In order for any contract to be enforceable, courts generally require three things: mutual assent (agreement to the contract terms), a valid offer and acceptance, and consideration.
Consideration is basically the exchange of something of value in return for the promise or service of the other party. A legal consideration is one which results in either profit to one party or loss to another. For example, if A promises B movie tickets for B’s promise to mow his lawn, the movie tickets would be the consideration for the promise. B’s efforts at mowing the lawn would also be consideration.
In addition, the exchange must be “bargained for.” 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 payment unless A and B agreed that the exchange would be made. Otherwise, B mowing A’s lawn would be treated as a gift.
Contract promises which are not supported by consideration are generally not enforceable. 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 a gift and not a contract.
In order for a contract to be enforceable, 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 being made.
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 considered adequate. (Note that consideration need not be money, but 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 a court in a contract setting:
- 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 quit drinking alcohol may be considered adequate consideration
- Past consideration is never adequate. Past consideration is where one party promises to perform a duty that has already been rendered. Also, a promise to perform an act which the party is already legally bound to perform may not be considered adequate
- If the parties agree upon the consideration, it 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)
Inadequate consideration does not automatically invalidate a 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 consideration, but the amount or performance given is too low 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 adequate consideration because sex is not valued by the law.
Some contract laws allow for a substitute of consideration, such where one party has already reasonably relied upon the promise to their detriment (promissory estoppel). Promissory estoppel is when a court upholds a contract even though adequate consideration was never given because one party mislead 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.
Consideration is often a central issue in most contract agreements. Consideration can also be an issue at several different stages of the contract, such as when the 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 issues over contract consideration. Or, if you wish to draft a contract, your attorney can make sure that it satisfies consideration requirements.