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LEGAL DICTIONARY

Consideration

What Is Consideration?

For a document to be a binding contract, it must include something of value each party receives in exchange for meeting the stated terms. Consideration is the reason a contract exists.

In a contract for the sale of goods, the price paid is the consideration for the seller, and the property sold is the consideration for the buyer. Under contract law, consideration is sometimes called a “bargained-for exchange.”

What Are Examples of Consideration?

Although monetary payment is the most common form of consideration, it can take other forms, including:

  • a promise to take a particular action
  • a promise not to take a particular action
  • goods
  • services
  • real or personal property

Here are some acceptable types of consideration with examples:

Agreement to Refrain: This type of consideration means you agree to stop doing something that you otherwise have the right and ability to do.

  • Example: You have a legal right to park your car on the street in front of your neighbor’s house. They offer you space in the driveway, and you agree to park there, leaving the street space open for their recreational vehicle. Both parties benefit because you prefer the driveway space, and they are happy to have the street space at their disposal.

Agreement Not to Sue: An agreement not to take legal action against the other party when reasonable grounds exist.

  • Example: An employee claims that you owe them more money for last month. You claim that you have paid them for the hours worked. The employee threatens to file a suit against you. You offer to pay a smaller sum of money in exchange for the employee’s agreement not to sue you.

What Is Insufficient Consideration?

For a contract to be valid, it must indicate that something of value is being offered by one party and accepted by the other in a manner that is beneficial to both.

In some cases, a court may rule that a contract lacks sufficient consideration and thus is invalid. Reasons for this decision could include the following:

  • One party was already legally obligated to perform the action. An example is a reward to a police officer for recovering your stolen car. The officer is already bound to perform that service as part of their job.
  • The exchange is something of value already promised in another exchange. You cannot agree to sell a painting to someone if you have already accepted a down payment on it from someone else.
  • The bargained-for promise is a gift, not an exchange. Let’s say you have agreed to mow your grandfather’s lawn for free and miss a week. You are not legally obligated to make it up in any way since you were getting nothing tangible in return for the voluntary service.
  • The consideration is illusory, meaning it is too vague to be binding. You make a promise to sell someone your car for the best price. That promise cannot be enforced because what is or is not the “best price” is vague.

Without sufficient consideration, a contract appears to be voluntary under the law. In this case, the parties would have no rights to legal recourse if an obligation stated in the agreement is not performed or given.

Helpful Resources:

Nolo - Consideration: Every Contract Needs It

Britannica - consideration | contract law

The Business Professor, LLC - Consideration - Explained

What Is Consideration?

For a document to be a binding contract, it must include something of value each party receives in exchange for meeting the stated terms. Consideration is the reason a contract exists.

In a contract for the sale of goods, the price paid is the consideration for the seller, and the property sold is the consideration for the buyer. Under contract law, consideration is sometimes called a “bargained-for exchange.”

What Are Examples of Consideration?

Although monetary payment is the most common form of consideration, it can take other forms, including:

  • a promise to take a particular action
  • a promise not to take a particular action
  • goods
  • services
  • real or personal property

Here are some acceptable types of consideration with examples:

Agreement to Refrain: This type of consideration means you agree to stop doing something that you otherwise have the right and ability to do.

  • Example: You have a legal right to park your car on the street in front of your neighbor’s house. They offer you space in the driveway, and you agree to park there, leaving the street space open for their recreational vehicle. Both parties benefit because you prefer the driveway space, and they are happy to have the street space at their disposal.

Agreement Not to Sue: An agreement not to take legal action against the other party when reasonable grounds exist.

  • Example: An employee claims that you owe them more money for last month. You claim that you have paid them for the hours worked. The employee threatens to file a suit against you. You offer to pay a smaller sum of money in exchange for the employee’s agreement not to sue you.

What Is Insufficient Consideration?

For a contract to be valid, it must indicate that something of value is being offered by one party and accepted by the other in a manner that is beneficial to both.

In some cases, a court may rule that a contract lacks sufficient consideration and thus is invalid. Reasons for this decision could include the following:

  • One party was already legally obligated to perform the action. An example is a reward to a police officer for recovering your stolen car. The officer is already bound to perform that service as part of their job.
  • The exchange is something of value already promised in another exchange. You cannot agree to sell a painting to someone if you have already accepted a down payment on it from someone else.
  • The bargained-for promise is a gift, not an exchange. Let’s say you have agreed to mow your grandfather’s lawn for free and miss a week. You are not legally obligated to make it up in any way since you were getting nothing tangible in return for the voluntary service.
  • The consideration is illusory, meaning it is too vague to be binding. You make a promise to sell someone your car for the best price. That promise cannot be enforced because what is or is not the “best price” is vague.

Without sufficient consideration, a contract appears to be voluntary under the law. In this case, the parties would have no rights to legal recourse if an obligation stated in the agreement is not performed or given.

Helpful Resources:

Nolo - Consideration: Every Contract Needs It

Britannica - consideration | contract law

The Business Professor, LLC - Consideration - Explained