You are wondering about the legality of a contract without consideration.
Did you hear about no consideration no contract?
What does no consideration mean and what’s the consequence on the legally binding impact of a contract?
In this article, we will discuss the concept of consideration in contract law particularly when there is no consideration.
Are you ready?
Let’s get started!
Consideration in contract law
Consideration in contract law is something of value that a person wishes to acquire from another in exchange for something of value they have in their possession.
Consideration is one of the five essentials of a valid contract.
For a contract to be legally formed and produce legal effects, you must have:
- Legal object
- A consideration
- Contracting capacity
As such, the consideration is an essential component of a contract.
Consideration can be for a good, tangible asset, services or money.
Consideration can also be a commitment to do or not to do something.
For example, if you buy a car for $20,000, the car is the consideration based on which you agreed to pay $20,000.
For the car dealer, your money is the consideration of selling you the car.
Another example is that you hire an instructor to teach you piano for $30 per hour.
The consideration for you is the service the instructor will give in teaching you piano.
For the instructor, the consideration is to take the time to teach you piano in exchange for $30 per hour.
You can have endless examples of considerations based on which parties enter into a contract.
We will provide you with some consideration examples so you can better assess the meaning of consideration in a contract.
Bear in mind that this is certainly not an exhaustive list.
If the consideration is the delivery of a good or tangible asset, you can have the:
- Sale of car
- Sale of property
- Sale of boat
- Sale of computer
- Sale of equipment
If the consideration is for a service:
- Tutoring services
- Cleaning services
- Sport lessons
- Computer repair services
- Project management services
If the consideration is to do something:
- Exclusive dealings
Every contract may have unique considerations relevant to the contracting parties.
Now, let’s look at what it means to have no contractual consideration and some examples: no consideration no contract examples!
Contract without consideration
When you enter into a contract, each contracting party will evaluate how they will benefit from the contract.
The rule of thumb is that a person will legally obligate himself to receive a benefit or a consideration in the exchange.
Can you have a contract without consideration?
The answer is no.
There’s a saying that goes: no consideration no contract.
By definition, a contract is a legal relationship where two or more parties will obligate themselves to do something or sell a product or service in exchange for something else.
If there is no exchange sufficient to both parties, there is no consideration.
Without consideration, a contract cannot be formed.
It’s as if you want to buy a car without obligating yourself to pay for it.
The car dealer will agree to sell a car for $20,000, that’s the consideration.
If you do not pay $20,000, you cannot legally claim that you’ve entered into a binding contract with the car dealer.
In this example, there is no consideration for the dealer.
No consideration no contract exceptions
Are there exceptions to the rule of no consideration no contract?
For a contract to be formed, you must have a consideration.
In the absence of consideration, a court may declare the alleged contract as void.
There is no exception to the rule of consideration.
However, there are other legal concepts important to mention like gifts and promises.
There are instances where you unilaterally obligate yourself to do something and do not expect anything back.
When you give someone a gift, you are obligating yourself to give someone something of value and you are not expecting anything in return.
The gift is a different legal concept as a contract.
Although there is no consideration for a party giving the gift, you are not in the concept of a bilateral contract.
Every jurisdiction will have its way of dealing with the legality or enforceability of gifts.
The same can be said about a promise.
You can make a promise to do something in the future.
That promise does not create a legally enforceable obligation.
Let’s look at the concept of gift and promise separately.
Is a gift an enforceable contract
The general rule is that a gift is not an enforceable contract.
A gift is “something voluntarily transferred by one person to another without compensation”.
This means that the person giving a gift does not receive a consideration in exchange for giving the gift whereas the person receiving a gift receives a consideration without having to give something up.
The laws in most jurisdictions distinguish gifts from contracts.
A contract is considered an onerous engagement while a gift is a gratuitous type of engagement.
A simple gift of little importance or value will not have any legally binding effects.
For example, if I give you $100 for your birthday as a gift this year, you cannot legally force me to pay you a higher amount or pay again next year.
However, a gift can be legally binding if it follows the strict rules required by the law.
In some jurisdictions, if you want to give a gift of significant value and importance, you can legally bind yourself to give a gift if you sign a written document before a lawyer or notary.
The formation of a gratuitous contract will typically follow strict guidelines to ensure that the person giving away something of great importance understands what they are doing.
