Consideration

Definition of Consideration

Consideration refers to something of value, either monetary or a promise to act or refrain from acting, exchanged between parties entering a contract. This mutual exchange forms the basis of the agreement and is essential for a valid contract, excluding deeds. The concept of consideration is rooted in common law and ensures both parties have a vested interest in the agreement’s terms.

Key Points

Contractual Promise: A promise that constitutes the price for buying a promise from another party. Without this, the contract is often unenforceable.
Securities: The non-net monetary value of a purchase or sale on the London Stock Exchange, devoid of commissions and additional charges.
Capital Gains Tax: The actual monetary or equivalent receipt upon disposing of an asset, potentially taxable.
VAT: Any non-monetary consideration should be expressible in monetary terms for VAT purposes.

Examples of Consideration

Service Contracts: A homeowner promises to pay a contractor $5,000 to renovate their kitchen. The $5,000 is the consideration from the homeowner, and the contractor’s promise to complete the renovation is the consideration in return.
Sale of Goods: A company agrees to sell equipment to another company. The selling company’s consideration is the equipment, and the buying company’s consideration is the payment.
Performance Contracts: An artist agrees to perform at a venue, and the venue’s owner promises to pay the artist a fee. The promise to perform is the artist’s consideration, and the payment is the venue’s owner’s consideration.

Frequently Asked Questions (FAQs)

What happens if a contract lacks consideration?

If a contract lacks consideration, it is often deemed unenforceable because both parties have not mutually agreed to exchange something of value, which is crucial for forming a binding contract.

Can consideration be something other than money?

Yes, consideration can include services, goods, an act, or refraining from performing a specific action, as long as it holds value to the parties involved.

Is a promise always considered valid consideration?

Generally, yes, but the promise must be legally sufficient and part of a mutual exchange. Gratuitous promises without reciprocal consideration typically do not form enforceable contracts.

Does consideration have to be adequate?

Consideration must be sufficient but need not be adequate, meaning it must have some value but does not necessarily have to be of equal value to what is received in return.

Is past consideration valid?

Past consideration, something given or promised before the contract was made, typically isn’t valid. Consideration must be given in exchange for the current promises in a contract.

Contract

A legally enforceable agreement between two or more parties with mutual obligations comprised of an offer, acceptance, and consideration.

Capital Gains Tax

A tax on the profit realized from the sale of assets or investments.

Value Added Tax (VAT)

A consumption tax placed on a product whenever value is added at each stage of the supply chain from production to the point of sale.

Online References

Suggested Books for Further Studies

“Contract Law: Text, Cases, and Materials” by Ewan McKendrick A comprehensive guide to contract law with in-depth discussions on consideration and its applications.
“Business Law: Text and Cases” by Kenneth W. Clarkson, Roger LeRoy Miller, and Frank B. Cross Covers various aspects of business law, including detailed sections on the principles of consideration in contracts.
“Understanding Contract Law” by John Adams and Roger Brownsword Provides insights into the intricacies of contract law, focusing on the role and significance of consideration in agreements.

Accounting Basics: “Consideration” Fundamentals Quiz

### What is the primary nature of consideration in contract law? - [x] The exchange of something valuable between parties forming a contract. - [ ] A unilateral promise. - [ ] A gratuitous benefit without reciprocation. - [ ] A physically tangible object only. > **Explanation:** Consideration is essentially something of value exchanged between parties for a contract to be legally binding. ### Why is consideration essential in a contract? - [x] It validates the mutual exchange, making the contract enforceable. - [ ] It ensures equal monetary contributions. - [ ] It guarantees performance quality. - [ ] It reduces negotiation time. > **Explanation:** Consideration confirms that both parties agree to exchange things of value, creating enforceable obligations. ### Which of the following scenarios illustrates valid consideration? - [x] A contractor promises to build a deck in exchange for $3,000. - [ ] A daughter promises to visit her father once a year. - [ ] A gift given on a birthday. - [ ] An offer to sell without expecting anything in return. > **Explanation:** A contractor’s promise to build a deck in exchange for $3,000 demonstrates a clear exchange of value, fulfilling the consideration requirement. ### Does consideration impact the enforceability of a contract? - [x] Yes, it's one of the crucial elements ensuring enforceability. - [ ] No, consideration is irrelevant. - [ ] Only if the contract exceeds $500. - [ ] Only in international agreements. > **Explanation:** Without consideration, most contracts cannot be enforced, as the mutual exchange aspect is missing. ### Can past acts serve as consideration for a current contract? - [ ] Yes, past acts are always considered valid. - [ ] Only if both parties agree. - [ ] In cases where the act was of significant value. - [x] No, past consideration is generally insufficient. > **Explanation:** Past consideration typically cannot support a present contract since it does not represent a current or future exchange. ### Why is monetary valuation crucial in VAT? - [ ] It simplifies inventory management. - [ ] It ensures equal trade. - [x] Even non-monetary consideration must be monetized for VAT purposes. - [ ] It helps in currency conversion. > **Explanation:** Because VAT requires that all types of consideration are expressible in monetary terms to ensure accurate tax calculations. ### In the context of securities, how is consideration calculated on the London Stock Exchange? - [ ] By factoring in commissions and charges. - [x] By excluding commissions, charges, and other expenses. - [ ] By the perceived value. - [ ] By negotiated prices including all costs. > **Explanation:** The monetary value of a securities transaction on the London Stock Exchange is considered before deducting commissions, charges, and other expenses. ### What validates a promise as consideration? - [x] Legal sufficiency and inclusion in a mutual exchange. - [ ] The prominence of the party making the promise. - [ ] The intrinsic value of the object promised. - [ ] The length of time the promise has been made. > **Explanation:** A promise must be part of a legally sufficient and mutual exchange between the contracting parties. ### When does consideration need to be “adequate” rather than “sufficient”? - [ ] Adequate consideration means exact market value. - [x] Consideration must be legally adequate (valuable) but doesn't need to be equal. - [ ] Both parties must benefit equally. - [ ] Insufficient consideration voids contracts by default. > **Explanation:** Consideration should be sufficient to hold some legal value but doesn’t need to match the value of the received benefit exactly. ### How does consideration impact the taxation of capital gains? - [ ] It depreciates taxable gains. - [ ] It is grossly inflated for tax purposes. - [x] The consideration received upon the asset’s disposal is taxable. - [ ] It is excluded from taxation calculations. > **Explanation:** The actual amount received (consideration) upon asset disposal determines the liability for capital gains tax.

Thank you for exploring the concept of consideration in contractual agreements and trying out our sample quiz! Continue expanding your legal and accounting knowledge and stay prepared for real-life applications.