Learn more about what consideration is in business.
Ready to start your dream business? Check the availability of your new company name to get started.
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.
Consideration’s definition is something that binds both parties to a contract. With consideration, you have a contract that you can enforce in court. If the other party to the contract doesn’t do what they agreed to do, you 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 you’re already required to do. An example of this would be if your friend agreed to pay you $200 if you arrest a criminal. However, you are a police officer, and it’s your legal obligation to arrest criminals. If your friend doesn’t pay you the $200, you can’t sue for a breach of contract because there was no consideration.
Consideration requires that both parties create new obligations under the contract. You can’t bargain for something that already happened in the past. For example, your mom agrees to give you $200 because you were on the honor roll for your college two years ago. This new $200 didn’t induce you to work hard to make the honor roll. You already did it without this promise. This is considered past consideration, and it isn’t enough to form an enforceable contract.
Examples help explain the concept of consideration. A settlement agreement demonstrates an example of consideration. 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.
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.
Making sure you include consideration in a contract can seem confusing. Fortunately, we’re here to help. We offer a Freelance Contract Template service that allows you to draft contracts that include proper consideration.
Plus, if you haven’t started your business yet, we can help you with our Business Formation service. Additionally, we offer our Worry-Free Compliance service for existing businesses to stay in compliance while you focus on growth.
Disclaimer: The content on this page is for informational purposes only and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.