What is Consideration in Contract Law? Consideration: is an essential element to make a contract must be provided for a contract to be legally binding. In contract law, it is said that "consideration must move from the promisee". Drawing out the subtlety of this statement: If there is "a promisee", there must already be a promisor The promisor has already made a promise to the promisee, which is sufficient to form a contract but it's not formed at this point The promisee must give something back to the promisor - a promise When the promisee promises to do something - gives consideration and it doesn't have to be given to the promisor - a legally binding contract is formed, provided the other elements have been satisfied Types of Consideration A promise - ie consideration - can be: a promise to do something, such as to: transfer ownership in property, such as intellectual property, a car or house create an art work develop software grant a licence to intellectual property rights pay money a promise to refrain from doing something known as a restrictive covenant : not work with another employer of a particular description for a period of time after employment ceases.
The law looks for some value in an economic sense - even minuscule. For this reason, consideration may be inadequate from a commercial perspective, but for legal purposes: it is "sufficient", and sufficient to form a legally binding contract.
What is the purpose of contractual consideration? Reciprocity of consideration is fundamental to contract law. Accordingly, gratuities are not enforceable in law. You do not offer to do anything in response. As there is no consideration provided by one party, there is no contract. Exception to requirement for Consideration: Deeds The exception to this, is use of a Deed. Deeds: are written contracts must state that they are a Deed must be "signed, sealed and delivered" by both of the parties.
Those words have a technical meaning which we don't cover here are not required to be supported by consideration to be legally binding have other special requirements which prevent them from being abused. Let's put that exception to the general rule to one side. What sort of consideration is required to properly form a legally binding contract? The Essential Characteristic of Consideration There's an essential characteristic of consideration which must exist to form a contract.
Above, 3 types of consideration were listed: a promise to do something a promise not to do something, and a promise to pay money. There's another requirement. The consideration must be fresh consideration. What is fresh consideration? It's consideration which has not : been given, provided or delivered by one party already already been promised, which the party is already bound to perform Let me explain.
Once a contract is signed, consideration can be either: Executed consideration , which is consideration which has been provided by the party promising it. Executory consideration is consideration has been promised but not yet performed or delivered to the other party. So when is this essential characteristic of fresh consideration not present? Absence of Fresh Consideration 1. Past Consideration: When contracting parties are already contracted with one another, a promise to do something that they have already contracted to do can't be "fresh" consideration.
Existing Obligation or Duty: Likewise, if a party is already required to do something by law, then that also can't be fresh consideration.
The usual forms of these are: an existing obligation to perform a contract A promise to perform an existing contractual obligation in an existing contract is something which the person is already legally bound to do. However if a party promises a superior performance of the requirement, that might be sufficient. Nevertheless, the fresh consideration must be offered freely and not under threat, and the receiving party receives a benefit from increase in standard of performance of the existing contract.
For instance, companies are required to file tax returns. This means that the mutual exchange must involve a fair price in comparison to the promise that is made in exchange for it.
Note that consideration need not be in the form of money; it can take the form of anything that has legal value. Regarding the adequacy of consideration in a contract, the following principles are generally applied by courts in contract disputes:.
Some contract laws allow for a substitute of consideration, such where one party has already reasonably relied upon the promise to their detriment. This is known in the law as promissory estoppel. Promissory estoppel is when a court upholds a contract even though adequate consideration was never given because one party misled the other party into believing that there was consideration. As a result of that misrepresentation, a party went through with the contract even though the other party never intended to make an agreement.
For example, suppose that a person on vacation in Hawaii runs into another person who is the CEO of a major corporation in a hotel bar.
Over drinks, the two share information about their employment. The CEO offers the other person a job at corporate headquarters in Boston, if they can arrive there within a month. The other person goes home to Des Moines, Iowa, quits their job, sells their home, and, at great expense, moves to Boston.
If you have a dispute that involves a contract, you should consult an experienced contract lawyer. Consideration is often a central issue in many contract disputes. Consideration can also be an issue at several different stages of the contract, such as when a contract needs to be rewritten. Therefore it is very important that you understand the way that consideration may affect your contract.
You may wish to contact a contract lawyer if you have a contract dispute that involves consideration. Or, if you wish to draft a contract, your attorney can make sure that it satisfies legal requirements in connection with consideration. Susan Nerlinger. Susan is a member of the State Bar of California.
She received her J. She also taught civil procedure in the Paralegal program at Santa Clara University. She then taught English as a foreign language for eight years in the Czech Republic. Now she devotes her time to writing on legal and environmental topics. You can follow her on her LinkedIn page. Jose Rivera. In social situations, there is generally no intention for agreements to become legally binding contracts eg friends deciding to meet at a specific time would not constitute a valid contract.
It is up to the person who wants the agreement to be a contract to prove that the parties actually intended to enter into a legally binding contract. You can end a contract for convenience or for cause eg because the contract has been broken. Read Ending a contract for more information. A minor between 7 and 18 years of age can effectively enter into a contract.
There is a presumption that a minor in this instance does not understand the implications of entering into the contract. This means that the minor remains protected to the disadvantage of the other party. The minor is able to cancel a contract at any time before reaching the age of 18 and for a reasonable period afterwards without valid reason as the contract is 'voidable'.
Dashboard Make a document Ask a lawyer Get guidance Home. Profile information Account settings. Make documents Ask a lawyer Get guidance About us. Get started. What is a contract? Why enter into a contract? Key elements of a contract. Agreement Offer An agreement happens when an offer is made by 1 party eg an Offer of employment to the other, and that offer is accepted.
Acceptance Acceptance of the offer must be unconditional eg a signature on a Contract of employment and it must be communicated. Capacity All parties must have the ability to understand the terms of and any obligations under the contract.
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