Invalid Consideration: Everything You Need to Know
Invalid consideration is when one of the basic elements of a contract or an agreement, the consideration, is considered unacceptable in the eyes of the law.3 min read
Invalid consideration is when one of the basic elements of a contract or an agreement, the consideration, is considered unacceptable in the eyes of the law. Usually, the consideration exchanged under contract between two parties is up to the parties involved. However, sometimes a court will deem the consideration invalid, usually if it is something that has no value or if it is illegal.
Invalid consideration can also refer to the fact that if a contract is lacking consideration altogether, it is viewed as invalid.
What Is Consideration?
Simply put, consideration in a contract is what is exchanged. When two parties enter into an agreement, each party expects to get something out of the contract. What they expect to receive is called their consideration. For instance, Starbucks receives your $5, you get a latte, and both parties get consideration.
Every contract must have three elements in order to be a valid contract:
- First, one party needs to make an offer to another.
- Next, the other party needs to accept that offer clearly.
- Both parties need to give up something of value. The final element is the consideration.
In order for consideration to be valid, each of the parties involved must change its "position" somehow. This means they'll need to lose something in exchange to gain something else. This is also called a bargained-for detriment or bargained-for exchange. The consideration also must be something valuable.
Contract consideration is always in one of these two forms:
- A promise to perform an action you are not legally required to perform (such as giving money).
- A promise to refrain from doing something you are legally allowed to do (such as promising not to take legal action).
Usually, when we think of contract consideration, we think of cash. However, there are many other types of contract consideration used on a regular basis. Some of the most common types of consideration found in contracts include:
- Property (land or other)
- A legal right.
How Does Consideration Work?
Consider this situation: A man backs into his neighbor's car, causing quite a bit of damage. The neighbor has every right to sue, but he agrees not to take legal action if the man pays him $1,500. There is equal and adequate consideration in this contract because each party is giving something up. The man gives up $1,500, and the neighbor gives up his legal right to a lawsuit.
Every valid contract has to have consideration, meaning something of value must exchange hands. Both parties must give up something, but they both must benefit as well. This is also called a quid pro quo, which simply means something received for something given.
What Is Nominal Consideration?
Nominal consideration is when a promise is made, but in name only. This means the parties in the contract make a bargain with each other, but the specific price for each party isn't actually seen as an accurate valuation. Individuals will use nominal consideration when they need to form a contract around a generous bargain.
For instance, if parents promise to give their daughter a new BMW in exchange for $1, they might want to form a contract around the exchange. If so, they'll need consideration in order to make sure the contract is valid. The $1 for the BMW is the daughter's consideration, but that isn't an accurate value for the car. Therefore, the consideration is only nominal.
If such an unbalanced exchange is put in writing, and both parties agree that $1 is a reasonable payment for the car, the court would view the consideration as valid even though it's disproportionate.
Nominal consideration doesn't make a contract enforceable, but under certain conditions, it creates enforceability for guarantees and options. Options in contract law are promised to keep an offer on the table for a certain period.
A guarantee is made when an individual promises to cover another's debt or follow through on the performance of a contract on behalf of someone else. Cosigners on loans make a guarantee to the loan giver that they will pay the loan if the original borrower defaults or cannot pay for any reason.
Many situations use nominal consideration. It is a sort of bargaining tool.
If you need help with understanding invalid consideration, you can post your job on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.