What is Consideration?
Consideration is a vital element in contract law. It is a benefit that two parties bargain for and is the basis for a contract. It is a payment made by one party to another in exchange for the transfer of something of value. Both parties to the contract are getting something of value that they have agreed to. Without consideration, a contract can be declared invalid.
Key Learning Points
- The essential principle is that one party to the contract must promise something of value, and the second party must offer something of value in , and the second party must offer something of value in return.
- For a contract to be valid, there must be an offer, acceptance, and consideration.
- Consideration formalizes the intention to enter into a contract.
Elements of Consideration
For a contract to be considered valid and enforceable by the courts, three elements of consideration must exist. If one or more of these elements is missing, the contract could be ruled invalid by the court. The required elements of consideration include:
- The contract must include a basis for the terms of the exchange. This means there must be something worth bargaining over for both parties.
- There must be a mutual exchange between the parties. In simple terms, all parties involved must benefit from the contract.
- The exchange in the contract must be something of value.
In addition to the elements of consideration, a contract must contain certain other elements to be enforceable. While these requirements vary by location, contracts must typically include:
• An intent by both parties to enter into the agreement
• A legal exchange
• One party making an offer
• The counterparty accepting the offer
Types of Consideration
Most often, services or goods are exchanged in a contract, though consideration may be determined by the counterparties. Examples include:
- Personal property
- Real property
- Promise to act
- Promise to refrain from acting
Several examples of consideration include:
- Being granted shares in a business in exchange for providing unpaid services.
- Paying cash in exchange for the right of first refusal for real estate.
- Issuing a loan in exchange for a promise of principal repayment, plus interest.
Is Consideration Always Money?
Money is the most common form of consideration, but certainly not the only one. The law states that consideration must be something of value, anything from professional services to any type of asset. In many industries, the forms of consideration have become standardized.
The Importance of Consideration.
Courts will not typically reform a contract because one party made a bad bargain. However, if a contract appears to have been entered into under duress, there may be questions about whether there is adequate consideration. However, absent any suggestion of duress, court’s do not look at a party’s motivation in determining consideration.