Definition of Consideration

Consideration is the one of the most essential elements of a valid contract. One theory about consideration is known as the "bargain theory." Bargain theory holds that both parties involved in the contract believe the consideration to be arrived at as the result of their bargain. This understanding of consideration is closely related to the concept that the consideration must be derived from a bargain for exchange.

The concept of a bargain for exchange is essential because it ensures that contractual terms are more likely to be understood by both parties to the contract if they are forced to agree to the terms.

That the consideration must be bargained for also increases the probability that both parties will remember what they agreed to as consideration for the deal, as well as decrease the chances that the terms of consideration will be challenged if the contract is ever disputed. This bargaining requirement often means that the only times consideration arises as a source of contention in contract disputes is when determining if the requisite level of consideration has been reached by both parties.

No attention is paid to whether or not the consideration called for in a contract represents a fair-market value for the exchange of goods and services stipulated in the contract. Rather, only three elements are needed for the consideration requirement of contractual negotiations to be met. The parties to the contract must bargain to determine an appropriate consideration, the consideration must include a mutual exchange, and the consideration must have some intrinsic value.

Whether the consideration in the contract is adequate is not normally of concern when a contract is being evaluated in a court of law. A contract which calls for an exchange of goods for a single dollar may or may not be regarded as adequate consideration. For instance, Liz agrees to give Tom her car if Tom gives her a dollar because she needs to sell the car. This is an adequate consideration because Tom gains the car and Liz gains the dollar as well as relief from caring for the car.

If Liz agrees to sell Tom her car for a dollar because it is Tom's birthday, this will not be counted as a contract and will instead be legally defined as a gift. A court would determine that this is not an adequate level of consideration because it has not been arrived at through a bargaining process. Normally a court will only concern itself with determining if consideration is adequate if there are allegations of fraud.

NEXT: What is the Contract Act