What is consideration in a contract? 

What is consideration in a contract?

Consideration refers to the benefit promised by each party within the terms of a contractual deal.

A contract has six key elements: offer, acceptance, awareness, consideration, capacity, and legality.

Today, we’re going to focus on the consideration element.

Here’s a rundown of everything we will cover in this article:

• What is consideration in a contract?
• Is consideration always needed in a contract?
• How does consideration work in a contract?
• What are the legal requirements of contract consideration?
• What is minimum consideration?
• Examples of consideration

What is consideration in contract law? The legal definition

Consideration in business law is an essential, legally binding contract element.

It describes the “bargained-for exchange” in which each party must offer something valuable in exchange for something valuable. 

For example:

• A promise to do something: such as create a product or deliver a service in exchange for cash.

• A promise not to do something: such as promising not to leak company secrets to competitors.

What is a substitute for consideration?

Very few instances exist where a promise can be enforced by law, even without a contract.

This is called a substitute for consideration, governed by the promissory estoppel doctrine.

Promissory estoppel rules that should a party fail to deliver on a promise, the obligation remains legally enforceable even if a valid contract doesn’t exist.

However, the promisee must have suffered substantial economic detriment due to their reasonable reliance on the promise. 

Let’s say you’re an interior designer who has just finished remodeling a client’s kitchen.

The client agrees to hire you to redesign their living room to match.

So — without drafting a contract — you purchase all the materials and furnishings needed to do the job. 

However, just before you’re due to start, the homeowner pulls out.

This will result in financial loss because you reasonably relied on the homeowner to come through with their promise to hire you.

Promissory estoppel would help you recover the costs of materials.

Is consideration always needed in a contract?

Yes.

For a contract to be legally valid, it must include consideration.

Contracts that lack sufficient consideration by the courts are deemed unenforceable, preventing either party from pursuing a claim. 

While exceptions exist — promissory estoppel, for example — these are very few. 

When does a contract lack consideration?

Here are three main reasons why a contract might lack consideration:

The promise is a gift or gratuitous promise: For example, if someone promises to gift you their computer for free, there’s no consideration because there’s no valuable exchange.

The promise is illusory: Vague promises — like if someone agrees to hire you if your work is high quality — are too ambiguous to be enforceable.

There’s an existing legal obligation: If a reward were offered for capturing a wanted suspect, a police officer wouldn’t be able to claim the reward because they’re legally obliged to catch criminals. 

How does consideration work in a contract?

Consideration ensures that every party involved in signing a contract is mutually obligated to commit to the promise they’ve made. 

In a nutshell, here’s how it works:

So, if Party A makes a promise to Party B, such as promising to develop software for them in exchange for money, both parties are legally obligated to fulfill their terms.

There may be specific nuances within the contract that affect the consideration.

For example, there may be specific time frames or specifications that must be adhered to.

What are the requirements of consideration?

For a consideration to be valid, it must meet the following requirements:

Considerations must be sufficient 

A “sufficient” consideration is one in which promises are things of value (money, assets, property, etc). However, the consideration need not be “adequate” in that it doesn’t have to reflect market values. 

Considerations must refer to bargained acts

For a promise or performance to meet the requirements for consideration, they must be bargained for. So, legally binding promises can’t be made in return for things you’ve already done.

What is minimum consideration in a valid contract?

If considerations must be sufficient but aren’t required to be adequate, is there a minimum consideration? 

Legally, considerations must have a minimum economic value.

However, it’s the responsibility of the involved parties to determine the value.

So, if a party agrees to sell their property to someone for $10, this is sufficient in the eyes of the law, as there’s still an exchange taking place (regardless of how unfair that exchange might appear!). 

What is an example of consideration in a contract? 

Considerations vary widely. Here are some common consideration examples:

• A landlord agrees to rent their property to a tenant in exchange for a specific sum of money.
• A tennis player agrees to refrain from partaking in risky extreme sports (e.g., paraskiing, mountain biking, motorcycle racing) in exchange for a better salary or benefits.
• A customer slips on a wet shop floor and sprains their ankle. The company promises the customer $1,000, and in return, the customer promises not to sue the company.

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