Consideration in Contract Law and Why It Matters

In the simplest terms, consideration is value. Under California contract law, mutual consideration (the exchange of value) is an essential element in the formation of a contract. Without it, a California court will (as will all courts across the country) most likely deem a contract unenforceable. For instance, consideration is lacking if two parties enter into a contract where one party is required to provide services and the other party is not required to pay or do anything. The bottom line is that the law disfavors one sided deals. It is presumed that one sided contracts are coerced in some form or another or fraudulently entered into. This makes perfect sense of course. What reasonably aware person would agree to provide something of value in exchange for nothing? However, consideration may come in a variety of forms including cash, property (real or personal) and services. Consideration may also come in the form of a promise to do something or to refrain from doing something that a party is otherwise legally entitled to do. The promise has its own value. If Party A promises to clear the snow from Party B’s driveway the following winter in exchange for Party B’s advance payment, there is a sufficient exchange of value (consideration). Similarly, if party A promises not to sue Party B if Party B pays restitution for some claimed harm, the promise not to sue may also be considered adequate consideration.

gold-1422084-225x300There are two general types of contracts – the bilateral contract and the unilateral contract. In both, however, there is an exchange of value in one form or another. Most people regularly enter into bilateral contracts. Paying for groceries or auto repairs, cell phone agreements and utility agreements are all forms of bilateral contracts. With unilateral contracts, only one party to the contract makes a promise. The most common example is the reward contract. One party offers a reward for the return of a lost dog. No person or business entity is obligated to look for, find or even return the lost dog under the contract, but the reward offeror is obligated to pay the reward if the dog is returned. The distinction has become less significant of late. Courts are increasingly focusing on other issues such as performance, party expectations and of course consideration rather than worrying about whether a contract is technically unilateral or bilateral. In any case, consideration remains a necessary element of any enforceable contract with a few narrow exceptions such as a promise to pay a prior debt that is no longer collectible because of a statute of limitations.

Consideration must be “adequate”. The exchange in value doesn’t necessarily have to be exact but there should be a reasonable exchange of value. The value of consideration is generally determined by the market values for goods and services. While parties are free to negotiate however they see fit, paying one dollar for a new car worth $10,000.00 (absent any other value exchanged) would clearly be inadequate. The one dollar is considered nominal consideration and therefore inadequate. The one dollar is essentially pretend consideration which courts see through. On the other hand, bad negotiation will not generally result in a contract being deemed unenforceable. Parties are free to make bad deals so long as the consideration is at least reasonable. The one dollar example above is an extreme case. Generally, courts analyze exchanges of value on a case by case basis. Other examples where consideration may be lacking include: performance when a party is already legally required to perform; gifts; past performances (in essence creating retroactive obligations); or illusory promises (where an obligation created is uncertain).

Contact San Diego Contract Lawyer Donald R. Oder at 1-800-900-9002 for a free consultation.

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