Consideration is one of the key elements that make a contract legally binding. For a contract to be valid, both parties to a contract must exchange something of value. This could be money, goods, services, or even a promise to do something (or not do something). Without valid consideration, a contract usually can’t be enforced by law. Let us handle your contracts with expert legal care.
In this article, we will explain what consideration is, why it’s important, and how it works in making a binding contract.
Why Is Consideration in Contracts Important?
For a contract to work, both sides need to agree to something that has good consideration. That means both sides must give or promise something of value. When both parties receive something in return, the contract becomes fair and balanced. If only one party receives something, it is not considered a valid contract. Instead, it could be seen as a gift or favor, which doesn’t have the same legal power.
For example:
If you promise to pay someone £50 to mow your lawn, the party receives £50 (your consideration), and the other person provides lawn-mowing services (their consideration).
But if you give a friend £50 without expecting anything back, that’s a gift, not a commercial contract.
Without valid consideration, there is no intention to create legal relations, and therefore, the agreement would not be legally binding.
What Can Be Consideration?
Consideration doesn’t always have to be money. There are several different forms of valid consideration in a contract. Let’s take a look at some common examples:
1. Money:
Paying for goods or services: When you pay for something, like buying a product or hiring someone to do work for you.
Repaying a debt: If you owe money and agree to pay it, that’s a form of consideration.
2. Goods or Services:
Providing a product: For example, selling a car or a piece of furniture.
Offering services: For example, a plumber fixing your pipes in exchange for payment.
3. A Promise to Do Something:
Agreeing to work for a company in exchange for a salary is good consideration.
Promising to deliver goods by a certain date is also valid consideration.
4. A Promise Not to Do Something:
Agreeing not to compete with someone’s business is an example of a promise that can count as consideration.
Promising not to sue in exchange for a settlement is another example of lawful consideration.
What Is NOT Consideration?
Not everything can be considered valid consideration. In some situations, a contract might not be legally binding because the party to the contract is not offering something of value.
Here are some examples of what is NOT considered valid:
1. Past Actions:
If someone helps you in the past without expecting payment, you can’t create a contract later to pay them. Consideration must be part of the agreement when it is made, not in the past.
2. Illegal Activities:
Promises that involve illegal activities are never valid consideration. For example, a contract involving the sale of stolen goods is not a binding contract because it’s illegal.
3. A Gift or Favor:
If one side does not expect anything in return, then it is a gift, not a contract. This is an example of something that lacks lawful consideration.
4. Something You’re Already Legally Required to Do:
If someone is already legally obligated to do something, it cannot be used as consideration. For example, if a police officer agrees to protect your house in exchange for money, that’s not valid consideration because they are already paid to do that job.
Examples of Consideration in Contracts
Let’s go through a few examples to understand how consideration works in different types of contracts.
Example 1: Buying a Car
You agree to pay £5,000 (your valid consideration).
The seller gives you the car (their valid consideration).
In this case, both parties to the contract are offering something of value, so the contract is legally binding.
Example 2: Employment Contract
You agree to work for a company (your consideration).
The company agrees to pay you a salary (their consideration).
This is a common type of commercial contract. Both parties have good consideration, so the contract is valid and enforceable.
Example 3: Settlement Agreement
One person agrees to drop a lawsuit (their consideration).
The other person agrees to pay them money (their consideration).
Even though the agreement might not seem fair or balanced, both sides are exchanging something of value. This makes the agreement a binding contract.
How Courts Look at Consideration
When reviewing a contract, courts are mostly concerned with whether there is valid consideration in the agreement. Courts do not usually check if the consideration is equal in value. For example, if someone agrees to sell a car worth £1,000 for just £100, the court will not stop the deal just because it seems unbalanced.
However, the court will step in if:
There is no consideration at all.
The contract involves fraud, misrepresentation, or illegal activities.
In summary, consideration is a key part of any binding contract. It ensures that both sides give or promise something of value, making the contract fair, valid, and enforceable. Whether you’re entering a commercial contract, agreeing to an employment arrangement, or negotiating a settlement, understanding consideration is vital for ensuring your agreement is legally sound.
At Canko Law Firm, we help businesses and individuals make sure their contracts are clear, fair, and legally binding. If you need assistance with drafting or reviewing contracts, we are here to provide expert advice. Our team will ensure that all your contracts are enforceable and meet legal requirements.
If you have questions or need help with commercial contracts, contact Canko Law Firm today for professional support. We’ll make sure your agreements are strong, and your business is protected.
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