Key Takeaways

  • Nominal consideration is a minimal amount exchanged to create a legally binding contract.
  • Courts typically do not judge the adequacy of consideration, but sham consideration can invalidate a contract.
  • Nominal consideration plays a role in option contracts, settlements, and confidential transactions.
  • Some jurisdictions distinguish sharply between nominal and sham consideration.
  • Modern practices, especially in corporate and real estate transactions, often rely on nominal consideration for efficiency or confidentiality.

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.

Nominal vs. Sham Consideration

While nominal consideration is a small or token amount offered to make a contract binding, it must still reflect an intent to create a genuine bargain. In contrast, sham consideration occurs when the stated consideration is a complete pretense—where the parties never intended an exchange. Sham consideration cannot support a valid contract because it lacks true mutual assent. Courts are wary of enforcing agreements based on sham consideration, especially if the evidence shows there was never an intention to actually perform the promised exchange​.

When reviewing contracts, particularly those containing nominal values like "$1," courts often look at the context to determine if there was a legitimate intent to exchange value. If the exchange is merely a façade, the consideration is invalid.

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.

Nominal Consideration in Option Contracts

Nominal consideration frequently appears in option contracts, where a party pays a small sum (e.g., $1) to secure the right to purchase property or assets at a later date. The law generally upholds these arrangements because the option holder provides something of value—even if minimal—in exchange for the right. Without any consideration, an option agreement could be revoked at any time under the common law rule requiring consideration for a contract to be binding​.

Thus, nominal consideration plays a crucial role in rendering option contracts enforceable and protecting the party relying on the future right to act.

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.

Confidentiality and Business Transactions

Another strategic use of nominal consideration occurs in transactions where parties wish to keep financial terms private. For instance:

  • Real estate deeds might cite a consideration amount of $10 instead of the actual sale price.
  • Internal corporate asset transfers may use nominal consideration to simplify paperwork and minimize public disclosures​.

While the use of nominal consideration for confidentiality is generally accepted, parties should ensure that local laws or regulations do not require disclosure of actual consideration in specific transactions.

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.

Historical Role of the Seal and Nominal Consideration

Historically, a formal "seal" on a contract was sufficient to establish enforceability without consideration. Over time, as the reliance on seals diminished, nominal consideration became a substitute to satisfy the requirement that each party contribute something to a contract​.

Today, while the seal no longer holds legal significance in most U.S. jurisdictions, nominal consideration continues to function as a formalistic way to create binding agreements—even when the practical value of the exchange is minimal. Some legal scholars argue that nominal consideration, like the seal, serves more to validate intent rather than to measure substantive fairness​.

Frequently Asked Questions

  1. What is nominal consideration in a contract?
    Nominal consideration is a token amount (e.g., $1) exchanged between parties to meet the legal requirement for a binding contract.
  2. How is nominal consideration different from sham consideration?
    Nominal consideration involves a genuine intent to exchange value, whereas sham consideration is a false pretense without real intent to perform.
  3. Why do real estate deeds sometimes list $10 as consideration?
    Parties often list a nominal amount like $10 to maintain confidentiality regarding the actual purchase price in public records.
  4. Can nominal consideration make an option contract enforceable?
    Yes, paying nominal consideration, even a small sum, can create a binding option contract that protects the option holder’s rights.
  5. Is nominal consideration accepted in modern courts?
    Generally, yes—courts do not evaluate the adequacy of consideration, but they require that the consideration not be entirely sham or illusory.

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