Contract Basics is a series of posts meant to give my readers a more fundamental understanding of the rest of the items and concepts posted on Pro and Contracts, and provide some context for understanding contractual situations in their own lives.
Contract Basics III: Consideration
Consideration is the last of the three items fundamental to any contract. At its most basic, Consideration is what one person exchanges to get the result specified in the contract. A more formal way of putting it is that Consideration is anything of value used to induce one person to enter into an agreement with another. Consideration may take the form of money, services, objects, promises to act, or even promises to abstain from acting.
So to use the running example in the Contract Basics posts, a person states “I’ll give you $20 if you babysit my child.” In this example, the Consideration by the offeror (i.e., the person making the offer) is the $20. For the offeree (i.e., the person receiving the offer), the Consideration would be the service of babysitting the child.
Consideration is fundamental to the formation of a contract because without it, there is no inducement to actually contract. The courts traditionally view contracts without Consideration as unenforceable promises. The purpose of contract law is to ensure that if one person gives up something of value to him- or herself for the purposes of procuring goods, services, or promises, then that person will actually receive value for whatever it is he or she gave up. It is ultimately a question of fairness and honesty. If you are offered $20 to babysit someone’s child, accept the offer, babysit the child, and then are refused the $20, you would agree that you have been wronged. You gave up the freedom to not babysit that child in return for the payment of $20.
Contrast that to an unenforceable promise: Consider that the same offeror states that she will give you $20 on Friday and you accept. Come Friday, if the offeror does not give you the $20, you cannot claim that it is unfair because you did not give up anything to warrant the $20. Consideration, then, is really just something that ensures that all parties value the exchange of goods, service or actions.
Just like the previous example, a contract without Consideration is generally unenforceable, and courts have invalidated a great many supposed contracts because of the lack of consideration. This can be especially problematic when someone a party thinks there is Consideration, but a court later determines there is none. Time and again, parties to contracts have found themselves without recourse because they thought that “nominal consideration” was good enough. But the Consideration needs to be sufficient to be an appropriate trade for the other party’s contribution. Contracting to trade one’s entire collection of fine art for 1 penny would not be considered enforceable because the Consideration of 1 penny is nominal–it only exists to hold the place of Consideration so the contract looks valid. Consideration, then, needs to be of actual value to the parties in order to support a contract.
This is the end of the first three posts of Contract Basics. With these three concepts (Offer, Acceptance, and Consideration), a person should be able to form, understand, and spot basic contracts that. More importantly, any contract missing one of these three components is not a contract at all, but a flawed agreement that will likely be unenforceable.
I will continue to post on other Contract Basics in the future. Please let me know if there is a particular concept you would like explained or laid out. Otherwise, keep watching every week or so for another installment.
And as always, thanks for reading.
(photo by Eduardo Deboni)
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Graham Martin is a solo practitioner focusing on Contract law (including drafting, review, and litigation). He operates Martin Legal Services, LLC in the Minneapolis-St. Paul area.