What is Legal Consideration?

Mary McMahon
Mary McMahon

Legal consideration is something of value which is structured into a legal contract. For a contract to be valid, both parties to the contract usually need to have "consideration." If one party has consideration and the other does not, the contract may not be upheld if it is challenged in court. In other words, both parties to a contract need to agree to do something, however large or small it may be, for them to enter into a legal agreement.

For a contract to be valid, both parties to the contract usually need to have "consideration."
For a contract to be valid, both parties to the contract usually need to have "consideration."

In a classic example of legal consideration, two people could enter into a real estate sales contract. The first person's consideration would be the house, which this person would be giving up to the other person in accordance with the contract. The second person's consideration would be the payment for the house, which might be in the form of money, traded services, or other goods. Both parties have legal consideration and the contract will be considered good if it is challenged in court.

Legal consideration is something of value in a contract.
Legal consideration is something of value in a contract.

Goods, services, and monies can all be forms of consideration. So can actions or inactions. For example, when an employee is asked to sign a noncompete agreement, the employee's consideration is the agreement to comply with this clause in the employment contract, while the employer's consideration is to agree to hire the employee. Questions of fairness are generally not involved in legal consideration; if someone wants to exchange a stack of wood for a luxury car, for example, this is considered entirely legal as long as both parties agree to the arrangement without coercion.

One test of legal consideration is whether or not both parties have exchanged at least nominal consideration, sometimes referred to as a “peppercorn.” Historically, for example, people sometimes referred to closing contracts with a one dollar payment. This is no longer held up as legal consideration because it does not meet the peppercorn test. If such contracts are challenged in court, it may be argued that they do not meet the standard of nominal consideration. For this reason, clauses are sometimes worded to make it clear that although the consideration on the part of one party is small, the contract is still valid.

One might wonder why a case in which the legal consideration was so small might arise, but there are in fact cases in which people wish to transfer property, goods, or services in exchange for a very small consideration. People involved in such transactions want to make sure that they are recognized as valid.

Mary McMahon
Mary McMahon

Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a wiseGEEK researcher and writer. Mary has a liberal arts degree from Goddard College and spends her free time reading, cooking, and exploring the great outdoors.

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Discussion Comments

starrynight

@indemnifyme - I've never thought of insurance in terms of a contract before but it makes sense!

People might be interested to know about the other things besides consideration that make up a contract. They are: legal purpose, offer and acceptance, and competent parties. Most of this is exactly as it sounds. The contract must be legal, so a contract that involves a criminal act is automatically invalid. One party must offer the contract and the other must accept it. Also, the people entering into the contract must be legally competent which basically means of legal age, not insane, and not under the influence of drugs.

indemnifyme

This is a great article. Contracts are much more present in our lives than most people realize so I think everyone should know a little something about contracts.

I work in the insurance industry and I deal with contracts every day! Any insurance policy that is issued by an insurance company to an insured is considered a contract. In the case of an insurance policy the consideration is always the same. From the insured the consideration is the premium, or the money they pay for their policy. From the insurance company the services they provide per the policy is the consideration.

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