In order for any contract to be enforceable, courts generally require three things:
- A valid offer;
- A valid acceptance; and
Consideration is something of value that is exchanged in return for the promise of performance by the other party. Valid consideration is one which results in either profit to one party or loss to another. Every party to a contract must offer consideration in order to be included in the exchange.
For example, if A promises B lunch from B’s favorite restaurant in exchange for B’s promise to mow A’s lawn, the lunch would be the consideration for the promise of B to mow the lawn. B’s effort in mowing the lawn would be the consideration for A’s promise to give B a free lunch.
Or, suppose a person causes a minor car accident in a grocery store parking lot. The party whose car is damaged gets an estimate for repair that would cost $1,200. Not wanting their insurance rates to go up, the party who caused the accident offers to give the owner of the damaged vehicle $1,200 in cash. If both parties agree that this is an acceptable resolution of their situation, a contract is formed.
A court would likely find the consideration 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.
Do not confuse the ordinary meaning of the word “consideration” for the meaning that it has in contract law. The meanings are completely different.
In addition, the exchange must be “bargained for” in a contract situation. The exchange must be something that the parties agreed to prior to making the exchange. For example, B cannot suddenly mow A’s lawn and expect a court to order A to pay for it, unless A and B had agreed beforehand that the exchange would be made. Otherwise, clearly, B mowing A’s lawn would be viewed as a gift.
Usually, a court will not enforce contract promises which are not supported by consideration. In fact, the requirement of consideration is what distinguishes a contract from a mere 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 will not enforce promises to make gifts.
What Does “Adequate Consideration” Mean?
In order 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 that B that they will sell them their house worth $50,000, and B offers to pay only $100, this consideration is probably not going to be “adequate”. However, if B offers to exchange services that are roughly worth $50,000, 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 that has 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 also involve a promise to do something, or a promise not to do something. For example, a promise to 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 might be valid as consideration;
- Consideration that is a past act is never adequate. Past consideration is where one party promises to perform a duty that they have already rendered.
- A promise to perform an act which the party is legally bound to perform at the time the promise is made may not be viewed as adequate consideration;
- If the parties agree upon a certain exchange for consideration, a court will not substitute its judgement of the value of the consideration; the contract may still be binding, even if the price does not totally match the promise;
- Consideration is not adequate if it involves an illusory promise or an item that is worthless, i.e., has no legal value, such as fake money; however, consideration does not have to be clearly 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;
- Consideration cannot be “nominal.” Nominal consideration is consideration which is clearly intended to be an inducement for a party to enter into a contract; but the value of it is too minimal for a court to recognize;
- Consideration is not adequate if it violates public policy. This makes the item worthless because the law cannot recognize such an exchange. For example, prostitution is not legal because sex is not recognized as consideration by the law..
Does a Contract Have to Contain Consideration to Be Enforceable?
Some contract laws allow for a substitute of consideration, such where 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 that there was consideration. As a result of that misrepresentation, a party went through with the contract even though the other party never intended to make an agreement.
For example, suppose that a person on vacation in Hawaii runs into another person who is the CEO of a major corporation in a hotel 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 home to Des Moines, Iowa, quits their job, sells their home, and, at great expense, moves to Boston. 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 the other person does not have a position with the CEO’s corporation.
Under the doctrine of promissory estoppel, a court might award damages to the party who believed the CEO’s promise of employment and at great cost to himself quit his job, sold his house and moved to Boston. On the other hand, a court might view the CEO’s promise as illusory and something the other party should have recognized as unenforceable.
Do I Need a Lawyer for Issues with Contract Consideration?
If you have a dispute that involves a contract, 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 different stages of the contract, such as when a contract needs to be rewritten. Therefore it is very important that you understand the way that 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 make sure that it satisfies legal requirements in connection with consideration.