1. What is Consideration?
2. What Happens Without Consideration?
3. Does Consideration Have to be Proportionate?
4. How is Consideration Included in a Contract?

A contract without consideration isn't considered valid. In order for a contract to be legally binding, it must have consideration, an offer, and acceptance.

What is Consideration?

In the legal sense, consideration is what each party gains from entering a contract. A basic form of this happens when you buy something at the store; you gain a new item, and the store gains money.

Every contract must include consideration for all parties involved in order to be considered valid. Each party must change their position as a result of the contract. Consideration can take the form of one of two things:

  • A promise to do something you're not obligated to do.
  • A promise to not do something you have the right to do.

An example of consideration could happen if you rode your bike over your friend's flowers and caused considerable damage. Your friend has the legal right to sue you for damages but agrees to not pursue legal action if you pay him $500. This contract provides consideration because each party is giving something up for something else. You are giving up $500 but getting a promise of not going to court, and your friend is giving up the right to sue you but getting $500.

What Happens Without Consideration?

A contract that doesn't include consideration can be declared unenforceable in court. Contracts can lack consideration for a variety of reasons, including:

  • One party was already obligated to perform. If one party was already obligated to do something, it doesn't qualify as consideration. They would have taken that action even without the contract. For example, a police officer can't claim a reward for turning in a criminal because the police officer is already obligated to find criminals for his job.
  • The promise is a gift instead of a contract. If only one party is giving something or there isn't an equal exchange of goods and services, it can be ruled a gift instead of consideration. If someone changes his or her mind or doesn't follow through on giving the gift, it doesn't carry the same weight as breaking a contract. However, the law still holds people responsible for breaking promises. A legal theory called promissory estoppel views promises like contracts if the promise was legitimate and the other party relied on it for a reasonable purpose.
  • The exchange is past consideration. A contract can't be made for something that has already taken place. Consideration doesn't count if the parties exchanged something before the contract was agreed upon.
  • The promise is illusory. If the promise can't actually be completed, consideration doesn't apply. This could happen if one party threatens legal action or says they won't do something that they really don't have authority to do anyway.

Does Consideration Have to be Proportionate?

Many deals seem unfair or one-sided after they have taken place. We've all been in situations when we realize later that we overpaid for something or got a great deal because we agreed to pay a price below the actual value. Most courts don't rule on the value of consideration unless the promises exchanged by the parties are so unequal that it demonstrates bad faith in the bargaining process.

Even without the ruling from the court, contracts with disproportionate consideration have a much harder time being finalized. A strongly disproportionate consideration usually demonstrates that one party hid information from the other or tried to be sneaky to get a better deal. A court will typically only get involved in the value of consideration if there is evidence of significant bad faith.

How is Consideration Included in a Contract?

Consideration is typically towards the beginning of a contract. Most contracts start with a statement that says that the contract is being entered into "for good and valuable consideration, the sufficiency of which is acknowledged," or something along those lines.

Simply stating that consideration exists, however, is often not enough. Just because the parties say they have consideration doesn't mean it is always there. According to legal scholars, a contract only needs to include the phrase “the parties agree.” The exception to the rule is for contracts that are only signed by one party, including assignments, promissory notes, and option agreements. In these types of contracts, it isn't clear that an exchange has occurred, so consideration must be spelled out more plainly.

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