration is a gift, it does not count. For example, if a relative promises to give you the down payment for a house without expecting anything in return, it is a gift. However, if you make the down payment on the house based on the relative's promise and the relative is aware, the court may hold the relative to the original promise. Despite not being a true contract, the law expects promises to be kept. In legal terms, this is called promissory estoppel.
  • If the consideration is for something that has already been completed, it is called a past consideration and will not be held up in court.
  • If the consideration is not real or allowed by the state. For example, when state law prohibits an employee from being fired for not signing a non-compete, a person who signs an agreement against their will and under threat of being fired cannot be fired for signing.

If consideration is not detailed in the contract, the contract is void unless it is in writing and registered under the law. If the contract is oral or in writing but unregistered, the contact will be invalid. Contracts must be in writing and registered. An exception to the rule is for deeds or documents under seal, which do not require consideration to be a binding contract.

Types of Consideration

Courts generally classify consideration into two main types:

  1. Executory Consideration – A promise to do something in the future, such as agreeing to deliver goods next month in exchange for payment now.
  2. Executed Consideration – A present act given in exchange for a promise, such as paying immediately for goods delivered.

Both forms are valid, provided they meet the requirements of mutuality and legal sufficiency.

Exceptions and Alternatives to Consideration

Although consideration is typically essential, there are notable exceptions:

  • Promissory Estoppel: Courts may enforce a promise without consideration if one party reasonably relies on it to their detriment.
  • Contracts Under Seal: Historically, contracts signed and sealed were enforceable without consideration, though this is less common today.
  • Statutory Exceptions: Certain statutory obligations, such as negotiable instruments or modifications under the Uniform Commercial Code (UCC), may be enforceable without new consideration.

These exceptions highlight the evolving nature of contract law and how fairness can sometimes override strict requirements.

Frequently Asked Questions

  1. What is the simplest definition of consideration in contract law?
    Consideration is the exchange of something of value—money, services, or promises—that makes a contract legally binding.
  2. Can consideration be non-monetary?
    Yes. It can include services, goods, promises, or even an agreement to refrain from certain actions.
  3. Why isn’t a gift considered valid consideration?
    A gift lacks a bargained-for exchange because one party does not give anything in return.
  4. What happens if a contract lacks consideration?
    Generally, the contract will not be enforceable unless an exception such as promissory estoppel applies.
  5. How does promissory estoppel differ from consideration?
    Promissory estoppel allows a promise to be enforced even without consideration if the other party relied on it to their detriment.

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