3.1 Definition and Requirements of Consideration
4 min read•july 22, 2024
is the lifeblood of contracts. It's the exchange of value that makes an agreement legally binding. Without it, most promises are just empty words. But with consideration, both parties have skin in the game.
Understanding consideration helps you spot valid contracts. It's not just about money changing hands. Promises, actions, or even refraining from doing something can count. The key is that both sides give up something of value to get what they want.
Definition and Role of Consideration
Define consideration and explain its role in contract formation
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- Consideration is an essential element of a valid contract
- Refers to the of value between parties where each party must promise, perform, or refrain from doing something in exchange for the other party's promise, performance, or forbearance
- Examples of consideration include payment of money, delivery of goods, or provision of services
- Consideration demonstrates the parties' intent to be legally bound by the contract and shows that the agreement is not merely a gift or gratuitous promise
- Absence of consideration may render a contract unenforceable
- Except in cases of formal contracts executed under seal or where the doctrine of applies, which enforces promises even without consideration in certain circumstances to prevent injustice
Essential Elements and Validity of Consideration
Identify the three essential elements of consideration: bargained-for exchange, legal value, and mutual inducement
- Bargained-for exchange requires that each party's promise or performance must be sought by the other party and the exchange must be reciprocal and agreed upon by both parties
- Example: A agrees to sell their car to B for $5,000. A's promise to transfer ownership of the car is exchanged for B's promise to pay the agreed-upon price
- Legal value means the consideration must have some legal value, even if minimal, and can be a promise, performance, or forbearance of a legal right
- Courts generally do not assess the of consideration or whether it's a fair deal, as long as some legal value is present
- Example: A promises to pay B $1 in exchange for B's promise to mow A's lawn. Although the value of the consideration may seem disproportionate, it still has legal value
- Mutual inducement requires that each party's promise or performance must induce the other party to enter the contract, meaning the exchange of promises or performances must be the reason for each party's participation in the contract
- Example: A offers to tutor B in math if B agrees to teach A how to play the guitar. Each party's promise induces the other to enter into the agreement
Distinguish between valid consideration and invalid forms of consideration, such as past consideration and preexisting duties
- Valid consideration meets the requirements of bargained-for exchange, legal value, and mutual inducement and can be a promise, performance, or forbearance of a legal right
- Example: A promises to paint B's house in exchange for B's promise to pay A $1,000 upon completion of the work
- Invalid forms of consideration do not meet these requirements and include:
- , which is something already done before the promise is made and cannot serve as consideration because it was not bargained for
- Example: A voluntarily helps B move to a new apartment. Later, B promises to pay A $100 for the help. B's promise is not enforceable because A's assistance was provided before the promise was made and was not bargained for
- Preexisting duties, which is a promise to do something one is already legally obligated to do and is generally not considered valid consideration
- Example: A owes B 500 if B agrees to give A an additional week to pay. B's agreement to extend the payment deadline is not valid consideration because A is already legally obligated to pay the $500
- Exceptions may apply, such as the performance of a preexisting duty to a third party or if additional duties are undertaken beyond the original obligation
- , which is something already done before the promise is made and cannot serve as consideration because it was not bargained for
Analyze fact patterns to determine whether the requirement of consideration has been met in a given contract
- Identify the promises, performances, or forbearances exchanged by the parties
- Determine if the elements of consideration are present:
- Bargained-for exchange: Were the promises or performances sought by and reciprocal between the parties?
- Legal value: Does each promise or performance have some legal value?
- Mutual inducement: Did each party's promise or performance induce the other to enter the contract?
- Assess whether any invalid forms of consideration are present, such as past consideration or preexisting duties
- Conclude whether the requirement of consideration has been met based on the analysis of the fact pattern
- Example: A promises to give B a ride to the airport in exchange for B's promise to watch A's dog for the weekend. The promises are bargained for, have legal value, and mutually induce each other, so the requirement of consideration is met
Key Terms to Review (16)
Adequacy: Adequacy refers to the sufficiency of consideration in a contract, ensuring that what is exchanged holds appropriate value for both parties involved. It plays a critical role in determining whether a contract is enforceable, as courts generally do not assess the fairness or equivalence of the exchanged values, but rather focus on the existence of consideration itself.
Bargained-for exchange: A bargained-for exchange refers to a mutual agreement in which each party provides something of value in return for a benefit or service from the other. This concept is central to contract law as it establishes the foundation of consideration, ensuring that both parties are committed to fulfilling their obligations. It emphasizes that the exchange must be a product of negotiation, rather than a gift or unilateral promise.
