Consideration is a concept of legal value in contract law. It is a promised action, or omission of action, that the promisee did not already have a pre-existing duty to abide by. It can take the form of money, physical objects, services, or a forbearance of action. Both parties to a contract must pass consideration to the other party for there to be a valid contract.
However, even if a court decides there is no contract, there might be a possible recovery under Quantum meruit (sometimes referred to as a Quasi-contract) or promissory estoppel.
Basic examples of consideration
If A signs a contract to buy a car from B for $5,000, A's consideration is the $5,000, and B's consideration is the car.
Additionally, if A signs a contract with B such that A will paint B's house for $500, A's consideration is the service of painting B's house, and B's consideration is $500 paid to A.
Further, if A signs a contract with B such that A will not repaint his own house in any other color than white, and B will pay A $500 per year to keep this deal up, there is also consideration. Although A did not promise to affirmatively do anything, A did promise not to do something that he was allowed to do, and A therefore did pass consideration. A's consideration to B is the forbearance in painting his own house in a color other than white, and B's consideration to A is $500 per year.
Conversely, if A signs a contract to buy a car from B for $0, B's consideration is still the car, but A is giving no consideration, and so there is no valid contract.
There are a number of common issues as to whether consideration exists in a contract.
Value of consideration
Generally, courts do not inquire whether the deal between two parties was monetarily fair - merely that each party passed some legal obligation or duty to the other party. The court is more concerned about the presence of consideration rather than the adequacy of the consideration.
The values between consideration passed by each party to a contract need not be comparable. For instance, if A offers B $200 to buy B's mansion, luxury sports car, and private jet, there is still consideration on both sides. A's consideration is $200, and B's consideration is the mansion, car, and jet. Courts in the United States generally leave parties to their own contracts, and do not intervene when parties knowingly make bad deals.
Nominal consideration
Although courts in the United States tend not to look at the value of consideration, there is one exception.
The old English rule of consideration questioned whether a party gave the value of a peppercorn to the other party. As a result, contracts in the United States have sometimes have had one party pass nominal amounts of consideration, typically citing $1. Some courts have since thought this was a sham. Since contract disputes are typically resolved in state court, some state courts have found that providing $1 to another is not a sufficiently legal duty, and therefore no legal consideration passes in these kinds of deals, and subsequently, no contract is formed.
Still today, licensing contracts that do not involve any money at all will often cite as consideration, "for the sum of $1 and other good and valuable consideration". If analyzed under state law, these contracts may very well be found invalid.
Existing legal duties
A party which already has a legal duty to provide money, an object, a service, or a forbearance, does not provide consideration when promising merely to uphold that duty.
The prime example of this sub-issue is where an uncle gives his 17 year old nephew (a citizen of the USA) the following offer: "if you do not smoke cigarettes or marijuana until your 18th birthday, then I will pay you $500" (it is a criminal offense in the US for people under the age of 18 to smoke). On the nephew's 18th birthday, he tells the uncle to pay up, and the uncle says no. In the subsequent lawsuit, the uncle will win, because the nephew, by U.S. law, already had a duty to refrain from smoking cigarettes.
The same applies if the consideration is a performance for which the parties had previously contracted. For example, A agrees to paint B's house for $500, but halfway through the job tells B that he will not finish unless B increases the payment to $750. If B agrees, and A then finishes the job, B still only needs to pay A the $500 originally agreed to, because A was already contractually obligated to paint the house for that amount.
Bundled terms
Contracts where a legally valueless term is bundled with a term that does have legal value are still generally enforceable.
Consider the uncle's situation above. If the same uncle had instead told his 17 year old nephew the following offer: "if you do not smoke cigarettes and do not engage females before your 18th birthday, then I will pay you $500". On the nephew's 18th birthday, he asks the uncle to pay up, and this time, in the subsequent lawsuit, the nephew will win. Although the promise of not smoking was not valuable consideration (it was already legally prohibited), virtually all states allow some sort of engagement by minors. Even though the engagement by minors is legally restricted, there are circumstances where it is legal, and thus the promise to forbear from it entirely has legal value.
Past consideration
Generally, past consideration has no legal value. Past consideration therefore cannot be used as a basis to form a new contract.
Suppose A is driving in his car on a sunny Sunday afternoon, and he sees smoke coming from a vehicle on the side of the road ahead. A pulls over, sees B injured in the vehicle, and pulls B out of the car to safety. B makes a full recovery, and the next day, says to A, "because you saved me, I will pay you $5,000 per year until you die." 5 years later, B dies of cancer and even though B paid A $5,000 each of those years, the executor of B's estate refuses to pay A any more money. In the subsequent lawsuit, A will lose, because no contract existed. At the time that B took up this $5,000 per year obligation, A did not offer any consideration. Applying the "value of consideration" rule, A might actually win if A had merely replied, "I will only accept, if you require that I do not walk backwards on Tuesdays between 4:00pm and 4:10pm EST while holding a red pen". Even though A's consideration has little monetary value to pretty much anyone, it does have legal value, as it is a promise of forbearance.
Option contracts and conditional consideration
Generally, conditional consideration is valid consideration.
Consider the following situation. A is a movie script writer. B runs a movie production company. A says to B, "buy my script." Instead, B says "How about this -- I will pay you $5,000 so that you do not let anyone else produce your movie until one year from now. If I do produce your movie in that year, then I will give you another $50,000, and no one else can produce it. If I do not produce your movie in that year, then you're free to go." If the two subsequently get into a dispute, the issue of whether a contract exists is answered. B had an option contract -- he could decide to produce the script, or not. B's consideration passed was the $5,000 down, and the possibility of $50,000. A's consideration passed was the exclusive rights to the movie script for at least one year.
Treatments by different nations
References
