Draw the Law: Consideration is the Cornerstone of Contracts, Part I

For the past couple of months I have talked about offer and acceptance, without either we do not get to a contract.  However, offer and acceptance can be viewed as the pre-formation phase to the contract. Remember it is the negotiating phase between two parties, until one side accepts there can be a series of offer and counteroffers, and there is no contract.  However, that is only one piece of the puzzle; at the very base of the negotiating is something or an action of value that the parties desire of each other, this is consideration.  Without consideration there is no contract.

What is Consideration?

Consideration is a bargained-for exchange, it can be for benefit or advantage or for detriment.  The key is that it is bargained-for and there is an exchange.  The basis for this in contract law is a concept called mutuality of obligation, which means both sides have to be committed to give or do something, or even refrain from doing something.

To put this into perspective, in a gift situation, the donor gives the donee something of value for no consideration whereas in a bargained-for exchange the offeree and offeror have promised something of value to each other or promised to do or not to do something.

Example: Consideration, Exchanging Benefit-Detriment

An uncle promises his nephew he will give him a certificate to use at the local shopping mall if the nephew gives him the fish he caught.  The uncle receives fish (benefit), but loses the certificate (detriment) whereas the nephew gains the certificate (benefit), but loses the fish (detriment).

Example 2: Consideration, Giving up the Right to Something

An uncle promises his nephew (who is of legal age) that for every year he refrains from drinking, he will receive a gift certificate.  The uncle’s consideration is giving gift certificates.  The nephew’s promise is not to do something that he is allowed to do, and this forbearance is his consideration.

Example 3: Gift, No Consideration

An uncle gives his nephew a certificate to use at the local shopping center.  The uncle has given something of value for no exchange of promise or anything of value from the nephew. This is not a contract, but a gift.

Final Word: Without Consideration, There is No Contract

It is important to determine whether or not that at the basis of a contract that there is valid consideration. Without consideration, there is no contract. In the next part of this discussion of consideration I will discuss what is and is not good consideration.  All of this taken together I will discuss the use of accord and satisfaction, a valuable contractual tool to deal with business disputes.


*Disclaimer:  This post discusses general legal issues, but does not constitute legal advice in any respect.  No reader should act or refrain from acting based on information contained herein without seeking the advice of counsel in the relevant jurisdiction.  Ryan K. Hew, Attorney At Law, LLLC expressly disclaims all liability in respect to any actions taken or not taken based on the contents of this post.