What Is a Consideration Clause?
Sign up for our newsletter to keep up with the latest in digital contract management.
No matter what type of contract you are working with, you will likely hear the word consideration. Consideration refers to the value exchanged between the parties to the contract. The consideration clause outlines this exchange of value and any terms that govern it.
A consideration clause in your contract can make or break it. In fact, if you fail to include one, your contract could be wholly unenforceable.
Contract management can help you include every necessary provision in your agreements—including consideration clauses. The right software makes it easy to standardize and modify these contractual provisions to reflect your negotiations and the unique terms of your deal.
What is Consideration?
Consideration is the value that both parties to a contract exchange as part of their agreement. If you enter into a contract with another party, you agree to give and get something in return. This exchange for something of value is the consideration for the contract.
Consideration can be anything of value offered and accepted by two contracting parties. The most straightforward example is monetary compensation for the exchange of goods. For instance, if your company agrees to buy office supplies from Company B for $1,500, the consideration for the contract includes both the supplies and the money. Each party exchanges something of value as part of the contract.
A consideration clause outlines this exchange of value and is one of many parts of a valid contract. Without it, your contract may not be valid, as no value is exchanged between the parties.
Types of consideration
There are two primary types of consideration in business contracts.
- Executory consideration: Executory consideration occurs when the parties promise to exchange something of value later. This promise is not yet completed, and the contract is not fully executed. For example, suppose you agree to purchase a software license from a software company, but the license is not yet delivered. In that case, your mutual promises to each other are considered executory consideration. If one party fails to deliver on their promise, executory consideration is the basis for a breach of contract lawsuit.
- Executed consideration: Executed consideration occurs once the promised deal is accomplished. Consideration is not considered executed until it is fully satisfied.
Legal Requirements for Valid Consideration
Consideration is a crucial part of a valid contract. For consideration itself to be valid, it must meet specific requirements. Valid consideration typically must include one of the following:
- A promise by one party to the other
- An agreement to perform an act or service
- An agreement to provide a good or another item of value
- An agreement not to do something
These promises or exchanges are typically in exchange for a mutual agreement. If one party agrees to pay for something, the other party must generally agree to provide whatever was bargained for.
Whatever each party promises must be legally recognized as having some value. Value does not have to be monetary—it can be nearly anything seen as having value by most people. The promise to do or not do something is typically considered something of value for the purposes of contract consideration.
Common examples of consideration in a contract
While consideration can be nearly anything of value, some common examples you might include in your contracts include:
- The provision of some service
- Chattel or objects
- Renouncement of an existing benefit
- A promise to refrain from engaging in particular conduct or behavior
Sufficiency and bargaining
Consideration must be sufficient and bargained for to be valid. Courts typically accept a fair and honest exchange of value as consideration for a contract when determining whether it’s sufficient. Case law on consideration does not attempt to substitute others’ judgment of what is valuable but considers the parties’ exchange when determining whether consideration exists.
If the parties agreed to an exchange, a court would typically respect the parties’ judgment—absent any fraud or unconscionability. The parties must bargain for the consideration and exchange of value in their contract. If the parties do so fairly and without undue influence on the other, the court will generally respect the bargain the parties struck.
Some courts will strike contracts of adhesion as lacking any bargaining. A contract of adhesion is a boilerplate contract that leaves no room for negotiation by the signee. Adhesion contracts may still be enforceable, but courts will carefully consider the parties’ respective bargaining power and reasonable expectations of the contract. The court will also consider unconscionability when determining if these contracts are enforceable.
Examples of Consideration Clauses
Consideration clauses are highly varied and designed to accommodate your particular contract. These clauses outline the mutual exchange of value you agreed to and other conditions related to your consideration.
These examples of consideration clauses help demonstrate what you might see or use in your contract:
- “Consideration. The Contract Parties acknowledge that the mutual covenants and promises contained herein and other good and valuable consideration are adequate and sufficient to support this Agreement.”
- “Consideration. [Party] acknowledges that: (i) the rights, payments, and benefits outlined in Section 7.5 of the Contract constitute full settlement of all [Party’s] rights under the Contract, and (ii) except as otherwise provided by this Release, [Company] will not and does not have any other obligation or liability to [Party] under the Contact. [Party] further acknowledges that, absent any execution of this Release, the payments and benefits specified in the Contract would not otherwise be due.”
- “As consideration of the obligations and commitments made by [PARTY], [COMPANY] agrees to compensate [PARTY] in the amount of [MONETARY AMOUNT]. [MONETARY AMOUNT] shall be payable in twenty-three (23) equal installments each month until consideration is fully satisfied.”
- “Consideration Clause. The mutual agreement by the parties to arbitrate any and all disputes between them, rather than litigate any disputes in court, is sufficient consideration for this arbitration agreement.”
- “Consideration for Services. The Contractor will be compensated at the rate of [Monetary Rate] per hour for performing the services as outlined above. Total remuneration for this Service Contract shall not exceed a total cost of [Maximum Services Cost].”
These examples demonstrate how flexible your consideration clause can be to fit your specific needs.
An effective consideration clause clarifies what value is exchanged, that the parties agree to the exchange and that the exchange constitutes consideration for the contract.
Consequences of a Contract's Lack of Consideration
If your contract lacks consideration, it may be deemed invalid in a legal dispute. A court may refuse to enforce the terms of your contract if it determines there was no mutual exchange of value. If the court refuses to enforce your contract, you could lose the value of your bargain and all the hard work you put into the deal.
The following are examples of when courts may find a lack of consideration:
- If one party promises something they were already obligated to perform.
- If the consideration is actually a gift that does not require a mutual agreement to perform.
- If the parties agree to an exchange for some past consideration already given.
- If the promise is illusory, such as being too vague to obligate the party to anything specific.
Include a Consideration Clause in Your Contracts
Every contract you make should clearly outline what consideration forms the basis of your agreement. Your consideration clause should state what each party promises to do and contain a statement that these mutual promises are of value to each party.
Contract management software makes creating form agreements with enforceable consideration clauses easy. Ensure you include a consideration clause in every contract you draft.