Nominal Consideration: Everything You Need to Know
Nominal consideration is an offer from one party of an agreement to another party that doesn't have any value in relation to the consideration being offered by the other party. 3 min read
Nominal consideration is an offer from one party of an agreement to another party that doesn't have any value in relation to the consideration being offered by the other party. On occasion, nominal consideration can support a contract that is enforceable, but only if the consideration is still acceptable according to the terms and conditions of the contract.
Nominal Consideration and the Law
In a contract, nominal consideration is considered a slight formality of a contrived exchange. For example, Party A wants to enter a contract to give Party B $5,000 and requests that Party B gives them a pencil in return. The promise from Party B is inconsequential to the promise of the larger gift from Party A, but adding the promise of a return item in exchange for the money makes the agreement enforceable by law. Normal gift promises aren't enforceable.
Nominal consideration is typically accepted in common court when it applies to a business setting. This can include being used in:
- An option arrangement.
- A compromise agreement.
Nominal consideration is less effective when done as part of a gift promise because there is bigger risk for one party.
On the other hand, a civil court defines methods in their statutes instead of using nominal consideration. This type of consideration could explain what the parties have actually agreed to do.
If the goods or services being offered weren't part of the bargained exchange, it is considered a pretense. When that occurs, the contract allows for nominal consideration, which usually takes the form of a small amount of money. If the parties never intended for the money to be paid, it is considered pretense and becomes “sham” consideration. According to U.S. law, both nominal and sham consideration are pretense and don't establish consideration.
Inadequate Versus Adequate Consideration
Consideration doesn't have to be accurate, which opens the door for parties to make a generous promise binding. Examples of this are giving a valuable property in exchange for $1 or asking for a peppercorn in exchange for a large amount of money. However, these examples are extreme interpretations of the rule, and courts will not judge the consideration's adequacy.
Because both nominal and inadequate consideration make a promise legally binding, most groups don't distinguish between the two terms. According to English law, a contract can be supported by nominal consideration.
Uses of Nominal Consideration
Nominal consideration can be useful when one or both parties want to hide details of the transaction from public records. Real estate transactions are always part of public record, but using nominal consideration can hide the actual value of the property. Instead of saying the actual cost of the property, the record would say that the payment on a house was $10. This often occurs if the buyer or seller wants to hide the actual amount of the payment.
Nominal consideration is also used when paying certain high-level officials, such as Michael Bloomberg, the mayor of New York City, and his daughter who also works for the city. They are both paid an annual salary of $1 a year, which is viewed as nominal consideration.
What Is Consideration?
A vital element of a contract, consideration is the promise that one party will perform an action in exchange for something from the other party. During a bilateral contract, or an agreement where both parties exchange promises, both promises are seen as sufficient consideration. A unilateral contract occurs when only one party makes a promise based on the action or performance of the other party. In this case, the consideration is the performance the party is agreeing to, and the promise is consideration for the promise.
In order to be valid, consideration must have an objective value. For example, a promise to make something or display affection can't be enforced because the promise is subjective.
Courts typically differentiate between unilateral and bilateral contracts based on if either or both parties offered consideration and when that consideration was provided. In order to be valid, consideration must be negotiated by both parties. It is the main reason the parties are joining together in an agreement. Consideration has to be valuable and is given in exchange for the performance by the other party.
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