Contract Consideration: Everything You Need to Know
Contract consideration is a vital part of a contract. Reduced to its simplest terms, a contract states a promise or an agreement that is enforceable in a court of law. A contract is bound by law when it's either spoken or made in writing between all parties involved. 3 min read
Contract consideration is a vital part of a contract. Reduced to its simplest terms, a contract states a promise or an agreement that is enforceable in a court of law. A contract is bound by law when it's either spoken or made in writing between all parties involved.
The two basic elements that make a contract valid and enforceable by law are mutual assent and consideration. Consideration is a thing of value exchanged by all parties involved in a contract, prompting them to enter into the promise to exchange performances so all parties benefit.
Aspects of Contract Consideration
Contract consideration is one of two things needed to make a contract legally binding and enforceable. Consideration is the advantage that all parties involved in the contractual agreement will receive. It involves trading a performance for a performance.
A service, material item, or some other form of compensation must act as payment for the service or material item rendered. This exchange of one thing for another thing of sufficient value is the consideration. The promisor places value on the consideration that matches the value the promisee places on the performance or material item.
Consideration means that every party involved needs to generate some form of action to contribute to the validity of the contract — or a "change in position" — to participate in and benefit from the contract. A change in position is also known as a "bargained-for exchange," which is where the legal definition of consideration came from.
Consideration is required in the following situations:
- You make a promise not to act on something you have the right to do.
- You make a promise to act on something where there is no legal obligation to do so.
When There Is No Consideration in the Contract
When contracts lack the promised or expected consideration, they become invalid or unenforceable by law because one of the components that makes the contract valid is insufficient.
Contracts become invalid when it's discovered that the consideration is inadequate because it has suffered ruination or that the performance was not done according to the terms of the agreement, causing the outcome to be unsatisfactory. Performances that act as the consideration component of contracts and are immoral, corrupt, or illegal in any way are not deemed consideration for contracts bound by law.
Examples of performances that cannot be the consideration aspect in contracts:
- Contracting someone to do physical harm to another human being
- Causing property damage
- Illegal gambling
The courts of law are not inclined to get involved in ruling over the fairness of contracts, but they will get involved if there is a possibility that fraud is occurring. When there is no evidence of fraud taking place between the parties, the courts will not interfere even if the contracts are bad and the consideration provided by the parties involved are disproportionate. The courts can examine whether each party has fulfilled their obligation or duty to the others involved based on the agreed upon consideration.
Contracts That Have Different Degrees of Consideration
The existence of consideration is essential to the soundness and the legal implementation of a contract, so it's necessary to have a "mutuality of obligation" by all parties involved. It is crucial that all parties of the contract meet the terms of the contract. There are some types of contracts where consideration occurs in different forms and the parties involved can perform their duties to the contract in different ways:
- Bilateral Contract: A contract where the parties exchange a promise for a promise, so the promise is the consideration. An example of this type of contract is the barter contract or agreements used in business transactions.
- Unilateral Contract: A contract where one party gives a promise and the other party performs an act.
- Mutuality of Obligation: An agreement made by all the parties involved in a contract to be bound in some way. In this type of contract, either all parties are bound by the contract or none of the parties are bound.
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