What is ‘Consideration’ according to Business Law?

Browse over a business contract or legal agreement and you will generally see a clause or provision in the first few paragraphs that indicates the parties agree on a specific amount of money or “other goods and valuable consideration.”

The notion of a ‘consideration’ in a legal agreement has a long history in the law, but it simply denotes something of value in the eyes of the law.

An exchange of “consideration” whether it be financial or of another sort between the parties to a contractual arrangement is crucial for the agreement to be legally enforceable.

Each of the parties to a legal agreement must give and receive something of value in order for the written arrangement to be legally enforceable.

The ‘something of value’ may be either something that the person actually hands over (that they would not otherwise be indebted to hand over) or some right that they give up (that they would otherwise have been entitled to exercise).

For example, if you agree to buy a boat for cash (in folding notes) you must agree to deliver the cash directly to the seller and the seller agrees to deliver the boat to you.

In that circumstance there is legal consideration, or sufficient monetary value, for the agreement to be enforceable.

Another typical example is a mutual release of claims. Let’s suppose you hit a parked car by accident, and you agree to pay the owner of the car $1,000 in cash to settle out of court. In that case, you agree to deliver the agreed cash amount to the owner of the car, and the owner agrees that he or she will not issue you with a summons. (In this type of a situation, you should always get a written “release of liability” or “general release” from the owner of the vehicle to prove that you have settled this matter.) The consideration from your side is the cash, and the consideration from the owner’s side is that he or she gave up the right to sue you for the damages.

Although the owner didn’t give up anything physical, there is consideration to support the agreement because the owner gave up a legal right.