Why Is Consideration Important? Everything You Need to Know
Legal novices often ask, "Why is consideration important?" Consideration is a required element of a legally binding contract.3 min read
2. How Does Consideration Work?
3. How is Consideration Measured?
4. What Happens Without Consideration?
Legal novices often ask, "Why is consideration important?" Consideration is a required element of a legally binding contract. In order for a contract to be valid, it must have consideration, an offer, and acceptance.
What is Consideration?
Consideration explains why a party is entering a contract and what they get from being part of the contract. A contract must include consideration for every party involved in order to be valid. Essentially, consideration is the benefit a party gets for entering a contract. In a basic contract, if you pay money for an item at the store and receive the item, that is your consideration. In order to qualify as consideration, each party must change their position.
Consideration usually results from:
- A promise to do something you aren't legally obligated to do
- A promise not to do something you are allowed to do
How Does Consideration Work?
Consideration is one of the most important parts of a contract because it states why each party is joining the agreement. Consideration can be the exchange of money for products or services, or it can be a trade of one type of product for another type of product. Consideration can also be a promise to do something or to not do something, like not to file a lawsuit. To be effective, consideration must be valuable and something you wouldn't have without the agreement.
For example, if you back into someone's car and cause significant damage, the person who owns the car has the legal right to sue you. However, you can enter a contract where they agree not to sue you if you give them $5,000. Each party is getting something of value and also giving something up—the person who owns the car is getting $5,000 but giving up the right to sue you, and you are getting a promise to not go to court and giving up $5,000.
With consideration, each party has something at stake in the contract. Without it, the contract would be considered a gift. Without consideration in the example above, your payment of $5,000 could just be thought of as a very generous gift. In a legal sense, gifts are very different from contracts. If a party can't answer why they entered the agreement, there likely isn't proper consideration.
How is Consideration Measured?
In order to qualify as consideration, each side in a contract must agree to change their positions, either by promising to do something or to not do something. One example is a company promising to take down a billboard that is very similar to your company's billboard in exchange for you not taking them to court for trademark infringement. Legally, the company doesn't have to take down the billboard, and you have the legal right to take them to court. By making these promises, it is ruled adequate consideration.
Consideration should be close to the value of the goods or services provided, which is typically based on the market value of the products at the time the contract was created. Consideration doesn't have to equal the exact amount of the product or service. If one party promises to pay another party $500 for a computer but the actual market value of the computer is $520, most courts will consider that close enough for adequate consideration.
What Happens Without Consideration?
If a court believes the contract doesn't have adequate consideration, it can step in and rule the contract unenforceable. This can happen for a number of reasons, including:
- A party was already obligated to perform. If one of the parties is already legally obligated to do something, it isn't actually consideration.
- The promise is a gift, not a contract. If one party gives something to the other party without expecting anything in return, it is considered a gift, not a contract. Because the other party didn't provide anything in exchange for the gift, they have no legal standing if the promise falls apart.
- The exchange is past consideration. Consideration doesn't apply if the action has already taken place. For example, a promise to pay money for a product that someone has already given you isn't legally binding.
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