Consideration Clause: An Authentic 360° View of Legal Trade-offs

Consideration Clause

Hi! Welcome to the Consideration Compass!

Your guide to understanding consideration clauses in contracts

So, here’s the deal:

In this guide, I’ll simplify the complex concept of a consideration clause to help you understand it better.

Its importance and how it varies in different types of contracts

Plus the risks and consequences of poorly written clauses so you can avoid problems.

And we’ll also look into the problems, exceptions, benefits, limitations, and legal consequences of contracts without proper consideration.

By the end of this guide, you’ll know how to draft it, identify potential issues for negotiation, and execute legally sound and beneficial contracts.

Got it? Good. Let’s start!


What is Consideration in a Contract?

Consideration in contract law is the exchange of something valuable between the parties in a contract. It is usually offering money, a service, an object, a promise, or even choosing not to do something that one has the right to do.

It’s basically asking, “What do I get out of this contract?”

If there’s anything valuable and legal, that’s the consideration.

A contract without consideration is ineffective, just like a car without an engine. It sure seems everything is okay from outside, but it’s not going to take you anywhere.

The Importance of Consideration in Contracts

A contract is a deal that two or more parties voluntarily make for the benefit of each other, and for it to be legally binding, it needs the following key contract elements:

  • An offer;
  • Acceptance of it;
  • Consideration for it;
  • Capacity and intention to enter into a contract;
  • Legality of the subject matter; and
  • Certainty, like some clear and definite terms and conditions.

If the contract is missing the important element – consideration, also known as a “bargain,” which involves an exchange of value – like would you pay for a coffee you won’t get?

Absolutely not!

So, in legal terms, a contract without an exchange (consideration) is unenforceable; hence, it’s important.

Do You Need the Word “Consideration” in the Contract?

Using the word “consideration” exactly is not necessary, but it helps because it clarifies the promises made by each party and reduces ambiguity.

Consideration can also be implied based on the parties’ actions and the overall context of the contract. So yes, a contract can still be enforceable as long as all other key elements are present.

Understanding the Consideration Clause

Define Consideration Clause

Consideration is the most important commercial clause in the contract. It clearly states what each party is offering, receiving, or promising, and based on that, the obligations, rights, and expectations of each party involved are drawn out.

Example: In a lease agreement, the consideration clause states that the tenant agrees to pay $1,000 of rent each month in exchange for the landlord providing a 1 BHK apartment at Coconut Grove in Miami.

It may involve products, services, or anything else of value that the parties agree upon.

The consideration clause outlines the main points of the contract. It’s the core of the contract, defining the who, what, when, where, and how parts of the agreement.

Purpose of Consideration Clause

  • Payment Amount: It’s the agreed sum of money one party pays to the other, and it should be fair and reasonable for the contract to be legally enforceable.
  • Payment Due Dates: This specifies when the payments are due, in terms of instalments or another agreed-upon schedule.
  • Consideration Exchanged: If there’s no money involved, then this clause defines what is being exchanged.
  • Limitations: This defines the limits or any restrictions with reference to the consideration. It may cover non-competition, confidentiality, non-circumvention, or other conditions.
  • Penalty Amounts: These define the penalties or other consequences for each party who does not fulfill their agreed-upon obligations.

Nature of the Obligation under the Consideration Clause

  • Subject: This is about the specific details of what is being exchanged. It can be goods, services, a promise, or an act of forbearance (more on this later).
  • Commitment: It’s the commitment that each party agrees to do or not do. It may involve a service, a payment, or a promise to engage in or not engage in certain activities.
  • Fulfillment: This explains how the obligation will be met or delivered.
  • Time Limit: This specifies the deadline for fulfilling the obligation, like a date, an event, or a period of time.
  • Place of Performance: This refers to where the contract obligations will be carried out.

