No matter what kind of contract you’re entering into, you’re likely to hear the term “consideration” thrown around. That’s because, along with offer and acceptance, “consideration” is one of the essential elements of a contract. But what does it really mean?

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Consideration in Contracts Defined

The legal definition of consideration is based on the concept of a “bargained-for exchange.” This means that both parties are getting something that they’ve agreed to, usually something of value for something of value.

Say, for example, that your neighbor admires your bicycle. You know you are moving soon, so you offer (an “offer” is an element of a contract) to sell it to her for $100 (consideration). She accepts your offer (acceptance is also an element of a contract), but can’t pay you until she goes to the bank. So, you scribble a quick note describing both of your intentions to enter into this agreement and hand her a copy of the note. You now have an enforceable contract because the elements of a contract are in place, including this “bargained-for” exchange.

On the other hand, if you tell your neighbor that you will give her the bicycle if you can’t sell it at your garage sale, there is no element of consideration because she has not agreed to pay you anything. Your promise to give her the bicycle may be an enforceable promise but it isn’t an enforceable contract. Consideration isn’t usually an element of a gift.

Is Consideration Always Money?

Lengthy court cases and writings abound on the subject of what constitutes consideration. To be very concise, there are two more important things to know. First, consideration does not have to be money. It can be something of value, so it can be another object or a service.

Second, what you bargain for does not have to meet anyone else’s standards of value and courts have consistently refused to weigh in on this subject. In other words, if you had offered to sell your bicycle to your neighbor and asked for her collection of antique cigar tins in exchange, and your neighbor agrees to pay that amount (i.e., give you her collection of cigar tins for the bicycle), it doesn’t matter that the agreement may seem unfair to some. You made an offer of the bicycle, your neighbor accepted it for consideration, and you both intended to enter this agreement, and you are both competent to do so; therefore, it is a viable contract. Whether someone else thinks it is fair or not is irrelevant, as long as it’s not unconscionable.

Resources

Although we have attempted to present the basics of consideration in contracts here, it can be very complex.

If you want to be certain that the agreements you enter into on a personal or business basis include all the proper elements, please use our online resource to access free customizable lawyer-drafted contracts for general servicescontracts for specific services, or general contracts for products.

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Get started Start Your Contract for Services Answer a few questions. We'll take care of the rest.