What is Consideration in Contract Law?
Consideration in contract law is an essential part of making a legally enforceable contract. It must be present for a contract to be legally binding.
In everyday English, consideration would be ‘thinking about something’ – considering it. But this is not the case in contract law.
Consideration is concerned with whether something of value is promised between the parties involved meaning that a valid contract must include an exchange of something of value between the offeror and the offeree.
Each party must receive a benefit and a detriment and the item of value should be the subject of the agreement and the reason for entering into the agreement.
Consideration must be something of value but is not limited to just money. It can be money, property, a promise, or some right. It can include a promise not to do something (see restrictive covenant) but does not include promises of love and affection.
Reciprocity – Exchanging things with others for mutual benefit.
The consideration must create a benefit and a burden for each party entering into a contract. This means that the promisor and the promise must gain and lose something of value.
For example, a bottle of milk is offered for sale at a set price. You accept that price and decide to buy it. You give the storekeeper your money for the purchase and take away the milk. Consideration in this example is where you give something of value – your money and you gain something of value – the milk. The storekeeper loses something of value – the milk and gained something of value – your money.
Non-financial consideration – Example
Without consideration being given and gained by each party to the contract, the contract can’t be legally binding.
Monetary value is not required, it may include valuable acts to do, or not do something. A promise to not do something is known as a restrictive covenant.
For example, you may agree to not work in a certain area for a period of time after your employment contract ends.
Contracts cannot be upheld where the consideration for either party is illegal.
Consideration given by the promisee must have been requested by the promisor freely without duress (bargained for). It must be given in return for an act or promise to do something. It must have been offered in exchange for making the promise.
A promise to make a gift is not legally binding because the party receiving the gift gives no value in return for the promise. A promise which is not supported by the exchange of something of value is not a legally enforceable contract in law.
Adequacy of Consideration
- Legal value has nothing to do with adequacy (quality, satisfaction) of consideration.
- Gifts may not be disguised to look like contracts
- An agreement to pay $100 in exchange for $500 is not consideration.
Nominal (Minimal) consideration is not recognized by courts unless it is negotiated for.
Consideration – Rules
The consideration must be sufficient but need not be adequate.
Consideration must be sufficient but need not have to be for the correct market value. If you made a bad deal and agreed to pay too much for something, as long as you were not deceived in any way then the courts will not be interested.
When contracting parties are already contracted with one another, a promise to do something that they have already contracted to do can’t be a “fresh” consideration. It was provided in the past, and not at the time of the formation of the contract.
For example, a buyer of goods who paid £10 in the past. It is not good consideration for the supply of new goods, so as to form a new contract.
An existing public duty
If the party had a normal duty to act, then the consideration is part of their normal duty and not accepted as an exchange of something of value.
A pre-existing contractual duty
Part Payment of Debts
A promise to pay part of a debt to discharge a larger debt is not classed as adequate consideration because there is no fresh payment of a smaller sum of money.
A promise to pay something that is already bound by law to pay is not acceptable for a legally binding contract.
Forbearance to Sue
Forbearance = Good nature
A promise not to file a lawsuit in exchange for a promise to pay money or some other consideration is a promise to give up a legal right. This can be acceptable consideration when the promisee believes, in good faith, they are giving up a valid legal right to sue.
Types of illegal consideration include performing some act that is illegal, such as:
- Committing a crime
- Insider trading
- Price fixing
- Officials accepting payment for something they are expected to do as part of their office.
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