Consideration in Contracts: Why It Matters
What Is Consideration?
Consideration is something of value exchanged between the parties to a contract. It is one of the fundamental requirements for a legally binding agreement. Without consideration, a contract is generally unenforceable.
In plain terms, consideration is the answer to the question: "What is each side giving up or providing in exchange for what the other side promises?"
Forms of Consideration
Consideration can take many forms:
- Money: The most common form — paying a price for goods or services
- Services: Performing work in exchange for compensation
- Goods: Exchanging physical items
- A promise to act: Agreeing to do something you are not otherwise obligated to do
- A promise to refrain from acting: Agreeing not to do something you have a legal right to do (called "forbearance")
What Does Not Count as Consideration
- Past actions: Something you already did before the contract was formed generally cannot serve as consideration
- Pre-existing obligations: Promising to do something you are already legally required to do is not new consideration
- Illusory promises: A promise so vague that it does not actually commit you to anything (e.g., "I will pay you if I feel like it")
- Gifts: A one-sided promise to give something without receiving anything in return is a gift, not a contract
Why Consideration Matters in Practice
Consideration issues frequently arise in:
- Non-compete agreements: Many states require additional consideration (beyond continued employment) for non-competes signed after the start of employment
- Contract modifications: Under common law, modifying a contract requires new consideration from both sides
- Settlement agreements: Both parties must give up something for the settlement to be binding
Adequacy vs. Existence
Courts generally do not evaluate whether the consideration is fair or adequate — only whether it exists. A person can sell a car worth $20,000 for $1 and the contract is still valid, as long as both parties agreed voluntarily.
When to Consult a Lawyer
Consider consulting an attorney if you are asked to sign an agreement where you are not clear what you are receiving in exchange, or if you are being asked to accept new restrictions (like a non-compete) without additional compensation.
This article is for informational purposes only and does not constitute legal advice. Consult a licensed attorney for guidance specific to your situation.