Consideration in Contracts: Everything You Need to Know
Consideration in contracts refers to the benefit each party receives in exchange for what it gives up in the contract. It is a vital element in a contract. 3 min read
Updated November 17, 2020:
Consideration in Contracts
Consideration in contracts refers to the benefit each party receives in exchange for what it gives up in the contract. It is a vital element that must be present in a contract in order to make it legally binding on the parties. A contract, whether oral or in writing, becomes invalid if there is no consideration involved.
Essential Elements of Consideration
In order to form a valid contract, consideration must meet the following conditions:
- It must be something worth bargaining for.
- It must benefit all the parties to the contract.
- It must be something of value.
Types of Consideration
There are two types of consideration:
- Consideration in a bilateral contract involves exchanging a promise for a promise.
- Consideration in a unilateral contract involves one party making a promise and the other party doing something in return.
Consideration Need Not Be Monetary
Consideration can be in the form of money, property, promise, services, or something else. It can be something as simple as a promise to do or not to do something. For example, if you enter into a contract with your neighbor wherein he agrees not to sue you for the damage you caused to his property, and in return, you agree to pay him a sum of $800, then the amount of $800 is the consideration your neighbor gets, whereas his promise to not sue you is the consideration you get from the contract.
Consideration can be as big or small as the parties mutually agree to exchange between themselves. For example, when you go to buy a dress, it's between you and the seller to agree upon the price. When a valid consideration is present, courts rarely interfere to decide whether the deal is unfair or disproportionate. However, if a party is tricked into an unfair deal by hiding some important information or otherwise acting in bad faith, then it can affect the legal validity of the contract.
Is It Mandatory to Mention the Word 'Consideration'?
Most contracts contain a line or two to the effect that a valid and sufficient consideration forms the basis of the contract. However, just mentioning something in the contract does not prove the existence of valid consideration. Likewise, a consideration does not become invalid if it doesn't find a mention in the contract. No
What Happens When a Contract Lacks Consideration?
If there is no consideration present in a contract, the contract becomes invalid, and the courts may refuse to enforce the contract. Sometimes, a contract may lack consideration though it may seem at the surface that the parties are exchanging something of value.
Following are some of the scenarios where there is no valid consideration involved:
- When a party promises to perform something he or she was already legally bound to perform. For example, when a policeman promises to catch the thief.
- When the consideration is more of a gift and does not require bargaining or mutual agreement between the parties. For example, when a mother creates a legal document promising to buy her son a car if he graduates with good marks.
- When a party promises to give something in exchange for some "past consideration" by the other party.
- When the promise to do something is illusory. For example, when a mango juice company enters into a contract with a farmer, saying that the company will buy all its mango requirements from the farmer, and the farmer can sell to the company as many mangoes as he wants, then the consideration given by the farmer is illusory since he is not legally bound by the contract to sell the mangoes to the company.
Failure to Provide Consideration
If a party fails to provide the promised consideration, the other party can cancel the contract. The defaulting party can also be sued for damages or specific performance.
The following instances are tantamount to failure of consideration:
- When the provided consideration is worth less than promised.
- When the provided consideration is damaged or destroyed.
- When the performance is not carried out as promised or expected; for example, when a mechanic does not repair a car properly.
It is worth noting that a promise to do something illegal or immoral does not serve as a valid consideration.
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