A Valid Consideration Needs to Be:

  • Real: It should have actual value, not just be a token or symbolic gesture.
  • Lawful: It must be legal. A contract to sell stolen goods is not enforceable because theft (the stolen goods) is unlawful.
  • Mutually Agreed Upon: Both parties must agree to the consideration. If there is confusion or disagreement, the contract may be considered invalid.
  • Sufficient: Apart from being valuable, if it’s not equal to what’s being provided in return, Insufficient consideration could raise concerns about the contract’s fairness and validity.
  • Not in the Past: It should be focused on future actions or obligations rather than events that have already occurred.

Types of Consideration with Examples

Executory: This occurs when a party makes a promise to perform an act in the future.

Example: If you order custom furniture, you pay some in advance and promise to pay the balance later at the time of delivery.

Executed: This refers to a situation where consideration is made after the act has already been completed.

Example: You promise to give a reward to someone who finds your lost dog; it’s a way of showing your appreciation.

Past: This refers to a situation where an action was completed before a promise was made. Past consideration is generally not considered valid in many jurisdictions.

Example: If you promise to pay someone for a favor they did for you last year, that’s considered past consideration.

Present: This is when the promise and consideration are exchanged simultaneously.

Example: If you pay cash for a coffee, your payment is the immediate consideration for the coffee.

Future: This is when a promise is made to provide consideration at a later date.

Example: If you sign a lease contract for an apartment next month, your promise to pay rent is considered a future consideration.

Sufficiency and Bargaining in Consideration

  1. Sufficiency refers to whether the value exchanged between parties is adequate, whereas bargaining refers to the negotiation and agreement on the terms of the exchange.
  2. Sufficiency should be considered, but it doesn’t have to exactly match the value of the promise or item in return, and bargaining is the process of reaching an agreement on the terms.

For a contract to be valid, both parties need to agree on the terms and value of what they are exchanging.

Distinguishing Gifts from Contracts

A gift is when someone willingly gives something to another person without expecting anything in return. The person who gives the gift is called the “donor,” and the person who receives it is called the “donee.” If the donor doesn’t receive anything valuable in return, then the gift is not considered a contract.

Examples and Samples

Consideration Clause Examples with Context

Purchasing a Property

“In consideration of the sum of $250,000 to be paid by the Buyer, the Seller agrees to transfer all rights, title, and interest in the property as described in the “Schedule”, to the Buyer.”

Buying an Insurance

“In consideration of the payment of the premium and subject to the stipulations herein, the insurer agrees to cover the insured against losses detailed in the policy.”

Working as an Employee

“In consideration of the Employee’s performance of the duties described in this Agreement, the Company shall pay the Employee a salary of $60,000 per year, payable monthly.”

Renting Construction Equipment

“In consideration of a weekly fee of $500, the Lessor agrees to provide the Lessee with use of the specified construction equipment.”

Purchasing IT Services

“In consideration of an annual fee of $12,000, the Service Provider agrees to provide IT services as detailed in this agreement.”

Consideration Clause Samples

Consideration clauses can vary in wording depending on the type and structure of the contract. Here are some basic examples:

“For good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows:”

“In consideration of the mutual promises contained herein and for other good and valuable consideration, the parties agree:”

“This agreement is made in consideration of the premises and the mutual covenants contained herein and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged.”

Consideration Clause in the Purchase and Sale Agreement

Consideration Clause in the Purchase and Sale Agreement

Consideration Clause in Assignment and Transfer of Lease

Consideration Clause in Assignment and Transfer of Lease

Problems and Exceptions

Insufficient Consideration

Insufficiency can cause problems in a contract, although it may not necessarily make the contract void. If someone sells a $1 million property for only $1, it could raise concerns about fraud or undue influence.

Promissory Estoppel

This happens when someone makes a promise knowing that it will cause the other person to take action but still chooses to back out. A court can enforce such a promise to prevent injustice even if there was no consideration.

Example: Amelia is a promising artist, and Jasper, her affluent friend, has always admired her work and believes in her potential. One day, Jasper promises Amelia $10,000 to help her host an art exhibition, but Amelia doesn’t offer anything in return, so the promise is gratuitous and there’s no formal contract.

