Monday, March 29, 2010

Contract Formation- Understanding Consideration

I recently posted about two critical aspects to contract law in Pittsburgh, PA: Offer and Acceptance.  Offer and Acceptance do not complete the puzzle- you also need consideration.

In order to form a valid contract there must be consideration given by each party. Consideration is probably the hardest part of contract formation to conceptualize. Consideration is something of value that is given in exchange for getting something from another person. For example, rent payments paid to receive the right to rent an apartment. “I promise to rent to you this apartment that I own if you promise to pay me $500 each month. I agree to pay you $500 each month in rent so that I can live in your apartment.” The consideration here is a) the one party leasing their rights in their apartment to the other and b) the other party giving up $500 each month to live in the apartment.

It can also be the compensation that is paid, or the inconvenience incurred by one party for the promise of the other party. It is the reason which moves the contracting party to enter into the contract.

The value or adequacy of the consideration is of little concern so long as there is some value attributable to the consideration. More important are the circumstances surrounding the contract that show that both parties were capable of bargaining for the agreement. So long as you are competent to bargain you can be bound by an agreement. That you entered into a bad deal is not much of an argument if you are deemed competent to bargain at the time of the agreement.

An important point is that a promise to make a gift to another is not an enforceable contract. The reason is that no consideration was given for the promise. “I promise to give you my car in one month. I accept.” The second party has given no consideration for the promise to give away the car and therefore no contract has been formed.

The existence of sufficient consideration creates a lot of interesting scenarios. For instance “I will give you $100 if you promise to repay me the $5,000 I lent you last month. I agree to repay you the money in exchange for the $100.” Though both parties in this example appear to be giving consideration for the promise of the other this is not a valid contract. No consideration will be found if one party has promised to do something that they are already obligated to do. The second party could not argue that they don’t have to pay the $5,000 if the first party fails to tender the $100.

Another interesting wrinkle in contract law is that while promises to gift are insufficient consideration, a promise to use one’s best effort is typically found to be valid consideration upon which to base a contract.

Because of the subtle complexities of contract formation, it is often wise to consult an attorney before entering into a substantial contract. Share this post :
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  1. Another cool post. Looking forward to more of your writings

  2. Thanks for the kind words- always appreciated.