Consideration in Contract Law — Examples & FAQs Included.

You’ve probably heard the phrase, “Always get it in writing” — but how can you be sure your written contract is as enforceable and legitimate as you need it to be? In most cases, a contract needs four main components in order to be valid: offer, acceptance, intention to create legal relations, and consideration. But what is consideration in contract law?

An experienced contract lawyer such as Hank Doyle The Doyle Law Offices can walk you through all of these vital components of a contract at both the individual and commercial level, to be sure that you’re getting just what you need, and that the document is legally binding. Let’s take a closer look at perhaps the most important element of a contract: The consideration.

What is Consideration in Contract Law?

In the simplest terms, a consideration in contract law is the benefit a party receives from the deal negotiated in the contract. It’s the answer to the question: “What does each party receive by entering this contract?” 

A legally binding and legitimate contract must include the consideration for every individual or entity involved in the contract. 

In most cases, a consideration comes in one of the following:

  • The promise to do something that you are not already legally obligated to do
  • The promise not to do something that you otherwise would have the right to do

Example of a Consideration in Contract Law 

Considerations come in many different forms: Money, products, promises, and labor. If you give or receive anything that you are not legally bound to do otherwise in a contract, it can be considered a consideration. 

Example #1

Say you own a business such as an LLC, and a customer slips and falls due to a lack of proper signage on a wet floor and injures themselves. In lieu of the customer filing a personal injury claim, you may offer them consideration so they don't sue your business. For example, if you both willingly agree in writing that the customer will not sue you if you pay them $2,000, you have entered into a proper contract with considerations. They will receive the money, but give up the right to take legal action; you receive the promise that legal action will not be taken, but give up that amount of money.

consideration in contract law

Example #2

At its core, consideration in contract law must include two parties who are each exchanging something. In other words, one person will offer money, an act of service, or an agreement as proof that they will not do something if the other party takes their consideration and either does what the other party suggested or disengages from doing something. For example, if you own a home in California and you wish to sell your home so you can move to North Carolina, you may sell your home to a buyer for a set price of $850,000. The buyer agrees to pay you, the homeowner, $850,000 in exchange for the home. You now leave your home in California to the buyer and pocket the $850,000 for which you may invest or put towards the purchase of your new home in North Carolina.

Example #3

As stated above, consideration in contract law can appear in forms other than money. For example, an NFL football player who is an active member of the Tennessee Titans team will agree to avoid reckless activities via a signed contract in exchange for a set salary. The activities the football player must avoid may include automobile racing and downhill skiing since these activities have a high rate of injury and could prevent the football player from playing in football games.

These examples are only meant to represent a few possible scenarios where one party will agree not to do something and the other party will receive money, an act of service, or a forbearance in exchange. These examples are only guidelines and only exist to paint a picture of the broad range of considerations. If you are uncertain whether your circumstance would be considered adequate consideration in contract law, please consult a trusted lawyer before taking further action.

Does a Contract Need a Consideration? 

A contract does need consideration for each party entering into that contract in order to be considered valid and legally enforceable. 

This doesn’t necessarily mean that the contract needs to include the term “consideration” though. In fact, in most states, the term doesn’t mean anything if the contract doesn’t clearly state what both parties are getting or giving up in the agreement. Simply having the word in the contract isn’t enough without the necessary verbiage to back it up. 

Most legal professionals agree that the only absolutely necessary language in a contract is the phrase “Both (or all) parties agree”, followed by a clear description of the agreement and the considerations. 

Why Contract Considerations Are Necessary 

A contract is defined by the Oxford English Dictionary as: “a written or spoken agreement, especially one concerning employment, sales, or tenancy, that is intended to be enforceable by law.” Considerations are vital to uphold this definition because they are proof that each party is bringing something of value to this agreement, and is legally obligated to bring it once they enter into the contract. 

This helps to ensure that both parties fulfill their end of an agreement. It also provides a record of the exchange for future reference. If the contract does not include a consideration, it is considered void. 

Contract Law Consideration FAQ

What are the three most common types of consideration in contract law?

The most common types of consideration in contract law include executory, past, and pre-existing.

Executory considerations are those that will be given or performed in the future. For instance, you pay a certain amount of money to a seller with the promise that they will transfer ownership of a property to you on a given date. 

Past considerations are those that involve actions already executed with the promise of something in exchange. For example, if someone agrees to house-sit for $50 a night for five nights, you would owe them $250 upon your return home. The amount asked for cannot be changed as the service was already performed and the amount already agreed upon. 

Pre-existing considerations typically involve obligations that are ongoing. If you’ve agreed to pay someone $10 a day to walk your dog until an agreed upon end date, the consideration would be $10 a day. 

What does a contract need in order to be valid? | 5 Aspects That Make a Contract Legally Valid

A valid contract needs, at minimum, five components to be valid: The offer, acceptance, statement of capacity of the parties involved, consideration, and recognition that all parties are in agreement about entering the contract. 

The offer is often a description of the terms of the agreement that one party is making to the other, such as a lease or formal job offer.

Acceptance is the portion in which the other party or parties agree to the terms. 

A contract also needs to include acknowledgment that all parties have the capacity to voluntarily enter the agreement, without coercion or other influencing factors. 

As previously mentioned, consideration is the statement about what each party is promising or agreeing to. It must be something of value, and cannot be anything illegal. Consideration in contract law may include money, an act of service, or forbearance.

Lastly, a contract must contain proof that all parties intend to enter the agreement willingly. 

Meet with a Contract Lawyer Today 

Even though we each enter into and create contracts more often than we might realize (think leases, retainers, new-hire paperwork, and more), most people benefit from the help of an trusted contract lawyer. Regardless of the circumstances of the contract, it’s important that you clearly communicate what you are receiving and giving in the agreement, anticipating potential misunderstandings or loopholes to be sure you are protecting yourself from any deviations. 

To that point, it benefits you to have a contract lawyer by your side to draft, interpret, or approve contracts you may find yourself needing to enter. At The Doyle Law Offices, our contract attorneys are available to guide you through any questions you might have, get advice regarding your contract, and fill in any gaps. We have law offices in Cary and Wake Forest, but we serve the greater Raleigh area.

If you have questions about contract law and considerations or would like to schedule an initial consultation with us, please fill out the contact form below or call us at  (984) 235-1067. A representative from our law firm will follow up with you promptly. Thank you!

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