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What is “Consideration”?

We’ve all signed countless contracts in the past for a variety of reasons and most of them contain, usually in the first few paragraphs, the phrase “for good and valuable consideration, the receipt and adequacy of which is hereby acknowledged.” For the most part, we generally pay no  more attention to this phrase than we do  to “in witness whereof,” or any of the other boiler-plate language we agree to when we accept the terms of service when we download a new application to our iPhone. So why the phrase in most contracts, and what is consideration anyway?

To understand why that phrase appears in contracts and to understand what consideration is, one must first understand what a contract is. Black’s Law Dictionary defines a contract, in part, as “

[a]n agreement between two or more persons which creates an obligation to do or not to do a particular thing. Its essentials are competent parties, subject matter, a legal consideration, mutuality of agreement and mutuality of obligations.” Black’s Law Dictionary (5th Ed. West 1997), pages 291-292. Generally, then, a contract is an agreement existing between two competent parties who both agree to do or not do something for “a legal consideration.” Black’s further defines the term consideration as “[t]he inducement to a contract. The cause, motive, price, or impelling influence which induces a contracting party to enter into a contract…. Some right, interest, profit or benefit accruing to one party, or some forbearance, detriment, loss or responsibility, given, suffered or undertaken by the other.”  Id. at 277.In an example of a straight-forward and simple contract, party A purchases a car from party B. The contract is formed when party A (a consumer) agrees to pay $32,000.00 in return for a Chevrolet Silverado and party B (your local Chevrolet dealer) agrees to accept the sum of $32,000.00 from party A in return for delivering a Chevrolet Silverado to party A. In this example the valuable “consideration” being exchanged is the sum of $32,000.00 for party A and a Chevrolet Silverado for party B. In this example the consideration is easily seen because most of us would agree that paying the fair market value in exchange for receiving a vehicle is not only fair, but is “valuable” to both parties.

However, “consideration,” or “legal consideration” does not have to be monetary in nature. “Virtually anything that anyone would bargain for in exchange for a promise can be consideration for that promise…. ¶ Usually the consideration is a return promise, as when a seller promises to deliver apples at a later time in return for a buyer’s promise to pay at that time.” Contracts, Section 2.3, page 45, Farnsworth (2ndEd. Little, Brown and Company 1990). Hence, for purposes of forming a contract one can promise to do, or refrain from doing, almost any legal act in return for another’s promise to do, or refrain from doing, any other legal act, so long as they both regard the doing or not doing of the thing to be valuable. That is why the phrase “for good and valuable consideration, the receipt and adequacy of which is hereby acknowledged” is contained in most contracts – it is the parties’ acknowledgement that whatever they are exchanging is valuable to them, even though it may not be considered valuable to others.

To ensure your agreement will be enforceable in California, you will need the services of a rising star like Michael Leonard, Esq., named “Best of the Bar” by the San Diego Business Journal in 2016. You can arrange for a consultation with Mr. Leonard to discuss creating agreements for your business or other business-related matters by visiting San Diego Corporate Law or by telephone at (858) 483-9200. He has the experience, knowledge, and unique qualifications to ensure your agreements are enforceable in the California Courts.

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