Why Consideration is Necessary For Every Commercial Contract

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Table of Contents

• Elements of a Valid Contract
• What is Consideration?
• What if There is No Consideration?
• Does Consideration Have to Be Monetary?
• Key Takeaways

You will undoubtedly handle commercial contracts during the course of doing business. The terms of commercial contracts will vary from one contract to another. However, you must meet specific elements for a commercial contract to be valid and enforceable. One of these elements is consideration, which refers to an exchange of value between the parties to a contract. This article will take you through what consideration is and why it is necessary for every commercial contract.

Elements of a Valid Contract

There are certain elements that a contract must have for it to be valid. Contract validity is essential for it to be enforceable. Let us explore the elements of a valid contract.

As consideration is an element of a valid contract, consideration is essential for all commercial agreements to be binding and enforceable. 

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What is Consideration?

Consideration refers to the value that transfers between each party to a contract. Essentially, it is a promise by one party to do something for another party in exchange for receiving some benefit. Often, this will be money in exchange for goods or services. An important thing to note about consideration is that each party’s position must change to be considered “consideration”.

For example, consider you are building a house, and you engage a bricklayer’s services. You might provide consideration in the form of $100 an hour and expect the bricklayer to provide their services in exchange. This monetary consideration makes the contract legally binding.

Alternatively, imagine the same bricklayer drops a pile of bricks, causing damage to your new house. You could initiate civil proceedings against them, but instead, you might agree not to sue the bricklayer in exchange for $1,000. This is also consideration, as each party is giving up something in exchange.

What if There is No Consideration?

If there is no consideration in a commercial contract, the contract will be invalid and, therefore, unenforceable. This makes it essential to exchange consideration in the preliminary stage of drafting the contract.

It is important to note that consideration does not need to be equal to be valid. For example, you might pay a bricklayer below market rates for their services. However, as long as they agree to these terms, the consideration will be deemed sufficient.

You may still provide or receive a service without consideration. However, instead of the transaction being subject to a contract, it will be considered a gift. In the case of executory contracts, this means that neither party is under any obligation to follow through with their promise. As such, you should ensure that both you and the other party are providing adequate consideration, making your agreement legally binding.

The only time when a contract will be enforceable without consideration is if the contract was a promise given under a deed. A deed is a unique contract that indicates a party’s promise to do something without receiving something else in exchange. For example, under a non-disclosure deed, a party does not provide any consideration for the other party’s promise to keep information confidential.

Does Consideration Have to Be Monetary?

While consideration is usually monetary, this is not always the case. However, consideration must be something of value to the parties involved, making it challenging to demonstrate consideration has passed between the parties where money is not involved. An example of non-monetary consideration might involve one party offering goods to the other in exchange for a service. As an example, you might be working at a hotel in exchange for food and board. 

Despite compensation not needing to be monetary, there are a few things consideration cannot be. First, consideration cannot be an existing legal duty, meaning the performance of a contractual obligation is not a form of consideration. Further, past consideration is not consideration. This means that an act performed before the contract’s formation will not constitute consideration. In addition, a promise that is a gift rather than something that the other party bargained for will not constitute consideration.

A good point to remember is that if something cannot be defined by the courts, it is likely that it is not valid consideration. For example, if you propose an undefined price in return for specialised services, where it is difficult to ascertain a market price, your contract may be invalid.

Key Takeaways

In summary, you must meet particular elements for a commercial contract to be valid and, therefore, enforceable. One of these elements is consideration, which refers to the value that transfers between each party to a contract. Some key things to note about consideration include that it is:

• essential for all commercial contracts;
• not necessarily monetary; and
• makes a contract enforceable.

If you need assistance with a commercial contract, our experienced contract lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.