Consideration refers to something of value, often money, goods, or services, exchanged between parties as a necessary element in the formation of a legally binding contract or agreement.
Starts at $0 + state fees and only takes 5-10 minutes
Last Updated: March 10, 2026
The definition of consideration is a benefit and detriment that each party incurs in an agreement. Consideration is what each party bargains for and what changes each party’s situation due to the contract.
The “consideration” meaning can be explained through a typical business encounter. One person agrees to buy shoes, and the other agrees to sell the shoes. The first person pays money for the shoes, which is what they give up. In exchange, they gain shoes. The other person gives up the shoes but gains money for the shoes. Essentially, the parties agree to exchange shoes for money. Both people receive a benefit and incur a loss.
If someone makes a promise without consideration, there is no contract. In the above example, if the second person agrees to give the first person the shoes in exchange for nothing, this isn’t a legally enforceable contract. Instead, it’s just a promise without consideration. This promise is not a legally enforceable contract.
By definition, consideration is something that binds both parties to a contract. With consideration, a business owner has a contract that can be enforced in court. If the other party to the contract doesn’t do what they agreed to do, a person can take them to court for breach of contract.
What is consideration? Defining this term raises several issues.
Consideration cannot be nominal. This means that consideration can’t be too little compared to the value of what the other party is giving up. For example, a penny for several acres of land may not be sufficient consideration.
Another issue is that consideration cannot be something a person is already required to do. An example of this would be if one friend agreed to pay another $200 for arresting a criminal. However, if the one friend is a police officer, it’s their legal obligation to arrest criminals. If the other friend doesn’t pay the $200, the police officer can’t sue for a breach of contract because there was no consideration.
Consideration requires that both parties create new obligations under the contract. A person can’t bargain for something that already happened in the past. For example, suppose an entrepreneur’s mom agrees to give them $200 because they were on the college honor roll two years ago. This new $200 didn’t induce them to work hard to make the honor roll; they already did it without this promise. This is considered past consideration, and it isn’t enough to form an enforceable contract.
An example can help explain the concept of consideration further. One common example of consideration is a settlement agreement in lieu of a lawsuit. In a settlement agreement, one person agrees to pay a second person. The second person agrees to withdraw a lawsuit in exchange for the sum of money the first party pays them. The payment and withdrawal of the lawsuit are bargained for and amount to consideration. Both parties receive a benefit and lose something, so there is valid consideration.
Consideration is something that each party bargains for and receives in a contract. For a contract to be legally enforceable, each party must incur both a detriment and a benefit.
Recommended articles
Drafting contracts, especially including consideration, can feel confusing. Fortunately, business owners don’t always have to navigate it alone. ZenBusiness offers a Freelance Contract Template that can help someone draft a contract to include proper consideration. They can also help entrepreneurs who haven’t started their business yet, thanks to their ZenBusiness Formation Plans. Finally, their Worry-Free Compliance service can simplify the process of keeping a business compliant with state requirements year over year.
Disclaimer: The content on this page is for information purposes only and does not constitute legal, tax, or accounting advice. For specific questions about any of these topics, seek the counsel of a licensed professional.
Ready to Start Your Business?
Scan to download
the ZenBusiness app
