Key Takeaways

  • Consideration is essential for a valid contract; it involves something of value exchanged between parties.
  • Invalid consideration occurs when what is exchanged is illegal, lacks value, or is missing altogether.
  • Nominal consideration refers to symbolic or token payments (e.g., $1 for a car) used to formalize agreements.
  • Courts typically uphold nominal consideration in options, guarantees, or gifts but may scrutinize fairness in other contexts.
  • Nominal consideration differs from inadequate consideration, which is small but still has measurable value.

Invalid consideration is when one of the basic elements of a contract or an agreement, the consideration, is considered unacceptable in the eyes of the law. Usually, the consideration exchanged under contract between two parties is up to the parties involved. However, sometimes a court will deem the consideration invalid, usually if it is something that has no value or if it is illegal.

Invalid consideration can also refer to the fact that if a contract is lacking consideration altogether, it is viewed as invalid.

What Is Consideration?

Simply put, consideration in a contract is what is exchanged. When two parties enter into an agreement, each party expects to get something out of the contract. What they expect to receive is called their consideration. For instance, Starbucks receives your $5, you get a latte, and both parties get consideration.

Every contract must have three elements in order to be a valid contract:

  1. First, one party needs to make an offer to another.
  2. Next, the other party needs to accept that offer clearly.
  3. Both parties need to give up something of value. The final element is the consideration.

In order for consideration to be valid, each of the parties involved must change its "position" somehow. This means they'll need to lose something in exchange to gain something else. This is also called a bargained-for detriment or bargained-for exchange. The consideration also must be something valuable.

Contract consideration is always in one of these two forms:

  • A promise to perform an action you are not legally required to perform (such as giving money).
  • A promise to refrain from doing something you are legally allowed to do (such as promising not to take legal action).

Usually, when we think of contract consideration, we think of cash. However, there are many other types of contract consideration used on a regular basis. Some of the most common types of consideration found in contracts include:

  • Money
  • Property (land or other)
  • Benefit
  • Interest
  • A legal right.

Invalid Consideration Examples

Certain types of promises or exchanges are not recognized as valid consideration under the law. Common examples of invalid consideration include:

  • Past consideration – something given before the contract was formed, such as paying someone for work already completed.
  • Illegal consideration – agreements based on unlawful acts, such as promising money in exchange for committing a crime.
  • Moral obligations – promises based purely on sentiment or duty (e.g., “I’ll give you $500 because you helped me last year”).
  • Pre-existing duties – when one party promises only to perform an act they are already legally required to do.

These types of promises fail the legal requirement of a bargained-for exchange and can render a contract unenforceable.

How Does Consideration Work?

Consider this situation: A man backs into his neighbor's car, causing quite a bit of damage. The neighbor has every right to sue, but he agrees not to take legal action if the man pays him $1,500. There is equal and adequate consideration in this contract because each party is giving something up. The man gives up $1,500, and the neighbor gives up his legal right to a lawsuit.

Every valid contract has to have consideration, meaning something of value must exchange hands. Both parties must give up something, but they both must benefit as well. This is also called a quid pro quo, which simply means something received for something given.

Adequate vs. Nominal Consideration

Courts generally do not weigh whether the consideration exchanged was fair, but they do require that it have some measurable value. Adequate consideration means both parties exchange something with recognizable worth, even if it is not equal in value.

By contrast, nominal consideration is symbolic. For instance, transferring property for $1 or selling a valuable asset for a token amount is legally permissible if both parties agree. However, courts may view such transactions skeptically if they appear to conceal fraud, avoid taxes, or unfairly disadvantage one party.

What Is Nominal Consideration?

Nominal consideration is when a promise is made, but in name only. This means the parties in the contract make a bargain with each other, but the specific price for each party isn't actually seen as an accurate valuation. Individuals will use nominal consideration when they need to form a contract around a generous bargain.

For instance, if parents promise to give their daughter a new BMW in exchange for $1, they might want to form a contract around the exchange. If so, they'll need consideration in order to make sure the contract is valid. The $1 for the BMW is the daughter's consideration, but that isn't an accurate value for the car. Therefore, the consideration is only nominal.

If such an unbalanced exchange is put in writing, and both parties agree that $1 is a reasonable payment for the car, the court would view the consideration as valid even though it's disproportionate.

Nominal consideration doesn't make a contract enforceable, but under certain conditions, it creates enforceability for guarantees and options. Options in contract law are promised to keep an offer on the table for a certain period.

A guarantee is made when an individual promises to cover another's debt or follow through on the performance of a contract on behalf of someone else. Cosigners on loans make a guarantee to the loan giver that they will pay the loan if the original borrower defaults or cannot pay for any reason.

Many situations use nominal consideration. It is a sort of bargaining tool.

Uses of Nominal Consideration

Nominal consideration plays an important role in specific types of contracts, particularly when the parties want to ensure enforceability:

  • Options contracts – A small sum, such as $1, is often exchanged to keep an offer open for a set period.
  • Guarantees – A token payment may support a cosigner’s promise to assume another party’s debt.
  • Gifts and family arrangements – Individuals sometimes use nominal consideration to formalize gift transfers, ensuring the transaction is legally binding.
  • Business transactions – Companies may use nominal consideration in corporate reorganizations, asset transfers, or when assigning intellectual property rights.

Limitations of Nominal Consideration

Although courts usually uphold nominal consideration, there are limitations. A judge may invalidate an agreement if:

  • The nominal exchange is merely a disguise for a lack of true consent.
  • The deal is used to hide fraud or evade creditors.
  • One party clearly exploits the other, and the disparity suggests unfairness.

In practice, courts are more likely to enforce nominal consideration when the parties’ intent is clear and there is no evidence of coercion or deceit.

Frequently Asked Questions

  1. What is the difference between nominal and adequate consideration?
    Nominal consideration is symbolic, such as $1 for a house, while adequate consideration has real, measurable value, even if small.
  2. Can nominal consideration make a contract enforceable?
    Yes, it can, especially in guarantees, options, or formalizing gifts, though courts may scrutinize fairness.
  3. Why do people use $1 in contracts?
    It is a common example of nominal consideration, used to demonstrate legal intent and ensure a contract is binding.
  4. Is nominal consideration always valid in court?
    Not always. If the consideration masks fraud or exploitation, courts may deem the contract invalid.
  5. How is nominal consideration different from no consideration?
    Nominal consideration involves a token exchange of value, while no consideration means nothing of value was exchanged, making the contract void.

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