Consideration

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Consideration meaning in law

In the legal system, the term consideration in contract law refers to something of value given to someone in return for goods, services, or some other promise.  A valid contract must include consideration for every party involved. In simple terms, consideration is the basic reason a party enters into a legal contract. To explore this concept, consider the following consideration definition.

Definition of Consideration

Noun

  1. Something of value given in exchange for something else of value, usually in the context of a contract.

Origin

1350-1400       Middle English  < Latin  consīderātiōn

What is Consideration

Consideration is the benefit that each party receives, or expects to receive, when entering into a contract. Consideration is often monetary, but it can be a promise to perform a specific act, or a promise to refrain from doing something. In order for a contract or agreement to be legally binding, every party to the contract must receive some type of consideration. In other words, a contract is a two-way street, so each party must receive something of value from the other party or parties. Illegal or immoral acts are not legally considered to serve as consideration.

Example 1

John backed into Allen’s car, damaging it. John is liable to pay for the damages, but does not have the money right now. While Allen could sue John for the damages to his car, he enters into an agreement with John to give him 90 days to pay the full amount of $1,500, plus an additional $250 for the inconvenience. The agreement states that Allen will not file a lawsuit before the 90 days is up, but is free to do so after that time. This agreement, or “contract,” provides consideration for both parties:

  • John’s benefit: Allen gives up the right to sue for a period of 90 days
  • Allen’s benefit: John will pay for the damages, plus an additional amount of $250

Example 2

Brittney agrees to sell her car to Bill for $1,000. Bill’s payment serves as consideration for Brittney’s promise to sell the car to him. Brittney’s consideration is her promise to sell him the car.

Example 3

A landlord and a prospective tenant meet to discuss the rental of a condo. At the meeting, they go over the terms of the lease, and agree to enter into the lease, which is signed by both the landlord and the tenant. In this type of contract, the landlord agrees to provide tenant with housing, and the tenant promises to pay rent in return.

Elements of Consideration

In order for a contract to be considered valid and enforceable by the courts, three elements of consideration must be met. If one or more of these elements are missing, the contract lacks the necessary requirements, it could potentially be deemed invalid by the court. The required elements of consideration include:

  1. The contract must include a bargain for the terms of the exchange. This means there must be something that is worth bargaining over to both the parties.
  2. There must be a mutual exchange between the parties. In simple terms, all parties involved must benefit from the contract.
  3. 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 state, generally these requirements include:

  • An intent by both parties to enter into the agreement
  • The subject matter must be legal
  • One party must make an offer
  • The other party must accept an offer

Types of Consideration

Consideration in a contract is the exchange of anything of value by each party. Most often, services or goods are exchanged or promised in a contract, though consideration may be whatever the parties agree to. Examples include:

  • Money
  • Services
  • Personal property
  • Real property
  • Promise to act
  • Promise to refrain from acting

Lack of Consideration

A contract may be deemed invalid by a court if it lacks recognizable consideration. Although the exchange of certain items or terms may seem like something valid on which to create a contract, not just anything meets the definition of consideration. Some of the scenarios where a contract lacks consideration includes:

  • The agreement is more of a promise of a gift, rather than a contract
  • One of the parties involved was already legally obligated to perform as specified by the contract
  • The bargained for promise cannot be illusory. This means there cannot be a contract if the parties are not mutually agreed, or where only one party is required to perform.

Example of a Gift

Naomi’s mother promises to buy her a car when she graduates in two years, if she keeps her grades up, making an official-looking document, which she signed. After graduation, Naomi is disappointed that her mother has decided not to buy the car, as Naomi got into trouble with drugs and delinquent behavior over the past couple of years.

Naomi files a civil lawsuit, claiming that she had a contract with her mother, and that her mother must buy her a car. However, because there was no mutual benefit, no consideration given by both parties, the court is likely to determine that the document was simply a promise of a future gift, which is not an enforceable contract.

Example of an Illusory Promise

ChocoTime candy company enters into a contract with Cocoa Merchants in which ChocoTime will purchase all of the cocoa it needs for its candy from Cocoa Merchants, and Cocoa Merchants will sell as much cocoa as it wants to ChocoTime. Because this contract binds ChocoTime to purchasing all of the cocoa it needs only from Cocoa Merchants, ChocoTime is not bound to do anything. In fact, Cocoa Merchants could choose not to sell any cocoa to ChocoTime if it desired. This is one type of illusory promise, and it therefore makes this contract invalid and unenforceable.

Related Legal Terms and Issues

  • Binding – Having power to bind or oblige; imposing an obligation.
  • Contract – An agreement between two or more parties in which a promise is made to do or provide something in return for a valuable benefit.
  • Damages – A monetary award in compensation for a financial loss, loss of or damage to personal or real property, or an injury.
  • Intent – A resolve to perform an act for a specific purpose; a resolution to use a particular means to a specific end.
  • Obligation – A promise or contract that is legally binding; the act of binding or obliging oneself, as in a contract.
  • Personal Property – Any item that is moveable and not fixed to real property.
  • Real Property – Land and property attached or fixed directly to the land, including buildings and structures.