Consideration Law: Everything You Need to Know
Consideration law refers to the laws that pertain to the reason why an individual or party is choosing to enter into a contract.3 min read
2. What Is Consideration?
Consideration law refers to the laws that pertain to the reason why an individual or party is choosing to enter into a contract.
Under the laws of contracts, consideration should answer two main questions:
- What is offered in exchange for entering into this contract?
- Why are you choosing to enter into this contract?
Before a contract can be legally binding, it must outline the consideration for each person or party that will enter into the agreement. Simply agreeing to terms doesn't make a contract legal. When signing the contract, all involved parties must outline their consideration if they ever need to take legal action on the terms of the agreement.
In a contract, each party must agree to do or provide something to the other party. One exception to this rule is when a contract is entered into by deed, which doesn't require consideration.
For example, if Party A makes an agreement to take care of the lawn and landscaping of Party B, this agreement is only legally enforceable if Party B provides consideration, or the reasons for their entering into the agreement. Party B might provide a form of payment as consideration, but another option might be offering some type of trade, as long as Party A agrees to the consideration. If Party B promises to pay or provide a service to Party A in the future, this is a sufficient consideration for a legal contract.
In order to convert a promise into a legally binding contract, both parties must offer something to one another.
What Is Consideration?
Consideration is a benefit to each party that has entered into a contract. For example, if you are shopping at Target, the company receives your money in exchange for your receiving goods that you have selected. Consideration was first discussed in an 1875 court case, in which it was referred to as a benefit to the person making the agreement with the other party.
According to the notes from the case, consideration is clearly defined as some type of benefit, profit, right, or interest for one party, or some type of responsibility, loss, forbearance, or detriment undertaken by the other party. When one party promises to engage in an act, the other party will pay a price for that. According to contract law, this promise is legally enforceable. As you're drafting or entering into a contract, it is essential to outline the consideration as part of the agreement.
Consideration might include a promise to perform an act or an agreement to refrain from performing an act when the individual is legally able to make that promise. When two parties exchange promises to one another, this is an example of a "bilateral" contract. Each of the promises made by the parties is considered to be consideration to the other. When a contract is unilateral, or one party makes a promise and the other agrees to offer some type of compensation for the performance, the consideration is evident for both sides.
In order to qualify as consideration, the value of the consideration must be determined objectively. For example, promising in a contract to offer affection or love in exchange for something else is not legally enforceable because this promise is subjective.
In the past, courts have distinguished between bilateral and unilateral contracts by looking at whether one of the parties or both parties are offering consideration and when they provided that consideration. When a contract is bilateral, it is generally legally binding as soon as each party signs because both of the promises made are sufficient for consideration.
A unilateral contract only binds the person making the promise unless the other party has completed the obligations made through the promise. Until the promised action is completed, the contract is not legally enforceable.
For example, if your co-worker offered to give you a ride to work on Wednesdays and Thursdays in exchange for your providing a ride to work on Mondays or Tuesdays, this would be considered a bilateral contract, as long as you both show consideration by accepting the agreement terms.
However, if the co-worker offered $10 per day in compensation for your giving them a ride to work, this would be a unilateral contract. Only the co-worker would be bound by the terms until you showed consideration by picking them up and driving them to work.
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