Why is Consideration Important in a Contract?

Consideration, or something of value exchanged in a contract, must be adequate in many jurisdictions in order for a contract to be enforceable.4 min read

Why is consideration important in a contract? Consideration, or something of value exchanged in a contract, must be adequate in many jurisdictions in order for a contract to be enforceable.

Role of Consideration in Contracts

Simply stated, the idea behind contracts is to facilitate engagement in mutually beneficial agreements and transactions.

There are three elements of a contract:

• The offer.
• Acceptance.
• Consideration.

Consideration is value or a promise, action, or thing that has value to its recipient. Examples of considerations are:

• Property.
• Money.
• Employment.
• A promise to undertake an action.
• A promise to abstain from an action that the party otherwise would have the right to engage in, also called forbearance.

In other words, consideration asks whether the parties to a contract have assumed either an obligation or an act of forbearance. Therefore, certain actions or promises may not qualify as consideration and cannot be incorporated into contract formation. In this type of case, the agreement was illusory, a gift, or possibly an unenforceable agreement due to illegality, for example, blackmail.

What Are the Legal Requirements of Consideration?

Consideration is required to be "adequate," meaning that the exchange in value should be reasonably balanced. A consideration's value is typically determined by the market value of goods and services. While parties to a contract can negotiate as they wish, consideration must at least be deemed reasonable in order to hold up in court.

Under many states' laws, mutual consideration, or the exchange of value between a contract's parties, is a critical component in contract formation. If mutual consideration is not present in a contract, under some circumstances a state may deem the contract to be unenforceable.