Virtually all first-year law students are required to take a course in Contracts. In that class, the instructors often spend much time focusing on the concept of consideration as a requisite component of a valid contract. What is contractual consideration? And why is it essential for business owners to understand this concept?

Contractual consideration, in its simplest form, encompasses the notion that, for a contract to be valid, both sides need to exchange something of value. As a young law student, I recall many Contracts classes that centered on the purchase and sale of a cow. In my many decades practicing law, I admittedly have never actually written a contract involving a cow purchase. Nonetheless, the seemingly never-ending examples of cow purchases ensued along these lines:

  • Suppose Farmer Brown told his son, “Son, I love you. I’m going to give you a cow.” Is that a valid contract? No. Reason: Farmer Brown’s promise lacked consideration. Specifically, the son did not give his father anything of value to receive the cow. He simply received it. That is not a valid contract; it is a gift.
  • Suppose Farmer Brown told his son, “Son, I love you. I want to teach you the value of hard work. If you work on the fields every day for six months, I will give you a cow.” Farmer Brown’s son responded, “Yes, Dad. I will do that.” Is that a valid contract? Yes. Focusing on the consideration element, in this example, the son gives his father something of value – labor – in exchange for the cow. Consideration exists.
  • Suppose Farmer Brown told his son, “Son, I appreciate that you named my grandson after me. Thirty days from now, in consideration of this fact, I will give you a cow.” Is that a valid contract? No. Just because Farmer Brown used the word “consideration” doesn’t mean that there was actual contractual consideration here. The son gave nothing of value in exchange for the cow. The name was chosen before Farmer Brown expressed his appreciation and offered the cow. Once again, the cow is a gift.
  • Let’s change that scenario. Suppose, instead, Farmer Brown said, “Son, if you name my grandson after me, I will give you a cow.” And the son responded, “Okay.” In this twist of the fact pattern, although it would undoubtedly be bizarre if it occurred in real life, consideration exists. The son wasn’t legally required to name his child after Farmer Brown, but he agreed to do it in exchange for the cow. That’s an exchange of two items of value, a name for a cow, even if that exchange didn’t involve money.
  • Suppose Farmer Brown offered to sell a cow to his son for $50.00. The son accepted, paid the money, and took possession of the cow. Consideration is present here due to the exchange of $50.00 for the cow. Then, the son stated, “Dad, I need to feed the cow. Can my cow graze on your land?” Farmer Brown responded, “Okay.” Even though consideration was present for the sale of the cow, that consideration did not carry over to allowing the cow to graze. No enforceable contract exists for this part of the exchange because Farmer Brown received nothing in consideration for providing grazing land for the cow. If instead, the son had paid Farmer Brown an additional $50.00 in exchange for grazing rights, consideration would be present.

Business owners often fail to consider consideration in their relationships with vendors, customers, and employees. For example, a business owner could offer an employee $100,000 in annual compensation in exchange for labor. The employee could respond, “Okay.” Consideration is present here, due to the exchange of money for labor. Then, two weeks later, suppose that same employer says, “Oh, by the way, you need to sign this non-compete agreement.” Even if the employee signs the agreement, this scenario is no different than the grazing rights example. Because the employer didn’t offer additional consideration in exchange for the employee’s agreement not to compete, no valid contract was created in relation to the non-compete agreement.

Are you considering consideration? Please let us know. We’d be happy to answer your questions.

This post is for informational purposes and does not contain or convey legal advice. The information herein should not be used or relied upon in regard to any particular facts or circumstances without first consulting with an attorney.

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