What Is 'Consideration' and How Much Is Required?
Consideration is a complex yet fundamental aspect of contract law. A legally binding contract requires a valid offer, acceptance, and consideration.
While offer and acceptance are relatively self-explanatory, the concept of consideration might seem more elusive. Consideration means each side of a contract gives something of value. If one person gives nothing, a court won't enforce the deal. This principle represents the mutual assent of the parties involved in the contract.
This article provides a general overview of contractual consideration and how much is required for a contract to be valid.
What Is Consideration?
Consideration is one of the essential elements of a contract. Consideration occurs when a party to the contract changes their position. This could be promising something you are not legally required to do or promising not to do something you are legally free to pursue.
For instance, a company may promise to take down a website that is confusingly similar to your company's website in exchange for you dropping your trademark infringement lawsuit against them. In this scenario, each side gains something of value -- or consideration -- from the agreement.
As the preceding example illustrates, consideration doesn't have to be money. There are several different forms of consideration. It can be anything of value, such as:
- Goods or services you provide
- A promise to do something later
- Not using a legal right you have
- Taking on more responsibility
If someone gives up something that matters, it can work as valid consideration.
Is There Sufficient Consideration?
Generally, the courts will not redo a contract because one party made a bad bargain. Courts usually don't look at whether the consideration is good enough. If something of value passes between the parties, the court will see there is consideration. The people in the contract decide if the consideration is adequate. Courts rarely cancel a contract because the consideration is too low.
However, certain contracts must be in writing and signed to be enforceable under the statute of frauds.
Consideration is the value bargained for by the parties, and most decisions indicate there is no reason to inquire into a party's motivation for giving another party an incredible deal.
But if the consideration is very low, there may be questions about whether it is adequate. A court might examine the contract for evidence of duress, undue influence, fraud, or lack of capacity.
Consideration must meet other requirements. The consideration must be an exchange for the bargain; past consideration is no good.
Example: Suppose XYZ Corp. employs Dave under a one-year contract for $100,000. Six months later, the president notes that Dave seems unhappy in his job. The president offers Dave $20,000 more to stay for the full term of the contract.
Dave asks for the extra $20,000 at the end of the year. There is no enforceable contract for the extra incentive pay. Under the original contract, Dave was already obligated to work for XYZ Corp. for a full year. The extra pay is not supported by new consideration. Dave is not giving anything that he did not previously agree to.
But, if the $20,000 was offered to Dave to take on extra responsibilities or to work Friday nights, and he did, the additional consideration would support the change to the contract.
Does Consideration Need To Be Equal?
The consideration does not need to be the same on both sides. One person might give up something really valuable. The other person might give up something with little value. This is common in settlement deals. What matters is each side gives up something that matters.
When a Contract Lacks Consideration
The court may declare that a contract lacks consideration for one or more of the parties involved, rendering it unenforceable. A contract may lack consideration if any of the following is true:
- The promise cannot legally (or practically) be offered
- Offer is for something that already has been done ("past consideration") and therefore cannot be bargained for
- One or more of the parties agreed to something they already were obligated to do, generally under the existing contract
- A promise was a gift, not something bargained
Are There Exceptions to Needing Consideration?
There are times when courts will enforce promises even without consideration:
- Promissory Estoppel: Promissory estoppel means you can't go back on a promise if the other party reasonably relied on your word. The promise doesn't have to be part of a formal contract. If the court finds promissory estoppel applies, the promisor may be legally obligated to fulfill it.
- Preexisting Duty Rule: If a person is already legally obligated to perform a certain act, promising to perform that act can't serve as consideration for a new contract.
- Firm Offers From Merchants: An exception under the Uniform Commercial Code (UCC) for signed offers by merchants meant to be held open.
Get Professional Legal Help When Drafting or Signing Business Contracts
Small-business owners deal with contracts every day. Entering into valid contracts is an essential part of running a successful business. Some contracts are as simple as a handshake or an invoice for payment and don't require legal advice.
However, certain high-stakes contracts, such as those dealing with the sale of goods, real estate, and some employment agreements, have significant legal requirements and are best vetted by a professional experienced in small business law.
In addition, if you are facing legal issues such as allegations of breach of contract, you should seek the services of a business lawyer. Consider speaking with a local business and commercial law attorney to get started.
FindLaw's Contract Law section provides additional related articles and resources.
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