Amelia trusts Jasper and takes action by renting an expensive gallery space, purchasing art supplies, and hiring a marketing company to promote her event. She takes these actions because she believes and expects to receive the promised financial support from Jasper.

And just before the event, Jasper backed out of his promised money.

Now, if this matter is taken to court, the judge might use the doctrine of promissory estoppel, which means that although there was no formal contract between them, the judge can still enforce Jasper’s promise because Amelia relied on it and suffered due to it.

Forbearance as Consideration

Refraining from doing something can also count as a valid consideration. If someone agrees not to sue another person in exchange for a payment, the promise not to sue can be considered a form of consideration.

What If the Consideration Seems Disproportionate?

Courts usually don’t assess the sufficiency of consideration unless it is extremely inadequate and suggests fraud, duress, or undue influence.

Liquidated Damages and Penalty Clauses

  • Liquidated damages are similar to insurance. They involve estimating the potential trouble or losses that could occur if things don’t go as planned and including that estimation in the contract.
  • Penalty clauses are quite different. The party who suffered harm as a result of the contract breach receives a sum that is significantly greater than their initial loss. It’s like making the contract breaker pay a high price to discourage them from doing it again, but for penalties to be enforceable, they need to be proven with proper justification.

Role of Restrictive Covenants in Consideration Clauses

Employment contracts often include restrictive covenants, such as non-compete clauses.

Illusory Promises

Promises that don’t actually require the party making the promise to do anything are not valid considerations.

Unforeseen Difficulties

The Unforeseen Difficulties Doctrine (exception) allows a contract to be modified if unexpected problems make it too difficult to fulfill.

Releases and Covenants Not to Sue

Issues with the Consideration Clause

Unfair Arrangements

These can happen when one party has more bargaining power, resulting in one-sided terms that cause unjust enrichment, and when one party benefits at the expense of another. Courts may refuse to enforce a contract if they consider it ‘unconscionable’.

Other Approaches

Some jurisdictions use alternatives like ‘good faith’ or ’cause’ to address limitations and potential unfairness. These concepts shift the focus of contracts from the exchange aspect to the behavior and intentions of the parties involved.

The Concept of the Contract of Adhesion

A contract of adhesion, also known as a ‘take-it-or-leave-it’ contract. It’s the one where one party sets the terms and the other party has limited or no negotiation power. While such contracts are still valid, courts carefully review them and may not enforce terms that are extremely unfair or not clearly disclosed.

Tips to Draft a Consideration Clause


When writing a consideration clause, it’s important to be clear. The clause should specify the rights, goods, services, or payments that each party is exchanging. Be as detailed as possible. Both parties need to understand their responsibilities and expectations.

Each detail can be drafted into sub-clauses for ease of understanding and readability.

3 Key Essential Elements

  1. Identification: Who are the parties to the agreement?
  2. Value: What is being exchanged in terms of value?
  3. Mutuality of obligation: What is it that both parties involved have a responsibility to either do or not do?

Using Contract Management Software

They can be helpful for drafting consideration clauses. These tools have templates that meet legal requirements, reducing the chance of errors.

They also help parties collaborate and negotiate terms more easily.

Some examples are ContractWorks, Concord, and Agiloft. They are helpful but not meant to replace professional legal advice.


In this guide, we explored how a consideration clause works, focusing on its purpose, the obligation it represents, and its key components.

We also discussed its legal requirements and different types with some relevant examples and samples to understand how they work, as well as potential issues and exceptions.

And lastly, we learned about drafting a good consideration clause.

I hope this Consideration Compass has helped you find your way.

Over to You

Now, I would love to hear about your experiences drafting or interpreting these clauses.

or if you want to ask me anything?

Either way, voice your opinion in the comments right now!

I’m excited to have meaningful conversations with you!

Cheers to creating strong contracts!

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