Consideration Notes: Everything You Need To Know
Consideration notes indicate the items of value that are exchanged by each party to a contract.3 min read
Consideration notes indicate the items of value that are exchanged by each party to a contract. This quid pro quo transaction is essential to create a contract that can be legally upheld by the court. For example, if you promise to sell someone your car for $1,000, the money and the car each constitute consideration, thus creating a valid purchase contract.
Types of Consideration
When two parties exchange promises, an agreement is called a bilateral contract, executory consideration has been created. Executed consideration occurs when one party makes a promise in exchange for the action or inaction of another party. When the latter condition occurs, the consideration has been executed. Executory consideration is not yet executed.
Features of Valid Consideration
- To be valid, the party who agrees to do or not to do something as part of the contract terms must not have already been planning to voluntarily engage in that specific action or inaction. That's because he or she is not offering consideration.
- Anyone can provide the consideration provided it is done so on behalf of the contracted party.
- Consideration can be given before, at the time of, or after the contract is signed. Past consideration, for example, would be a promise to pay a debt that was already incurred. This type of consideration is often not valid because the person was already obligated to pay. However, one valid example would be if you work to plant crops for a farmer and he or she promises to pay you at harvest time. Your labor would be considered valid past consideration. Present consideration means that both items of value are provided at the same time, such as when you order food and pay for it upon delivery. Your agreement to purchase the meal constitutes a valid contract. Future consideration, also called executory consideration, is when consideration is provided at a later established date.
- Consideration must exist and have some legal value, though this value does not need to be equal to the consideration provided by the other party. However, if consideration is inadequate on one side the court may consider whether the other party signed the contract of his or her free will.
- Forbearance to sue is considered valid consideration provided the actions described in the contract are not illegal.
- An existing legal duty or obligation is not valid consideration.
- Consideration that is illegal or against policy is not valid. For example, if someone offers a third party $500 to attack their enemy but does not pay up, the person who conducted the assault cannot seek legal recourse because the consideration was illegal, rendering the contract invalid. This is true even if only part of a single consideration is illegal.
Case Law Examples
The 1842 case of Thomas vs. Thomas explains the concept of inadequate consideration. In this case, a property was rented for £1 even though it could have commanded a much higher price. The court ruled that the consideration was valid, indicating that even though consideration was inadequate, individuals are free to make bad bargains.
This case also illustrates that consideration must have some economic value. Another case that illustrates this point is the 1853 case of White vs. Bluett, in which a father promised to forgive a debt he was owed by his son under the condition that his son would stop complaining about the terms of his will. This consideration was found invalid by the court, which ruled that a promise to stop complaining does not have economic value.
The 1960 case of Chappel & Co Ltd. vs. Nestle Co. Ltd. found that candy wrappers submitted as prize entries had economic value and could act as valid consideration. However, the 1991 case of Lipkin Gorman vs. Karpnale found this was not true for casino chips.