For example, in some countries, you can enter into a marriage contract where a person may legally bind themselves to provide a gift to the spouse if certain things happen during their marriage.
This is a type of gift that will have legal enforceability as it must be made within a marriage contract and follow strict formation rules.
Is a promise an enforceable contract
A promise in of itself is not a consideration and does not produce a contract with legally-binding effects.
A promise is a “declaration that one will do or refrain from doing something specified”.
A promise is when you give someone an expectation as not a legal commitment.
For example, if I promise that I will come and see you later in the day, you cannot legally expect that I see you later in the day.
If I do not see you later in the day, you have no legal recourse for contractual breach against me.
Promise to purchase agreement
A promise should be distinguished for a promise to purchase agreement for example.
If you sign a promise to purchase a property with the seller of a property, then the promise to purchase agreement is an actual contract and enforceable in law.
The promise to purchase agreement does have a consideration.
The consideration is that, in the future, you will sign a purchase agreement and pay the seller a certain amount of money in exchange for the seller’s property.
The promise to purchase a property is based upon the exchange of property for a sum of money and there’s a legal commitment on the part of the buyer and the seller that they obligate themselves to buy and to sell in the near future.
What is not considered a valid consideration
In some cases, you may end up with a legal challenge on the sufficiency of the contractual consideration.
A contractual consideration must be sufficient, not necessarily adequate.
Sufficiency has to do with the existence of a consideration important enough to justify the legal enforceability of the contract.
A consideration must not necessarily be adequate for a party who believes they should have gotten more.
The inadequacy of a consideration does not affect the validity of the contract.
However, if you enter into a contract and do not pay the full amount agreed upon, the part payment will not be an adequate consideration and can lead to the cancellation of the contract.
Other examples of invalid considerations are illusory considerations or moral considerations.
An illusory consideration is a consideration that is impossible to achieve.
Moral consideration is based on moral values, love, affection and sentiment.
No consideration can result in the voiding of contract
We’ve talked about the concept: no consideration no contract.
This means that if a contract does not have a consideration for the parties, you are not in the presence of a contract.
What happens if parties enter into a contract without a consideration, can the contract be voided?
The contract can be voided if the absence of consideration for a party.
In most jurisdictions, if someone tricks another person into a contract without a consideration or where there is a significant disproportion in considerations, the courts may void the contract.
For example, imagine someone tricks you in entering into a contract where they get a major benefit and you get nothing although you thought you were getting something.
In this case, you can legally demand the nullity of the contract based on the absence of consideration and the trickery used to induce you to enter into a contract.
Referring to the term consideration in the contract
In most contracts, it’s commonplace to see that parties will write a statement to the effect that “for good and valuable consideration, the sufficiency of which is acknowledged” to protect themselves.
Will the statement made by the parties that the contract has a consideration and its sufficiency is acknowledged legally imputable against a party?
The short answer is no.
If a party enters into a contract without a consideration, although acknowledged otherwise, a party can prove that consideration is absent and demand the nullity of the contract.
The courts will have little hesitation in voiding the contract if there was a defect in the consideration aspect of its formation.
A statement by the parties acknowledging the existence of a consideration does not have a strong chance of holding in court if consideration is absent for a party and a party can prove otherwise.
For a contract to be legally binding, one essential element for its formation is the consideration.
Contracts without consideration are not legally binding.
Hence, no consideration no contract!
In this article, we’ve looked at the topic of consideration in a contract and looked at some consideration examples.
What is consideration in the first place?
A consideration is how each party to a contract stands to gain in a contractual exchange.
The consideration does not have to be equal or perfect for both parties, it just has to exist.
A party cannot cancel or void a contract because they are not happy with the adequacy of the consideration.
Rather, a party can ask to cancel a contract if there was no consideration at all.
To ensure you have a legally binding contract, you must make sure that the parties have a sufficient consideration.
If you are in a situation where you have to give something up and get little or nothing in exchange, you’ll need to be mindful of the fact that a contract without consideration can be declared as null and void.
We hope this article helped you better understand the notion of consideration in law, particularly that a contract without consideration is not a valid contract.
Did you ever have to dispute the validity of a contract based on the absence of consideration?
We would love to hear from you.
Drop us a comment!