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.

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.

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