Elements of Consideration in Business Law
Elements of consideration in business law include items of value offered by each party of a contract to the other.3 min read
Elements of consideration in business law include items of value offered by each party of a contract to the other. Consideration can be currency or property, but it can also be a promise to either do or refrain from doing a legal act.
- The promisor has the power to take action or forbearance on a specific element of consideration. If consideration is not made by the promisor or a third party, it is not valid. Voluntary acts and services are not consideration. The provision of unwanted consideration does not render one eligible for consideration in return. For example, if you save someone from drowning, he or she is not required to pay you for doing so because rescue was not specifically requested.
- Consideration can be furnished by the person who promises it or by any other person he or she designates. Indian contract law specifies this as well, though English contract law states that consideration should move only by the promised individual or by one of his or her blood relations.
- Consideration must be a real item and not an imaginary concept. It may not be a promise to complete an physically impossible or uncertain act. For example, a contract that promises to bring someone back from the dead in exchange for a fee is not legally valid.
- Consideration may have already been given (past), it can be given at the time the contract is signed (present), or it can be promised by a future date. Although all three types of consideration are valid under Indian law, English contract law does not recognize past consideration.
- Consideration cannot be fraudulent, be illegal, involve personal injury or property damage, be immoral, or stand against public policy.
- Equal consideration does not necessarily need to be offered by all parties. Consideration can be grossly inadequate, inadequate, or adequate, as long as all the parties agree. However, it must have some value even if it is very small. For example, if you sign a contract to sell someone your house for $100,000, you cannot later void the contract if you find out the house is worth $200,000. That's because some consideration has been offered even if it is not adequate. Grossly inadequate consideration may be reviewed by the court in the event of a contract dispute.
- Consideration cannot consist of something the party was already required to do by law since this adds nothing of additional value.
Past, Present, and Future Consideration Examples
Past consideration involves something that was already given before the contract was signed. It's sometimes called executed consideration. For example, a person finds a lost wallet and returns it to its owner who promises to pay $100 in one week. The return of the wallet thus constitutes past consideration.
Present consideration, most commonly cash in exchange for goods, is given at the time the promise is made. If you buy groceries for cash, the cash is your consideration, and the groceries are the consideration given by the store. This is a contract even though it is not spoken or written.
Future consideration will be given after the contract is formed. For example, you order a product online that will be delivered in one week. The product is payable when it is delivered.
Legally Sufficient Value
As described above, consideration does not need to be adequate, but it must be bargained for by both parties and legally sufficient. Legally sufficient means that the consideration consists of either:
- A promise by a party to do something he or she is not legally required to do.
- A promise to refrain from doing something a party is allowed to do by law.
- A promise for a party to do something he or she would not otherwise have an obligation to do.
Consideration will not be deemed sufficient by the court when:
- The obligation is solely moral but not legal.
- The contract terms are vague and do not actually promise to do or not do something specific.
- It refers to events that have already happened.
- The party already has a legal duty to refrain or commit the act in question.
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