Consideration: Overview, definition and example
What is consideration?
Consideration is what each party agrees to give or do for the other in a contract. It’s the value exchanged that makes the agreement legally binding. This value doesn’t always have to be money—it could be services, goods, or even a promise to do (or not do) something. Without consideration, most contracts wouldn’t hold up in court because the exchange of value is what creates the obligation to follow through.
Why is consideration important?
Consideration is the backbone of any enforceable contract. It shows that both parties are giving something up to gain something in return, making the agreement fair and mutual. For example, if one party agrees to pay for a service and the other party agrees to provide that service, the payment and the service are the considerations.
Without consideration, a contract can be seen as one-sided and might not be enforceable. For businesses, it’s crucial to ensure that the consideration is clear and adequate, as vague or missing terms could lead to disputes or claims that the contract is invalid.
Understanding consideration through an example
Imagine you own a catering business and agree to provide services for an event. The client promises to pay $5,000 in exchange for the catering. Your consideration is the service you’re providing, and the client’s consideration is the payment. Both sides are giving something of value, making the contract enforceable.
Now, imagine the client promises to pay you but asks for the catering "as a favor," with no payment or other benefit in return. Without any form of consideration from the client, there’s no enforceable contract—it’s just a promise.
Another example involves a non-compete agreement: if an employer asks an existing employee to sign a non-compete without offering additional pay or benefits, there may be no consideration. This could make the agreement invalid in some jurisdictions.
An example of a consideration clause
Here’s how a consideration clause might look in a contract:
“In exchange for the Services provided by the Service Provider under this Agreement, the Client agrees to pay the Service Fee of [$X] on or before [date]. Both parties acknowledge that this exchange constitutes valid and sufficient consideration for this Agreement.”
Conclusion
Consideration is what gives a contract its teeth—it ensures both parties are offering something of value, making the agreement enforceable and fair. Without it, a contract is just a promise, and promises alone often aren’t enough in the eyes of the law.
Whether you’re offering payment, services, or a commitment, ensuring clear and adequate consideration protects your interests and keeps your contracts legally sound. It’s a simple but critical concept that ensures everyone gets their fair share in a deal.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.