Consideration: An Essential Element in a Valid Contract

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Consideration: An Essential Element in a Valid Contract

No contract is valid without the inclusion of consideration, which is an exchange of items of value between the two contracting parties. Considerations may consist of money, services, stock, promissory notes, intellectual property, or other tangible items of value. There are no limits on these exchanges unless they are illegal.

Consideration must be legally sufficient and bargained for — e.g., the value one party places on the consideration must be the same value the other party places on the performance terms of the contract. To be legally sufficient, one party cannot promise to do something they are already legally obligated to do. They can, however, refrain from exercising a right they are entitled to — for example, if someone damages your house with their car, you have a right to sue, but can forfeit this right in exchange for the person who caused the damage compensating you with cash or repair.

For consideration to be bargained for means that there is a promise to exchange something of value where both parties receive both a reward and a detriment. For example, if you purchase a dining room table from someone for $200, you receive the table but forfeit the cash. The person you bought it from receives the cash but forfeits the table.

There are certain circumstances where a court will find a contract unenforceable because it lacks consideration. These include:

When a party was already legally obligated to perform. For example, a fireman cannot require payment for putting out a fire at your house because he is already legally obligated to do so.

When a promise is a gift. If your best friend wins the lottery and promises to buy you a car, this is a promise to make a gift. If she changes her mind, you cannot force her to do so because her promise was one-sided. You did not promise anything of value in return for the gift of the car.

When an exchange is for past consideration. If someone promises to pay you for something you already did, this exchange was not bargained-for, so it lacks consideration.

When the promise that is bargained for is illusory.   An agreement is unenforceable if one party cannot fulfill its promise, either due to impossibility, unconscionability or because it is against the law.

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