In the simplest terms, consideration can be seen as value. Under California contract law, mutual consideration (which is the exchange of value) is an essential element in the formation of any legally binding contract. Without it, a California court will most likely deem a contract unenforceable.
For example, consideration is lacking if two parties enter a contract where one party is legally required to provide services, and the other party is not required to do or pay anything in exchange. The bottom line is that the law discredits one-sided deals. The reasoning behind it: why would a person enter a contract if they have nothing to gain from it? Talk to a San Jose contract attorney to learn more about what your business is missing.
Business Contracts
There are generally two types of contracts—the unilateral contract and the bilateral contract. In both, there is an exchange of value. Most people regularly enter bilateral contracts. Paying for groceries or mechanical repairs, mobile phone agreements, and utility service agreements are all considered forms of bilateral contracts.
With unilateral contracts, only one party makes a promise. The most common example is a reward contract. For instance, one party offers a reward for the return of a lost cat. Nobody is obligated to find, look for, or even return the lost cat under the contract. Still, the reward offeror is legally bound to pay the reward if the cat is returned. Has your contract been breached? Learn more about how to defend yourself and about the different general breaches of contracts.
An Exchange Of Value
Consideration can take many forms. These can include cash, services, and property. Consideration can also be a promise to do or to refrain from doing something that a party can otherwise legally do. The promise has been given value. If party A promises to cut the grass on party B’s lawn the following summer in exchange for party B’s advanced payment, there is a sufficient exchange of value. Similarly, if party A promises not to take party B to court if party B pays reimbursement for some claimed harm, the promise not to sue can also be considered adequate consideration.
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A Reasonable Exchange Of Value
Consideration must be “adequate.” The exchange in value doesn’t have to be exact, but there should be a reasonable exchange of value between two or more parties. The market value determines the value of consideration for a good or service. While parties are free to negotiate amongst themselves, paying one dollar for a new car worth $50,000.00 (absent any other value exchanged) would clearly be inadequate. The one dollar is essentially pretend consideration, also considered nominal consideration, which courts will quickly see through.
Bad negotiation will not always result in a contract being deemed unenforceable. Parties are free to make any bad deals so long as the consideration is at least somewhat reasonable. Generally, courts analyze exchanges of value on a case by case basis. Learn more about negotiations and business disputes here.
Nick Heimlich Law Can Help
Consideration in contracts can create useful options for businesses. For instance, you can think of an option contract as a legally binding agreement to keep an offer open and accessible for a certain amount of time in exchange for something of value—which usually is money.
The consideration element of legally binding contracts can be as straightforward as an exchange of money for goods, or it can become obscure when it comes to complex, long-term contracts with multiple amendments. Heimlich Law can help ensure your business has legally enforceable contracts in place and make sure you know the key differences between state and federal courts to be prepared.
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