What exactly is “consideration” in forming a contract?

There are three essentials to creating an enforceable business contract: a valid offer, its valid acceptance, and what the law refers to as “consideration.” We have already touched upon the first two of these elements in previous posts. Here, we will examine the third requisite, consideration.

In a sense, the requirement for consideration is what helps to distinguish a contract from situations that might otherwise be construed as one person offering a “gift” to another. The notion of a contract is that both parties must engage in a process of give-and-take: to receive a benefit from someone else under an agreement, you must be willing to give something back in return. It may be helpful to think of consideration as the “burden” part of the agreement: what you promise to do, or promise not to do, in exchange for the benefit that the other party promises to give to you in exchange.

Consideration can take the form of a promise in exchange for action on the part of the other party, or it can be an exchange of promises. The main requirement is that it must be mutual: both sides must participate. This is what is legally referred to as the “bargain theory” of consideration, but it is not the only recognized form of consideration; for example, sometimes situations can arise in which a party’s reliance on the promise of the other party can be construed as consideration

 

A purported contract that lacks sufficient consideration will likely be unenforceable. Some situations in which a lack of consideration exists include:

  • When one party is already legally bound to perform;
  • When the consideration is more like a gift;
  • When the consideration is made as a result of a past event, or
  • When consideration is based on an illusory promise.

Most of the time in a business setting, it will not be difficult to establish consideration in the formation of a contract. But in the event of a contract dispute, part of your Chicago business attorney’s review of the underlying agreement will be to include an examination of all of the underlying elements, including valid consideration, to make sure that the provisions that you want to enforce (or avoid) are all legally valid.

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