Charitable subscriptions: Charitable subscriptions are promises or commitments made by individuals or organizations to donate money or resources to a charitable cause or organization. These subscriptions often lack the traditional elements of a contract, such as consideration, making their enforceability questionable under contract law. Despite this, they play a crucial role in fundraising and support for non-profit entities.
Consideration: Consideration refers to something of value that is exchanged between parties in a contract, which is essential for the agreement to be enforceable. It acts as the incentive for each party to enter into the contract, ensuring that there is mutual benefit and a promise made by each side. Without consideration, a contract may be deemed invalid, as it demonstrates that both parties have agreed to give and receive something tangible or intangible.
Dougherty v. Salt: Dougherty v. Salt is a notable case that addresses the issue of consideration in contract law, specifically focusing on the validity of promises made without an exchange of value. The case highlights how a mere promise or expectation of a gift is not sufficient to form a binding contract, underscoring the necessity of consideration as an essential element for enforceability.
Hamer v. Sidway: Hamer v. Sidway is a landmark case from 1891 that established important principles regarding consideration in contract law. The case revolves around the promise made by an uncle to his nephew, offering $5,000 if the nephew refrained from drinking alcohol and smoking until he turned 21. This case is significant because it illustrates that consideration does not have to involve a tangible exchange; instead, the refraining from certain actions can constitute valid consideration, impacting the understanding of what makes a contract enforceable.
Legality: Legality refers to the requirement that a contract must be for a lawful purpose and not violate any statutes or public policy. This means that the content and purpose of the agreement must align with existing laws, making it enforceable in a court of law. If a contract involves illegal activities or violates established laws, it is considered void and unenforceable, which has implications across various aspects of contractual agreements.
Monetary consideration: Monetary consideration refers to the exchange of money or a tangible equivalent as a part of a contract, which is essential to create a legally binding agreement. This type of consideration signifies the value that one party offers to another in return for a promise or service, helping to establish the mutual benefit required for enforceability. Understanding monetary consideration is crucial as it highlights the importance of value in contracts and connects to concepts like adequacy and sufficiency.
Mutual Assent: Mutual assent refers to the agreement between parties to enter into a contract, demonstrated through an offer by one party and acceptance by another. This concept is vital as it ensures that all parties involved clearly understand and agree to the terms, forming the foundation for a binding contract. Without mutual assent, the essential element of consent is absent, leading to disputes over whether a contract exists or is enforceable.
Non-monetary consideration: Non-monetary consideration refers to something of value exchanged in a contract that does not involve money. This can include services, goods, or promises that are deemed valuable by both parties involved in the agreement, and it plays a crucial role in establishing the validity of a contract. Such consideration must be sufficient to support a contract, regardless of its monetary value, thus ensuring that both parties have something to gain from the arrangement.
Offeree: An offeree is an individual or entity to whom an offer is made in a contractual agreement. The offeree holds the power to accept, reject, or negotiate the terms of the offer, which significantly impacts the formation of a legally binding contract. Understanding the role of the offeree is essential for recognizing how offers are communicated and accepted, and it influences various aspects such as specific performance, contract interpretation, consideration, and the validity of an offer.
Offeror: An offeror is a party who makes a proposal to enter into a legally binding agreement with another party. This role is crucial in the formation of contracts, as the offeror sets the terms and conditions that the offeree can accept or reject. The actions and intentions of the offeror help establish the parameters of the contract, influencing its enforceability and performance.
Options contracts: An options contract is a financial agreement that gives the buyer the right, but not the obligation, to buy or sell an underlying asset at a specified price within a predetermined time frame. This type of contract is often used in financial markets to hedge risk or speculate on price movements, and it incorporates elements of consideration, which is essential in determining the enforceability of any contract.
Past consideration: Past consideration refers to a situation where something of value has already been given or performed before a promise is made, which does not qualify as valid consideration for a new contract. This concept is important because it underscores the requirement that consideration must be contemporaneous with the promise in order to support enforceability. Understanding past consideration helps clarify why certain promises may not be legally binding, even if they appear generous or well-intentioned.
Pre-Existing Duty Rule: The pre-existing duty rule is a legal principle stating that a party cannot create a valid contract by offering to do something that they are already legally obligated to do. This rule highlights the importance of consideration in contract law, as it requires that something new or additional be exchanged to form a binding agreement.
Promissory Estoppel: Promissory estoppel is a legal principle that prevents a party from withdrawing a promise made to another party when the latter has reasonably relied on that promise to their detriment. This doctrine is essential in contract law as it allows for enforceability of certain promises even when a formal contract does not exist, often bridging gaps where consideration or formalities may be lacking.