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What is Consideration in a Contract? | Consideration in Contract Law Explained

Updated on
November 1, 2019
Article written by
Attorney Kevin O'Flaherty

In this article we will answer the question “what is ‘consideration’ in a contract?” When discussing contracts and contract law, the term “consideration” is often mentioned. In relation to a contract, consideration refers to what each party will receive as a result of the contract, also known as “bargained-for exchange.”

For example, consideration could include one party  receiving a product or service as consideration for  payment for that product or service. Simply, consideration is the benefit each party gets or is expecting to get as a result of the contractual agreement.

Consideration does not have to include money. It has to be something of value deemed appropriate by both parties.  Anything of value promised by one party in exchange for something else is referred to as consideration.

Typically, consideration is a result of either two things; the first is a party’s promise to do something it’s not legally obligated to do. The second is a promise to not do something a party has the right to do. An example of this is often a promise not to file a lawsuit against the other party.

A contract must include consideration for it to be valid. If litigation ensues and a court finds the contract lacks consideration, the court can rule that the contract is unenforceable. The court can base its findings on these for criteria:

  • One of the parties was already legally obligated to perform;
  • The promise amounts to a gift, not a contract;
  • The exchange is for “past consideration” (this is something of value that was already promised in exchange for something other than the present consideration);
  • The bargained-for promise is illusory (this is a promise that is so vague as to not actually be binding, like “I agree to sell you all of the widgets I want to sell you.”)

Common language in some contracts may include the phrase “for good and valuable consideration, the sufficiency of which is acknowledged…”, however, just because it uses the term “consideration” doesn’t necessarily mean the contract contains consideration. For a contract to be enforceable and valid, it must indicate that value is being offered by one party and accepted by another in a way that’s beneficial to both.

What is Consideration in a Contract? | Consideration in Contract Law Explained
Author

Attorney Kevin O'Flaherty

Kevin O’Flaherty is a graduate of the University of Iowa and Chicago-Kent College of Law. He has experience in litigation, estate planning, bankruptcy, real estate, and comprehensive business representation.

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