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What is consideration in a contract?

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.

What are the requirements of consideration?

Consideration is an essential part of a valid contract with its own requirements. For consideration, itself, to be valid, each party to the contract typically must do one of the following: 

  1. Make a promise to the other party. 

  2. Perform an act (such as provide a service). 

  3. Agree not to do something.

Each party’s promise, performance, or agreement not to do something is usually in exchange for the other party’s promise, performance, or agreement not to do something.

Whatever it is that a party promises, performs, or agrees not to do must typically have some value that can be recognized by law. The value does not have to be monetary, or anything that would be recognized as having value by most people. Generally speaking, if a party accepts a promise, performance, or forbears from doing (agrees not to do) something they have a right to do, the promise, performance or forbearance may be found to have some legally-recognized value. 

This broad view of “value” is consistent with the principle of “freedom of contract” as set forth in Article I, Section 10, Clause 1 of the United States Constitution  “No State shall…pass any Law … impairing the Obligation of Contracts.” Known as the “Contracts Clause,” this language generally bars any state from passing laws that would interfere with the right to enter into a contract.

What is acceptable consideration in a contract?

Money (or the promise to pay a monetary sum) is a common form of consideration, but it is not the only one. The law recognizes many types of consideration, including: 

  • Providing a service.

  • Land. 

  • Objects. 

  • Goods. 

  • Giving up an existing benefit. 

  • Refraining from engaging in a particular activity or behavior. 

In the majority of cases, it does not matter if a party does not receive or appear to receive any direct benefit from the bargain. So long as there is no fraud involved, where one party agrees to accept a particular form of consideration that the other party agrees to provide, that is almost always – with rare exceptions – enough to form the basis of a legally binding contract.

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.

What is an example of consideration in a contract?

Consideration comes in many forms, both material and abstract. Here are some examples:

  • An employer promises not to fire an employee if they haven’t done anything wrong, and the employee provides their services to the employer.

  • In addition to offering services as a professional baseball player, a party agrees not to participate in hazardous activities (such as skiing, automobile racing, motorcycle racing, or skydiving) in exchange for the salary and benefits offered to them as a professional baseball player.

  • Homeowners agree to sell their home to a buyer, who promises to pay the homeowners a specific sum of money for the home.

  • An uncle promises to pay his nephew $5,000 if the nephew refrains from drinking alcohol and using tobacco until the age of 21.

  • Delaying pursuit of a career (along with the inability to save for retirement during that time) and being responsible for maintenance of the household was given in exchange for a share of the other party’s retirement benefits and other assets acquired during that specific period.

  • A dentist’s widow sold his late wife’s practice to another dentist, who among other contractual terms, specifically agreed to pay $4,000 for the goodwill attached to opening a dental practice in the same location where the deceased dentist had operated.

These are just a few examples of consideration and not an exhaustive list. These examples are meant solely to illustrate the broad range of promises, performances, and forbearances that can form legally-recognized consideration for entering into a contract. If you are uncertain whether a promise, performance, or forbearance would be considered to be adequate compensation, please ask a lawyer.

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.

This article contains general legal information and does not contain legal advice. Rocket Lawyer is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.


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