Contract Consideration

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 What Is "Consideration" in Contract Law?

In order for any contract to be enforceable, three things are required:

  • An offer (e.g., Party A: “I will mow your lawn”)
  • Acceptance of the offer (Party B: “I will pay you to mow my lawn”)
  • Consideration (Both: ‘For $25.”)

In essence, consideration ensures that both parties have bargained and are getting something out of the deal. This means that each party must receive some benefit from the agreement they have entered into. In other words, there must be an exchange of value between the two parties for a contract to be valid. In the example, Party B is paying $25, and Party A is giving up the time and effort it will take to mow the lawn.

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 “bargained for” to be valid. That means that the exchange must be something that the parties agreed to 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, 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 will not enforce promises to make gifts.

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.

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 each other 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 he 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: 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.

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.

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