• Startups
  • December 01, 2021

Contracts: What is Consideration?

If you are about to enter into a new contract for your small, medium, or large business, or you need to renew an existing arrangement, it is extremely useful to understand the legal concept of ‘consideration’. Understanding what this term means, its different forms, and legal requirements will ensure that your contracts are valid and enforceable.

What is meant by ‘consideration’?

There are five requirements for a contract to exist, including an offer, acceptance, consideration, intention to create legal relations, and certainty of terms. The need for consideration is based on the idea that for a contract to exist, there must be something given in return - this is the notion of ‘reciprocity’. Agreeing to make a gift (e.g. land, assets, or property), therefore, would not be a legally acceptable form of contract. 

In law, there are a number of factors you should take into account when determining whether consideration exists:

  1. consideration must have some value (e.g. property, assets, monetary)
  2. there is no need for the consideration to be ‘adequate’ to meet this contractual requirement - this is a matter for the parties to a contract to decide
  3. the consideration must come from the promisee (the person to whom the promise is made)
  4. consideration does not need to be intentional 
  5. consideration is not needed for a deed (this is one of the main differences between a simple contract and a deed)

What are the forms of consideration?

There are two forms of consideration:

  • executed consideration - where promises made in a contract are delivered immediately (e.g. delivery of goods)
  • executory consideration - where promises made in a contract will be delivered in the future (e.g. a commercial property lease)
If you are unsure of the implications of the type of consideration in your contract, speak to a commercial law Solicitor who can advise you.

Final words

‘Good’ consideration (that meets the above criteria) is just one of five elements that make up a valid contract. If you are unsure if consideration exists in one of your contracts, it is advisable to speak to a commercial law Solicitor. Consideration may be harder to find in non-commercial contracts. In this case, you may decide to acknowledge the existence of a token/nominal consideration in the written agreement or seek to execute the agreement as a deed rather than a simple contract.

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Questions about contract law? Our commercial lawyers can provide you with the legal advice, legal document templates and contract review services you need to ensure that agreements work in your favour, protecting you from potential legal disputes and expensive litigation.

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Additional useful information

In closing

Nothing in this article constitutes legal advice on which you should rely. The article is provided for general information purposes only. Professional legal advice should always be sought before taking any action relating to or relying on the content of this article. Our Platform Terms of Use apply to this article.

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