What Is Consideration And What Does It Mean For You?
Consideration is an essential part of any contract and a lack of consideration can make a contract (vocal or written) completely invalid.
Small business owners and large businesses alike need to understand the importance of crafting a contract. By taking precautions to make sure all terms are deemed fair both by you, the business owner and the people you work with, you protect yourself and your employees with a fair deal. Many users have been asking our Good Lawyers what consideration means in terms of the law, and how consideration is becoming more and more important.
In this post, we will be defining what consideration is, what it means in contract law, in unilateral contracts, in bilateral contracts and vocal contracts. We’ll also show you how consideration works through a hypothetical example of what it means to have specific terms (considerations) laid out for both yourself and your workmates.
What Is Consideration?
Consideration is something valuable that is offered in exchange for something else. Consideration requires the item that is being offered to be something that the receiver acknowledges is valuable does not already have a legal right to. Consideration generally takes one of three forms:
- Money
- The promise to do something
- The promise to refrain from doing something
What Is Consideration In Contract Law?
A key feature of a valid contract is mutual consideration. Mutual consideration means that both parties have offered something of consideration.
Fair consideration is when the two parties agree mutually on the exchange which is often described in a contract. When there isn’t consideration, the agreement can be one sided and often the result of fraud, misrepresentation, or duress. Agreements without mutual or fair consideration are generally invalid.
For example, Aiden has offered to give $1,000,000 for Kim’s building. Kim has offered her building in exchange for the money. In this scenario, the money is part of consideration, in which both of the parties agree on the exchange for another.
1. Why Is Consideration Important?
Consideration is important because it lays out specifically the expectations of two parties. When people promise something, it is expected that the other party follows through, right? Same with contracts and your professional relationships at your business. Without the proper considerations of what is expected of everyone, people can find can loopholes in both contracts and regular promises (that are then called vocal contracts) and always find a way to back out of from what they have promised, which means as a business owner, you could potentially lose out on certain assets, profits, costs and things that would hinder your business from growing.
2. What Is Consideration In Unilateral Contracts?
Unilateral contracts are when one party considers to offer something tangible to another party, but they are only bound to that contract/promise if the other party accepts the terms. If the second party doesn’t accept the terms, the first party is not obligated to follow through with the contract.
Back to our example, Aiden has offered to give $1,000,000 and Kim has offered to give her building. If consideration went only one way (Aiden sent his $1,000,000 without Kim offering her building) then the contract is considered a “bare promise” and is no longer valid. Aiden could legally request that Kim send his $1,000,000 back at any time.
3. What Is Consideration In Bilateral Contracts?
Bilateral contracts are mutual agreements as each part of the exchange was already deemed sufficient by both parties.
In this scenario, Aiden may agree to pay Kim $1,000,000 in exchange for the title to the new building. Kim agrees to deliver the building title in exchange for the specified sale amount. If either party fails to complete one end of the bargain, a breach of contract has occurred.
4. What Is Consideration In Vocal Contracts?
Considerations in vocal contracts are legally binding. When two people are consenting to promising each other something without documentation it is known as an oral contract. However it is not very enforceable because it becomes difficult to prove in court. Lawyers recommend that small business owners take the time and craft a contract, because then it wouldn’t be a “he said, she said” confrontation.
Continuing on with our example with Aiden and Kim, if one of them breaches the contract (as a verbal agreement), this matter would be hard to prove in court. For instance if Kim decides not to sell her building for the specified price and sells it for a higher price, Aiden has no written proof that they agreed on the $1,000,000 previously.
Essentially, consideration is something that no business owner should neglect. Not taking the time could cost you potentially your business. If you want to know more about contract law in general, we have another article that covers contracts in detail.
Ready to draft a contract and get all your considerations in order?
Business lawyers are the best options in creating contracts. Making sure all your terms are in order is a great first start when forming your business, whether you are just started, or have been putting off writing a contract for a while. Goodlawyer is happy to help kickstart this process by book a call with our team!
