What is 'Consideration' and How Much is Required?
A legally binding contract needs three main elements: an offer, consideration, and acceptance. While the terms "offer" and "acceptance" are fairly straightforward -- an offer is made, and either rejected or accepted -- "consideration" refers to something of value that is being gained through the contract. If there is no consideration for one or more parties, then it casts a shadow over the legitimacy of the contract.
In other words, each party should be able to answer the question of why they entered into the agreement. Those who are unable to answer this question may not have been given proper consideration. This article provides a general overview of contractual consideration and how much of it is required for a contract to be valid.
How is Consideration Determined?
Basically, a consideration is determined when the two or more parties to a contract change their positions, such as promising something you are not legally required to do or promosing 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, which is not legally required to do, in exchange for you dropping your trademark infringement lawsuit against them (which you have a right to do). In this scenario, each side gains something of value -- or consideration -- from the agreement.
The Importance of Consideration
Generally, the courts will not reform a contract because one party made a bad bargain; but if the contract appears to be entered into under duress, there may be questions about whether there is adequate consideration. 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.
Having said that, consideration must meet other requirements. The consideration must be an exchange for the bargain in question; past consideration is no good.
Example: Suppose XYZ Corp. employs Dave under a contract for one year for $100,000. Six months later the president notes that Dave does not seem happy in his job. The president offers Dave $20,000 more to stay for the full term of the contract. At the end of the year, Dave asks for the extra $20,000. 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, there would be additional consideration that would support the change to the contract.
When a Contract Lacks Consideration
The court may, at times, 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 made for something that already has been done ("past consideration") and therefore cannot be bargained for
- One or more of the parties agreed to something he or she already was obligated to do
- A promise was actually a gift, not something bargained
Get Professional Legal Help When Drafting or Signing Business Contracts
Entering into contractual agreements is an essential part of running any successful business. Some contracts are simple as a handshake or an invoice for payment, but certain high-stakes contracts and employment agreements are best vetted by a professional. Consider speaking with a business and commercial law attorney in your area to get started.
FindLaw's Contract Law section provides additional related articles and resources.