Intermediate Financial Accounting II

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Consideration

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Intermediate Financial Accounting II

Definition

Consideration refers to something of value that is exchanged between parties in a contract, which can take the form of money, services, or goods. It serves as the foundation for a legally binding agreement, ensuring that each party is providing something of value in return for what they receive. Without consideration, a contract may be deemed unenforceable, making it essential for establishing mutual obligations.

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5 Must Know Facts For Your Next Test

  1. Consideration must be present for a contract to be valid; otherwise, it may be challenged in court as unenforceable.
  2. Consideration can be either a promise to do something or a promise not to do something, as long as it has value.
  3. Past consideration, or something that has already been done before the contract is formed, is generally not valid as consideration.
  4. Both parties must provide consideration; if one side offers consideration without the other reciprocating, the contract lacks balance.
  5. In cases of contract modification, new consideration is often necessary to ensure the changes are enforceable.

Review Questions

  • How does consideration affect the enforceability of contracts and what happens if it is absent?
    • Consideration plays a crucial role in determining whether contracts are enforceable. It represents the value exchanged between parties and without it, contracts may be viewed as lacking mutual obligation. If consideration is absent, a contract might be deemed unenforceable in court, which means that even if one party fails to meet their obligations, the other party cannot seek legal remedy based on that agreement.
  • Discuss how modifications to a contract require new consideration and why this is important.
    • When modifying an existing contract, new consideration is typically required to validate the changes. This means that both parties must provide something new or different than what was originally agreed upon. The necessity of new consideration helps maintain fairness and ensures that both parties have an incentive to agree to the modifications. Without this new consideration, the modified terms may not hold up legally.
  • Evaluate how the concept of consideration can influence negotiations and drafting of contracts in practice.
    • The concept of consideration significantly influences negotiations and drafting by encouraging parties to carefully assess what they are willing to exchange. When drafting contracts, it is vital for parties to clearly outline the considerations involved to avoid disputes later on. Understanding how consideration works allows parties to create more effective agreements and strengthens their negotiating positions by ensuring that both sides feel they are receiving adequate value for their commitments.
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