Defining consideration as it relates to contract law is when each party gets a specific benefit from signing the contract. Consideration necessitates a concession or change in position for each party. The main kinds of consideration include:

  • Promising not to do something you have the legal rights to do
  • Promising to do something you have the legal rights to not do

In legal terms, consideration is often thought of as a bargained-for exchange. Both parties will get something they want in exchange for offering up something of value.

It's not like gift giving because when you give a gift, the other party doesn't have to do anything in exchange. For example, if you say you will give your neighbor your old television if it doesn't sell at your yard sale, this is not a consideration. The neighbor did not have to make any concessions to earn the TV from you.

In contract law, every contract must have some form of consideration for each party, otherwise, the contract is not valid. This ensures both sides get something valuable from the agreement and is the main reason the parties choose to create a legal contract.

What Happens if a Contract Does Not Have Consideration

If a legal contract does not have considerations, a court may step in and rule the contract unenforceable. This might happen:

  • If the consideration promise is more of a gift than a contractual obligation. For example, if you have a family member that says they'll give you money to buy a new car with no stipulations, it's not a legal contract.
  • If the benefit stipulated in the consideration was a duty that one of the parties was already obligated to perform. An example of this is when a police officer catches a wanted suspect. Because it's in the officer's job description to catch criminals, they are legally obligated to perform this duty and aren't entitled to reward money.
  • If the contract tries to use past consideration. This might be if one of the parties tries to exchange something you've done in the past for future benefits.

When a court decides that the consideration in a contract is unfair or nonexistent, the contract usually falls apart. This is often a sign that one party tried to swindle the other party, making the deal unfair or unjust.

Adding Consideration to Your Contract

Simply adding the word "consideration" to your contract isn't enough to make it enforceable. For example, many contracts commonly have a recital at the beginning that stipulates the contract is "for good and valuable consideration." Unless there is clear evidence of this consideration in the contract, this statement is useless.

While there's no law saying exactly a contract should contain, most scholars concur that the only statement really required is something along the lines of "the parties agree." However, if there is a type of contract where only one party signs, such as a promissory note, option agreement, or assignment, more formal consideration language is appropriate.

What Makes up Consideration?

Legally valid consideration in your contract includes something of value to both parties being bargained over. One party cannot "win" over the other party in the contract; both sides must see a similar benefit by signing the contract. This does not mean that the consideration is monetary in value; instead, it's just something of value to the parties involved, such as a service, personal property, or real property.

In the past, courts said that nominal consideration was appropriate, with the benefits being exchanged as small as only one cent. As time went on, however, this type of thinking went out the window, and consideration required more value.

This is most easily seen in the real estate field. If two parties are exchanging a property for money, the exchange isn't necessarily the exact market value of the property. However, a price within reason makes sure that the judge's conscience is not offended. If it is, they may block the deal from going through.

Consideration protects the person signing the contract from a certain action that is not in their best interest. It might also discourage questionable transactions, which helps both parties know if their transaction is valid.

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