What Is Consideration?

Definition

Consideration is something of value that each party to a contract agrees to exchange. It can be a right, an interest, a benefit, or a forbearance (the act of refraining from something). In simple terms, each party must give something and receive something in return.

When a contract is formed, consideration serves as proof that the parties intend to enter into a binding agreement. Without it, a contract may be deemed a gratuitous promise and therefore unenforceable.

Key Elements of Consideration

• Mutuality: Both parties must exchange something of value.
• Legal Sufficiency: The exchanged items must have some measurable value in the eyes of the law. A promise to love and cherish someone, for example, is not sufficient.
• Bargainedfor Exchange: The consideration must be the result of a negotiation, not an incidental or unrelated benefit.
• Possibility of Performance: The promised act or forbearance must be something that can actually be performed.

Types of Consideration

1. Executed Consideration

This occurs when a promise is fulfilled at the time the contract is made. Example: paying cash for a product at the moment of purchase.

2. Executory Consideration

Both promises are to be performed in the future. Example: a landlord promises to lease an apartment next month, and the tenant promises to pay rent two months later.

3. Past Consideration

Acts performed before the contract are generally not valid consideration because they were not bargained for at the time of the agreement. An exception exists when the promise is expressly linked to a prior benefit.

4. Nominal Consideration

Sometimes a token amount (e.g., $1) is used to satisfy the requirement of consideration, especially in the transfer of property between relatives. Courts will look for intent rather than actual value.

Consideration vs. Gift

A gift lacks consideration because the recipient does not give anything in return. For a gift to be enforceable, it must be delivered and accepted, but it remains outside contract law. In contrast, a contract with consideration creates obligations that courts can enforce.

Common Misconceptions

• Any promise is a contract. Only promises supported by consideration become enforceable contracts.
• Consideration must be money. Anything of legal value qualifies, such as services, property, or a promise to refrain from an action.
• If both parties agree, its a contract. Mutual assent is required, but without consideration the agreement is generally not binding.

Legal Tests for Consideration

Courts use several tests to determine whether consideration exists:

1. BenefittothePromisor Test: Did the promisor receive a benefit?
2. DetrimenttothePromisee Test: Did the promisee suffer a legal detriment?
3. Value Test: Does the exchange have any measurable value, however nominal?

If the answer is yes to any of these, consideration is likely present.

Exceptions and Special Situations

• Promissory Estoppel: In rare cases, a promise may be enforceable without consideration if one party relied on it to their detriment.
• Preexisting Duty Rule: Performing something one is already legally obligated to do does not count as new consideration.
• Contracts Under Seal: Historically, a sealed document could be enforceable without consideration, though this is largely obsolete in modern jurisdictions.

Practical Tips for Drafting Contracts

1. Clearly state what each party is giving and receiving.
2. Use specific language payment of $5,000 rather than payment.
3. Avoid vague promises that might be interpreted as gifts.
4. When using nominal consideration, include a statement of intent to ensure courts view it as a genuine exchange.
5. Review local statutes as some jurisdictions have modified the traditional doctrine of consideration (e.g., the Uniform Commercial Code for sales of goods).

Conclusion

Consideration is the lifeblood of a contract. It guarantees that parties have a reciprocal exchange, providing the legal basis for enforceability. By recognizing what qualifies as consideration, understanding its exceptions, and applying the concept correctly in drafting, individuals and businesses can create stronger, more reliable agreements.

For further reading, consult the Restatement (Second) of Contracts or your jurisdictions specific contract statutes.