Consideration is an essential part of a contract. In fact, a contract isn’t legally binding without it. But what exactly does it mean, and what does (and doesn’t) count as consideration? Find out in this Juro explainer.
What is consideration in a contract?
Consideration is a legal term used to describe the benefit each party to a contract receives. This is often payment in exchange for goods or services. Consideration doesn’t actually have to be money though – it can be anything of value that you get as part of a contract, like equipment or work. In short, it’s what you agree to give in a contract, to get what you want as a result of the relationship.
Consideration is a key element of a contract. In the UK, business contracts need to include the following to be legally binding:
- Intention to be legally bound
- Contractual capacity
In the US, legal doctrine varies slightly, and the key elements are:
All these elements must be present for a contract to be binding, and if just one of them is missing, the agreement may not be legally enforceable.
Consideration is perhaps the element of a legal agreement mostly commonly the subject of contract negotiation - so it’s worth digging in to find out more.
How does consideration work in a contract?
For a contract to be legal, there must be “mutuality of obligation”, which means both parties must meet their obligations. And consideration is the commitment the parties make to each other. This means both parties must be exchanging one thing of value for another.
It doesn’t have to be a large value – it simply has to be “sufficient”. As we mentioned above, it also doesn’t have to be money (although it often is). Some examples include:
- services, or knowledge and expertise – like painting a house or consulting on a project
- a promise to do something, like transfer ownership (e.g. if you’re selling/buying a car or house, or intellectual property), or to create or develop something (like computer software or a wedding cake)
- a promise not to do something (called a “restrictive covenant”) – like not working for a competitor for several months after leaving an employer, or not having a pet in a rental property
- property of any kind (whether that’s a house, land, or an “intangible” like stocks or bonds)
As well as being a promise to do something, consideration must also be “fresh”. This means that one of the parties hasn’t given or delivered the service or payment (or whatever) already, and isn’t already contractually obliged to do it.
And finally, consideration can be executed or executory. If it’s executed, then one party has already performed their part of the contract, while the other has yet to do theirs.
For example, imagine you pay a caterer in advance to make a buffet for your birthday party. The executed consideration is the payment you’ve made in exchange for the caterer’s promise to make your finger food and canapés.
Executory consideration is when promises are exchanged between both parties, for example if you promise to pay the caterer after they deliver those vol-au-vents and blinis.
When is consideration invalid in a contract?
Consideration must have value in the eyes of the law. If it doesn’t, a court might decide it isn’t valid. So what type of things don’t meet the definition of consideration?
- The promise of a future gift - for example, if I promise to gift you a painting if you complete a project for me. ‘Donative’ promises aren’t enforceable, because there’s no consideration.
- An illusory promise. This sounds a little bit Hogwarts, but actually just means a promise that’s too vague or open-ended. Like, “If you pay me £500 I’ll paint your house when I have time”, or “If your cakes are high-quality, I’ll buy my wedding cake from you”.
- If one of the parties was already legally obliged to do something. For example, a police officer can’t claim a reward for catching a criminal, because they’re already legally bound to catch bad guys (and gals) as part of their job.
- Anything that both parties haven’t agreed on.
Without valid consideration, a key element of the contract is missing, which means the agreement isn’t legally binding. This doesn’t mean you can’t still follow the course of action described in the document - but it’s not a contract in the eyes of the law (for example, a breach of contract isn’t possible) and you can’t enforce it in court.
Want examples of contracts with consideration? Check out our free templates:
NDA template | offer letter template | MSA template
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