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What is valid consideration for a contract?

On Behalf of | Nov 21, 2022 | Firm News

Business owners frequently deal with contracts. Therefore, you may have come across certain common terms like ‘consideration‘. This is a critical aspect of forming legally binding contracts, and its absence means your contract is invalid. You have no court-enforceable legal rights without a valid contract.

Below, we take a comprehensive look at what valid consideration for a contract entails. We will also look at other essential elements in forming a valid and legally-binding contract. Read on to find out more.

What is valid consideration?

Valid consideration is anything that has some sort of value under the law. In practice, a business contract needs to include an exchange of valuable things to be legally binding. This is critical when creating new contracts in order to ensure they are enforceable in law.

For consideration to be deemed valid, it has to contain some act, payment of money and a promise or abstinence. Therefore, one party needs to make a promise against the promise of the second party. Only then can you have a valid consideration in your contract.

What forms of consideration are considered valid?

Some of the common types of consideration in business contracts include a return promise, real estate property, forbearance or some act. However, there are three invalid reasons for consideration of a business contract. These include when consideration is given as a gift, when consideration is grounded on an illusory promise or when one party is already legally required to perform an action.

Understanding the rules of consideration

There are legal rules that regard consideration. These include the following:

  • Consideration has to be present – it cannot be past
  • Consideration doesn’t have to be adequate, but it needs to be sufficient
  • Consideration does not have to flow to the promisor but must move from the promisee
  • Consideration should not be illusory
  • Partial payment does not form part of good consideration

What constitutes minimum consideration in a valid contract?

When forming business contracts, you need to meet the minimum consideration for a contract to be deemed valid. The parties involved need to agree that the set consideration terms are valuable and good. Therefore, the court will not consider whether the consideration was adequate or not.