What is consideration?

Consideration is a crucial part of contract law. It refers to something of value that is exchanged between the parties entering into a contract. Consideration is what makes a contract legally binding and enforceable. Without it, a contract is generally not valid because it ensures that each party is giving something in return for what they are receiving.

Key elements of consideration

Legal definition

Legally, consideration is defined as a promise, an act, or a forbearance that is bargained for in exchange for a promise. This is what separates a contract from a gift—it requires a mutual exchange of value. Importantly, consideration doesn’t need to be equal in value to what is received; it just needs to be recognized by law as having some value.

Types of consideration

• Positive consideration: This involves providing something of value, like money, goods, or services. For example, if you’re a freelancer offering graphic design services in exchange for payment, that payment is your positive consideration.
• Negative consideration: This involves agreeing to refrain from doing something, such as not competing with a former employer. Non-compete agreements often include negative consideration, where an employee agrees not to engage in certain activities in return for compensation.

Why consideration matters

Legal enforceability

Consideration is key to making a contract legally enforceable. Without consideration, a contract typically isn’t valid. For instance, if someone promises to give a gift without expecting anything in return, that promise generally isn’t enforceable because it lacks consideration.

Fairness and reciprocity

Consideration also ensures fairness and reciprocity. It requires both parties to contribute something of value, which helps maintain balanced business relationships and prevents one-sided agreements.

Common issues and how to avoid them

inadequate consideration

Inadequate consideration can lead to disputes or even make a contract unenforceable. To avoid these issues, make sure the consideration is clearly defined and agreed upon when drafting the contract.

Past consideration

Past consideration, or something that was done before a contract was made, doesn’t count when forming a new contract. For example, if you completed a project before signing a contract, that past work cannot be used as consideration for the new contract.

Practical tips for freelancers and small businesses

Ensuring valid consideration

• Clearly state what each party is giving and receiving in the contract.
• Make sure the consideration is current and not something that was done in the past.

Examples in business contracts

In a typical contract between a freelancer and a client, the freelancer’s consideration might be delivering a project, while the client’s consideration is payment for that project. Outlining these terms clearly in the contract helps prevent misunderstandings and disputes later on.

Takeaways

Consideration is a vital element in a contract, ensuring that both parties provide something of value. It’s essential for legal enforceability and for maintaining fair and balanced business relationships.

Take a moment to review your contracts to ensure that proper consideration is included. For an easier and more compliant contract creation process, consider using Notch.so, which helps you ensure that all necessary legal elements are in place.