7.1 General Perspectives on Consideration

Consideration is the main element of a contract and a fundamental principle in contract law. It refers to the exchange of something of value, often money or a promise, between the parties to a contract. In order for a contract to be legally binding, there must be consideration.

Practically speaking, consideration is important in a contract for several reasons. First, it ensures that both parties have something at stake in the agreement. When both parties are required to give something up, they are more likely to take the contract seriously and fulfill their obligations. Being invested in the outcome of a contract helps to prevent a breach of contract while providing a sense of security in the contract to both parties.

Second, consideration reinforces the intention of the parties to be legally bound. In the prior Chapter on Agreement, we learned that the intention to be bound to a contract is an essential element of the offer. When each party gives up something of value for consideration, it demonstrates that they are serious about the agreement and that they intend to be legally bound by it.

Finally, consideration helps ensure that the terms of a contract are fair and reasonable. Assuring that consideration is present in a contract helps prevent situations where one party is taking advantage of another contracting party.

In this Chapter, we will assume that an agreement has been reached, that there is offer and acceptance, and learn how to identify the existence of consideration.

Which of the following examples best illustrates a scenario where there is consideration?

1. Betty offers to give a book to Lou. Lou accepts.
2. Betty offers Lou the book in exchange for Lou’s promise to pay twenty-five dollars. Lou accepts.
3. Betty offers to give Lou the book if Lou promises to pick it up at Betty’s house. Lou agrees.

If you recognized that only the second situation contains consideration, you are correct. Scenario two is the only scenario where each party is exchanging something of value with the other party. This best illustrates the concept of consideration which is a set of promises in which each party agrees to give up something to the benefit of the other. This Chapter will explore the meaning and rationale of that statement.

Historical Perspective

The question of what constitutes a binding contract has been answered differently throughout history and in other cultures. For example, under Roman law, a contract without consideration was binding if certain formal requirements were met. And in the Anglo-American tradition, the presence of a seal—the wax impression affixed to a document—was once sufficient to make a contract binding without any other consideration. The seal is no longer a substitute for consideration, although in some states it creates a presumption of consideration; in forty-nine states, the Uniform Commercial Code (UCC) has abolished the seal on contracts for the sale of goods. (Louisiana has not adopted UCC Article 2.)

Whatever its original historical purposes, and however apparently arcane, the doctrine of consideration serves some still-useful purposes. It provides objective evidence for asserting that a contract exists; it distinguishes between enforceable and unenforceable bargains; and it is a check against rash, unconsidered action, against thoughtless promise making.