In order for any contract to be enforceable, consideration is required. For example, the following would create an enforceable contract:
- An offer, e.g., Party A says to Party B, “I will mow your lawn for $25.”
- Acceptance of the offer, Party B then says to Party A, “I agree to pay you $25 to mow my lawn.”
- The consideration is Party B’s promise to pay the agreed upon price of $25 given in exchange for Party A’s promise to mow the lawn.
That a contract is enforceable means that a court of law would enforce the contract, i.e. either require both parties to do what they promise or require the party who does not do what they promise to pay the other party money damages to compensate them for their loss.
In essence, consideration is a bargain for the exchange of things of value. It ensures that both parties have bargained and are getting something of value from the deal. This means that each party must receive some benefit from the agreement they have entered into.
In the example, Party B is paying $25 to get a lawn that has been mowed. Party A is spending the time and effort it will take to mow the lawn in order to receive $25.
Another example: Suppose a person hits another car in a grocery store parking lot. The party whose car is damaged gets an estimate for repair that would cost $1,500. Not wanting their insurance rates to go up, the party who caused the accident offers to give the other party $1,500 in cash. If both parties agree to this resolution of their situation, a contract is formed. A court would likely find the consideration in this event adequate.
The party whose car is damaged receives an amount of money that is adequate to repair their car, and the other party avoids reporting the accident to their insurance company while disposing of their obligation to repair the other party’s car.
As you can see, “consideration” in contract law is very different from the ordinary meaning. Be careful not to confuse them.
In addition, the consideration must be something of value for which the parties “bargained” to be valid. This means that the consideration must be something to which the parties agreed prior to making the exchange. For example, A cannot suddenly mow B’s lawn and expect a court to order B to pay for it unless A and B had agreed beforehand that the exchange would be made. Without bargaining for the trade, and agreement from both parties, mowing the lawn would be viewed as a gift.
The requirement of consideration is what distinguishes a contract from a gift. If one party merely promises goods to another party without requiring them to do something in exchange, the transaction would be viewed as a gift and not a contract. Courts do not enforce promises to make gifts.
Eligibility: There are other legal requirements that must be met to make a contract enforceable. The parties must be at least 18 years old when they enter into a contract if it is to be enforceable. If a party to a contract is under 18, the contract would be “voidable,” meaning that the under-age party would have the legal right to cancel it if they should choose to do so.
In addition, the party to a contract must have the mental capacity to reasonably understand the nature and consequences of the contract to which they agreed. Again, if they do not have the mental capacity to understand this, the contract would be voidable, meaning that the party lacking the required mental capacity could void it.
The Importance of Hiring a Lawyer: An individual may always negotiate and draft a contract on their own with the help of a contract lawyer, but this can lead to pitfalls, especially regarding consideration. A lawyer can ensure that the consideration is legally sufficient and clearly defined in a written contract, which reduces the risk of future disputes or the unenforceability of the contract.
What Does “Adequate Consideration” Mean?
For a contract to be enforceable in a court of law, the consideration that is exchanged must be deemed “adequate.” This means that the mutual exchange must involve a fair price in comparison to the promise that is made in exchange for it.
For example, if A promises to sell B their house for $100. The house is worth $150,000. This consideration is probably not going to be “adequate.” However, if B offers to exchange services roughly worth $150,000, then the consideration would be deemed adequate. Note that consideration need not be in the form of money; it can take the form of anything with legal value.
Regarding the adequacy of consideration in a contract, the following principles are generally applied by courts in contract disputes:
- In addition to monetary sums, consideration can involve a promise to do something or a promise not to do something. For example, a promise by a neighbor not to build something in their backyard that is next to the fence between their property and the one next to it is likely to be adequate consideration.
- Consideration that consists of a past act is never adequate. Past consideration is where one party promises to perform a duty that they have already rendered. There is no contract if the exchange of consideration is “I will pay you $25 for the lawn you mowed yesterday.” That payment is a gift, according to the law
- A promise to perform an act that the party is legally bound to perform at the time the promise is made may not be viewed as adequate consideration (“I will pay you the $100 that the small claims court judge ordered me to pay, if you mow my lawn” is not adequate consideration.
- Consideration is not adequate if it violates public policy. This makes the item worthless because the law cannot recognize such an exchange. For example, a contract for prostitution services is not enforceable because sex is not recognized as valid consideration by the law.
