What is consideration in a contract, and what happens if there isn't any in an agreement?
Consideration is the answer to the inquiry, "Why are you entering this contract?" or "What are you receiving for being a party to this contract?" under basic contract law concepts.
Any agreement must involve consideration on the part of every individual or entity who enters the contract in order for it to be considered legally binding. This article addresses the fundamentals of the consideration requirement, as well as real-world consideration instances.
What Is Consideration?
Consideration refers to the benefit that each party receives or expects as a result of the contractual agreement — for example, Victoria's Secret receives your money, while you receive the cashmere robe.
Each party must change their "position" in order for consideration to offer a valid basis for a contract — and remember, every valid contract must have consideration. Consideration is usually the outcome of one of two things:
This shift in position is sometimes referred to as a "bargained-for detriment."
In the real world, how does consideration work? Assume you collided with your neighbor's golf cart and caused damage. Your neighbor has the legal right to sue you for the damage, but if you pay him $2,000, he will not sue you. Because each party is giving up something in the exchange — you're giving up some of your money, while your neighbor is giving up the ability to sue you — this arrangement provides enough value for the contract.
When a Contract doesn’t have Consideration
In some cases, the courts will intervene and declare a contract unenforceable due to a lack of consideration. Let's take a look at a few of these possibilities.
One of the parties was already required to fulfill by law. A police officer, for example, cannot claim a reward for apprehending a wanted suspect because the officer is already legally compelled to apprehend and arrest criminals.
The promise is more of a gift than a contract. A promise to make a present is when your wealthy uncle pledges to give you money to buy a house with no strings attached. You can't force him to come up with the money if he changes his mind because his pledge was one-sided; you haven't done or promised anything in return.
However, if you make a down payment on a house based on his promise and your uncle is aware of it, a court may uphold his initial promise. Despite the fact that it isn't a formal contract, the law acknowledges the need of holding people accountable for their commitments after others act on the premise that the promise would be kept. Promises are treated as contracts under this legal notion, known as "promissory estoppel," if they were fairly relied upon.
The transaction is for "previous consideration." When someone promises to give you something in exchange for something you've already done — "I'll pay you $500 because you quit smoking last year" — a court will not enforce the promise to pay because the performance (quit smoking) wasn't bargained for. You did that without realizing that someone would later offer to pay for it.
The promised benefit is illusory. In Robert's state, for example, it is illegal to fire an employee for refusing to sign a noncompete agreement. Robert signs one anyhow, despite the fact that he is on the verge of losing his job. Because Robert's employer cannot execute what it promised (or threatened to do), the agreement is unenforceable. Instead of threatening to dismiss Robert if he didn't sign the agreement, a better strategy would have been to offer him some sort of reward or pay if he did.
What if the consideration appears to be out of proportion?
Many transactions appear to be unjust in retrospect ("How much did you pay for that laptop?"). Courts, on the other hand, rarely pronounce judgment on the worth of the consideration transferred unless the two pledges are so disproportionately valuable that the bargaining process was conducted in bad faith (or "unconscionability"). If a court finds the consideration to be unjust, the contract will most likely come apart not because of a lack of consideration, but because the amount is so unequal that it implies that one party acted unfairly or withheld facts that may have made the arrangement fairer. Courts, on the other hand, are often hesitant to weigh in on the relative worth of specific promises or commodities unless there is evidence of ill faith. After all, what is valuable to one person may be worthless to another; that is what negotiating is all about.
Is it necessary to include the word "consideration" in your contract?
Many contracts include a recital (a declaration at the start of the deal) that states that the contract is being entered into "for good and valuable compensation, the sufficiency of which is acknowledged," or something similar. These contracts' authors make the error of thinking that simply saying that consideration exists satisfies the contractual consideration criterion. However, this is not the case in the majority of states; such recitals do not establish anything. To put it another way, stating that there is consideration does not imply that there is consideration.
A contract, according to legal authorities, does not need to include anything more than a statement that "the parties agree." Contracts in which only one party signs, such as assignments, option agreements, or promissory notes, are an exception. Because it is not self-evident that a bargained-for exchange has occurred, a recital that the consideration is sufficient should be included in these contracts.
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Yoel “Mo” Molina, I am a lifelong resident of Miami, Fl. I am a graduate of Miami Senior High, Class of 1992, Georgia Institute of Technology, B.S. 1997 and University of Maine School of Law, J.D. 2001. I have been practicing law in Miami Since 2001. I am a former training prosecutor in the Miami-Dade State Attorney’s Office. I have experience in jury trials, appeals, and administrative hearings. I have appeared before judges across the State. My experience ranges from civil litigation matters, collection matters, foreclosure, business and corporate, contracts, real estate, leases and employment matters..
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