Every business agreement needs a solid foundation in the form of a contract. Consideration is what makes a contract legally binding. It makes sure that both parties are meaningfully invested in the agreement through some form of obligation or commitment.
According to Procurement Tactics, contracts govern 70%-80% of all businesses. Most of a company’s relationships are structured through these agreements, and a good contract is the backbone of business performance and risk management.
At Portalatin Business Law Firm, we help business owners protect their companies by structuring agreements that actually work in their favor. Our team focuses on business transactions and trademark protection, helping entrepreneurs secure their contracts and brands from costly mistakes.
Key Takeaways
- Consideration makes a contract legally binding by making sure both parties exchange value.
- Without valid consideration, a contract may not hold up in court.
- Gift promises and pre-existing duties don’t count as consideration.
- Clear, mutual consideration prevents disputes and strengthens agreements.
What is Consideration?
Consideration is what each party gives or promises in a contract. It can be money, services, goods, or even a promise to do or not do something. Without it, most contracts aren’t legally binding.
- Valid consideration: Paying for a service, trading goods, or exchanging promises.
- Not valid: Gifts, favors, or things someone was already required to do.
Why Does It Matter?
Courts enforce contracts. If there’s no consideration, an agreement is just words. A gift, like giving a friend your old laptop, isn’t a contract unless they offer something in return. If nothing of value is exchanged, the contract won’t hold up.
What Happens If a Contract Has No Consideration?
If one party isn’t giving anything in return, the contract may be void or unenforceable. That means if someone breaks the deal, you likely have no legal grounds to hold them accountable.
Are There Exceptions?
Some agreements don’t require consideration to be valid. Courts may enforce a promise if promissory estoppel applies. This is when someone relied on the promise and suffered a loss because of it.
What Are the Elements of Consideration?
For consideration to be legally valid, it must meet specific criteria. Not every exchange qualifies, and failing to meet these standards can make a contract unenforceable.
Consideration Must Have Value
Consideration must involve something of legal value, though it doesn’t have to be money. A business contract might include payment for services, an agreement to trade goods, or a commitment to certain actions.
However, if the exchange is too insignificant, like paying $1 for a house, courts may question whether it was a legitimate agreement or just a legal formality.
Consideration Must Be Mutual
Both parties must give something up for an agreement to qualify as a contract. If only one party provides value, the deal is considered a gift, not a contract, and may not be enforceable.
A business hiring a freelancer with an agreed payment creates mutual consideration. In contrast, if a business simply promises to pay a freelancer without expecting work in return, the agreement lacks consideration and is unlikely to hold up in court.
Past Consideration Is Generally Not Valid
Something already done in the past generally does not count as consideration for a new contract. A person who helps a friend move and later receives a promise of payment cannot enforce that promise because the work was completed without an initial agreement. For consideration to be valid, it should be part of the contract from the start, although there are exceptions where past consideration is considered sufficient.
What Are the Different Types of Consideration?
Consideration can take different forms depending on when and how the value is exchanged. Understanding these types helps in structuring contracts.
Executed vs. Executory Consideration
Consideration can be immediate or promised for the future.
- Executed Consideration happens when one party has already fulfilled their obligation at the time of the agreement. Buying a product in a store is an example since you pay and you receive the item immediately.
- Executory Consideration is when both parties commit to doing something in the future. A company agreeing to pay a vendor for a shipment that will arrive next month is an example of this type.
Adequate vs. Sufficient Consideration
Courts don’t typically judge whether a deal is fair, but they do check if consideration is legally sufficient.
- Adequate Consideration means both parties receive something of roughly equal value, though fairness is subjective. Paying $50 for a meal at a restaurant is adequate because there is a clear exchange.
- Sufficient Consideration means that what is exchanged has legal value, even if it seems unfair. Selling a car for $100 might seem like a bad deal, but if both parties agreed to it voluntarily, it could still be legally binding.
Forbearance as Consideration
Consideration can also come from agreeing not to do something. If a company pays a former employee not to work for a competitor, that promise has legal value and can be enforceable. This type of consideration is common in non-compete agreements and legal settlements.
Create Strong, Enforceable Contracts
A contract should protect your business, not create uncertainty. Missing details or weak agreements can lead to disputes that cost time and money. The right legal framework allows your deals to hold up when it matters most.
At Portalatin Business Law Firm, we help business owners create strong contracts that are clear and aligned with their long-term success. We make sure your agreements work for you, not against you.
Need a contract that actually protects your business? Book a consultation today.