- Consideration is not adequate if it involves an illusory promise or a worthless item, i.e., has no legal value, such as fake money; however, consideration does not have to be equal in value to what is received in exchange.
Inadequate consideration does not automatically invalidate an entire contract. However, inadequate consideration generally has the effect of making the contract unenforceable in court.
Timelines: Past consideration is not adequate, so the timing of the exchange is relevant. Consideration should generally be exchanged contemporaneously with the agreement or as specified within the contract terms. If one party’s consideration is something already performed before the agreement, it may not be considered valid consideration.
Does a Contract Have to Contain Consideration to Be Enforceable?
Contract law allows for an enforceable promise even though consideration is not given. This happens when the parties have each promised the other party something in exchange, and one party has already reasonably relied upon the promise to their detriment.
This is known in the law as promissory estoppel. Promissory estoppel is when a court upholds a contract even though adequate consideration was never given, because one party misled the other party into believing there was consideration. As a result of that misrepresentation, a party went through with the contract even though the other party never intended to fulfill the agreement.
For example, suppose that a person runs into the CEO of a major corporation in a bar. Over drinks, the two share information about their employment. The CEO offers the other person a job at corporate headquarters in Boston if they can arrive there within a month. The other person goes to their home in Des Moines, Iowa, quits their job, sells their home, and moves to Boston, including paying the first month’s rent on an apartment.
When the person appears in the CEO’s office within the month, the CEO expresses shock and says that he was inebriated at the time he made the offer and will not give the person a job with the CEO’s corporation.
Under the doctrine of promissory estoppel, a court might award monetary damages to the party who believed the CEO’s promise of employment and at great cost to himself acted in reliance on the promise: If the circumstances indicate that money will not be sufficient to put the person in the position they were in before a contract was attempted, the court might order specific performance: forcing the company to hire the person.
Costs/Fees: There may be a cost to ensuring that consideration is legally adequate. The party to a proposed contract may have to pay attorney’s fees if they seek legal advice in drafting or reviewing a contract to ensure that the consideration is valid. Additionally, court costs may have to be paid, if a dispute over the adequacy of consideration leads to litigation.
Process/Steps: The parties to a contract want to be sure to arrive at a clear understanding of what their contract requires of each of them, including what the consideration is. Ideally, it should be stated in a written contract. Contracts can also be oral agreements. Courts enforce oral contracts that are otherwise valid.
However, it is generally best practice to put a contract in writing. This can help ensure that both parties clearly understand the exact goods or services being exchanged and can prove it in a court of law if that becomes necessary.
Evidence/Documents: Broadly speaking, evidence relating to a contract and the consideration can include the contract itself, receipts, invoices, bank statements, bills of lading for the deliveries of goods, or any other documentation that demonstrates the exchange of value between the parties.
Documents regarding the negotiation of the contract, such as letters between the parties to the contract, would be relevant. Witness testimony can also be used to support claims regarding consideration exchanged in a contractual relationship.
State Variations: There are some variations among the states in the law of consideration, but the basic concepts are mostly similar in different states. In many states, the consideration in written contracts, as opposed to oral contracts, is presumed to be adequate unless something different is proven. In these states, courts are more reluctant to question whether the consideration is adequate.
They believe that the parties are free to decide whether the consideration in their contract is adequate. Still, courts in these states are willing to view consideration that shows “gross inadequacy” as evidence of fraud or other problems, e.g. mistake of fact in the formation of a contract.
The Importance of Hiring a Lawyer: It is always advisable to have a lawyer draft a written contract. A lawyer who knows contract law can anticipate problems and include provisions that prevent disputes. The law of consideration can be technical, and a lawyer can ensure that the consideration is legally sufficient and clearly defined in the contract. This lowers the risk of potential disputes or ending up with an important contract that cannot be enforced in court.
In addition, it can be helpful to have a lawyer negotiate a contract on your behalf, especially if the contract is one that is important to you.
Do I Need a Lawyer for Issues with Contract Consideration?
If you have a contract dispute with someone, you should consult an experienced contract lawyer. Consideration is often a central issue in many contract disputes. Consideration can also be an issue at several stages of the contract, including when a contract needs to be rewritten because the consideration has changed. It is very important that you understand how consideration may affect your contract.
You may wish to contact a contract lawyer if you have a contract dispute that involves consideration. Or, if you wish to draft a contract, your attorney can ensure that it satisfies legal requirements in connection with consideration.
