What is consideration in contract law?

Why the law requires it

Courts do not enforce every promise people make. Consideration is the test the common law uses to separate bargains, which the law enforces, from gifts and casual promises, which it does not. The classic formulation is a “bargained-for exchange”: each side's promise or performance is given in return for the other's.

What counts

• A payment, or a promise to pay.
• Goods or services delivered, or promised.
• Forbearance — giving up a legal right, such as agreeing not to sue or not to compete. In a famous nineteenth-century case, an uncle's promise to pay his nephew if he gave up drinking and smoking until 21 was enforceable because the nephew gave up something he had a right to do.
• A mutual exchange of promises, which is why most commercial contracts are binding on signature, before anyone has performed.

What does not count

• Past consideration. Something already done before the promise was made cannot support it. “Thanks for helping me move last year — I'll pay you $500” is generally unenforceable.
• Pre-existing duty. Promising to do what you were already obliged to do adds nothing. A contractor's mid-project demand for more money for the same work is often unenforceable unless something changes — for example, unforeseen conditions — or the contract is for goods under the UCC, where a good-faith modification needs no new consideration.
• Illusory promises. A promise that leaves you free not to perform at all (“I'll buy what I want, if I want”) is no promise. Courts often save such agreements by implying a duty of good faith or reasonable efforts.
• Gifts. A promise to give something in the future, with nothing asked in return, is not enforceable — although a completed gift cannot be taken back.

Adequacy is not the test

Courts ask whether consideration exists, not whether it was a good deal. The nominal “one dollar” recited in some agreements survives for exactly this reason, although many courts now look past a recital that was never actually paid. A large imbalance matters only as evidence of fraud, duress or unconscionability.

Consideration in employment agreements

The issue comes up constantly with non-compete and confidentiality agreements. Most states treat the offer of a new job as enough consideration for a non-compete signed at hiring. For current employees asked to sign one later, many states require something new — a raise, a bonus, a promotion or access to training — and some, such as Pennsylvania and Massachusetts, will not enforce a mid-employment non-compete without it. California, Minnesota, North Dakota and Oklahoma ban most non-competes entirely, and other states limit them by income level.

Contract modifications and settlements

A settlement of a disputed debt is supported by consideration because each side gives up its position in the dispute. But paying part of an undisputed, due debt in exchange for a release of the rest is traditionally not binding without something extra — such as payment early or in a different form. Many contracts avoid the problem by stating that written modifications are binding without new consideration.

The main exception

Promissory estoppel. Where one party reasonably relied on a promise to their detriment and injustice can only be avoided by enforcement, courts may enforce it without consideration. Examples include a job offer withdrawn after the person quit another job and moved, or a charitable pledge a charity relied on. It is a fallback, not a substitute — damages under it are often limited to the reliance loss rather than the full expected benefit.

Practical takeaways

If you want a promise to be enforceable, make it part of a real exchange and put it in writing. If you are asked to sign a new agreement that restricts you, ask what you receive in return — the answer may decide whether it binds you. A business or employment lawyer can review agreements where the stakes are significant.

Under the UCC, a firm written offer by a merchant can also bind without consideration for up to three months.