A valid contract generally consists of an offer, an acceptance, and the presence of consideration.
What Is Consideration?
Consideration is a bargained-for exchange between the two parties to a contract. Each party is giving up something. Each party is either agreeing to do something they do not have to do, or agreeing to not do something that they are allowed to do.
Crucial Element To Understand:
Consideration requires that each party make a promise in exchange for the other party’s promise. Therefore, acts already performed in the past do not constitute consideration. It must be a presently bargained-for exchange.
Example 1: I’m walking across the street one day while not paying any attention to my surroundings. A bystander grabs me and pulls me out of the way of a speeding car that was about to strike me. I promise to Venmo the bystander $1000 to express my incredible gratitude to her for saving my life. Do we have an enforceable contract? NO. We have no consideration here because there wasn’t a presently bargained-for exchange. I never bargained for the bystander to save my life for $1,000. She had already saved my life anyways because she is an upstanding citizen. I made an offer of payment for a past act that I did not bargain for.
Example 2: I’m walking across the street one day and I see a car coming towards me. For some (truly bizarre and inexplicable) reason, I say to a bystander, “Hey, if you pull me out of the way of this car that’s about to hit me, I’ll pay you $1,000,” rather than just getting out of the way of the car myself. The bystander says, “that sounds like a pretty good deal, I accept,” and pulls me out of the way to safety. Do we have consideration now? YES. This was a presently bargained-for exchange. I am paying the bystander $1,000 BECAUSE she pulled me out of the way of the car, AND she pulled me out of the way of the car BECAUSE I am paying her $1,000. Each act is being performed in exchange for the other act.
Summary
Always ask yourself whether each side is promising to perform because the other side is promising to perform. In the first example the bystander pulled me to safety because she was being a good samaritan. She did not do it because I offered to pay her $1,000 (that didn’t happen until afterwards). Thus there was no consideration. However in the second example the bystander pulled me to safety because I offered to pay her $1,000, and I offered to pay her $1,000 to pull me to safety. There we did have consideration.
There are a couple of situations where an obligation is enforceable without a bargained-for exchange (there always have to be exceptions we’re forced to learn), but I will tackle those in a future post.