Consideration meaning in law and legal documents - Legal Terms

What does consideration mean in legal documents?

Consideration is a foundational element in the realm of contract law that refers to something of value which is exchanged between parties entering into a contract. The concept of consideration is crucial because it differentiates a legally binding contract from mere agreements or promises. For a contract to be enforceable, there must be an exchange of consideration; that is, each party must agree to give or do something for the other. This could take the form of money, services, goods, or a pledge to refrain from a particular action. It's the "price" one party pays for the other's promise, making the contract a two-sided obligation.

The legal requirement of consideration serves to ensure that the parties are genuinely invested in the contractual agreement. It prevents individuals from being legally bound to a contract based on gratuitous promises, where one party stands to gain without giving anything in return. While the law does not typically assess the adequacy of the consideration—meaning even a consideration of seemingly insignificant value can be legally sufficient—it does require that consideration be something of legally sufficient value and not something that is already a preexisting duty or obligation.

It's important to note that consideration must be exchanged at the time of the contract's formation. Past consideration, or something given or promised before the contract was formed, does not typically satisfy the legal requirement for current transactions. For instance, if one party promises to pay another for a service they had provided last year, without any prior agreement, this would not constitute valid consideration for a new contract because the service was rendered in the past and therefore, cannot be the basis for the current exchange.

However, there are exceptions to the consideration requirement. Certain agreements, such as those covered by the Doctrine of Promissory Estoppel, can be enforced without consideration. This doctrine applies when one party makes a promise knowing the other party will rely on it, the other party does indeed rely on it to their detriment, and the only way to avoid injustice is to enforce the promise. In such cases, the reliance takes the place of consideration.

Understanding consideration is essential for anyone entering into a legal contract. It's not enough to simply agree; there must be an exchange of value. While the concept may seem straightforward, it's often where the complexities of contractual disputes arise. When creating or entering into a contract, it's crucial to ensure that what you are offering or receiving as consideration is clear, has measurable value, and is agreed upon by all parties involved to avoid legal pitfalls and ensure the contract's enforceability.

What are some examples of consideration in legal contracts?

Employment Contract: "In consideration of the promises and mutual covenants herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree to the terms outlined within this Employment Contract."
Sales Contract: "The buyer agrees to pay the sum of $250,000 as consideration for the seller's transfer of the property located at 123 Main Street."
Service Agreement: "This Agreement is made in consideration of the parties' desire to outline the scope of services to be provided and the compensation for said services."
Non-Disclosure Agreement (NDA): "In consideration of the disclosure of certain proprietary information, the recipient agrees to refrain from sharing any confidential details with third parties."
Lease Agreement: "The tenant shall provide a monthly payment of $1,200 as consideration for the use and occupancy of the premises at the address specified in this Lease Agreement."
Merger Agreement: "The two companies have agreed to merge, and in consideration thereof, Company A will issue shares to the shareholders of Company B."
Loan Agreement: "As consideration for the loan provided by the Lender, the Borrower agrees to pay interest at the rate specified herein."
Settlement Agreement: "The plaintiff agrees to dismiss the lawsuit in consideration for the sum of $50,000 to be paid by the defendant."
Franchise Agreement: "The franchisee shall pay a weekly franchise fee to the franchisor as consideration for the use of the franchisor's brand and business model."
Licensing Agreement: "The licensee is granted the right to use the patented technology in consideration of royalty payments as set forth in this Licensing Agreement."