What is a nominal consideration?
How is it considered in contract law?
Is a nominal consideration sufficient for the formation of a contract?
In this article, we will break down the notion of “nominal consideration” so you know all there is to know about it.
We will look at what nominal consideration means, its legal definition, how it is considered in contract law, compare it with inadequate consideration, look at examples and more!
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What is nominal consideration
A nominal consideration is a consideration that does not correspond to the actual value of the contractual consideration or transaction.
Mary sells her car to John for $1 although the value of her car is $10,000
In this example, the contracting parties arbitrarily set the value of the car to $1 (nominal consideration) to hide or conceal the actual value of the car actually worth $10,000.
Nominal consideration definition
According to the BusinessDictionary, nominal consideration is defined as:
Some benefit that bears little or no relation to the real value of an agreement, contract, job, or position.
What is notable with this definition is that nominal consideration has “no relation” to the real value of the agreement.
In other words, what the contracting parties define as “consideration” in the contract is no real consideration but is considered as a consideration in name only.
Nominal consideration law
From a contract law perspective, the moment there is a consideration (nominal, good or bad), you have a valid and legally binding contract.
To determine the validity of the contract, the courts will generally not look at the adequacy of the consideration to the parties to conclude whether a contract was legally formed or not.
Typically, the courts do not look at the adequacy of consideration
As a rule of thumb, a contract, even with nominal consideration, is legally binding and you should consider it carefully before entering into one.
The enforcement of a contract bearing a nominal contract will be left to the evaluation of the judge, the underlying purpose and the overall circumstances of the case.
Enforcement in law
A court can enforce a nominal consideration clause or agreement.
The courts typically will not evaluate the adequacy of the consideration to the parties so long as there was a consideration.
If a party knowingly and consensually entered into a contract without acts of misrepresentation of the other, illusory promises or fraudulent inducement (as an example), the courts will consider the contract to be legally binding and enforceable.
Nominal consideration may be considered an acceptable form of consideration in business in agreements such as option agreements or compromise agreements.
We will look at some examples later in this article, particularly to guarantee contracts or certain promises.
Non-enforcement in law
In law, the courts may also decide not to enforce a contract bearing a nominal consideration.
When parties enter into a contract to conceal the value of the transaction for illegal reasons or to circumvent the law, the courts may consider the contract as unenforceable, void or voidable.
Party A agrees to sell a parcel of land of 20,000 square feet to Party B for the sum of $10.
In this example, Party A has transacted as such to get rid of his or her assets to frustrate creditors.
From a contract law perspective, the contract entered into between the parties is as the parties have contracted as such in bad faith.
Nominal consideration vs sham consideration
A sham consideration is a consideration given as a formality to give a contract the appearance of a contractual bargain but it’s intended to conceal a gift.
“Sham” consideration is therefore not the real consideration between the parties but a pretense.
A pretense is considered a sham consideration
When the parties define a consideration on paper but never truly agreed on that consideration, the parties are considered to have pretense and the consideration will be considered a “sham consideration”.
From a legal perspective, there is a fine line between what’s not a consideration, what is a nominal consideration or even inadequate consideration and what is an adequate one.
The courts do not need to get into the qualification of the consideration as the contract is considered to be legally formed when there is “a consideration”.
A party who believes that there was trickery or fraud leading to a nominal consideration or sham consideration will have the burden of proof to demonstrate that in court, otherwise, the court may consider the contract as legally binding.
Nominal consideration vs token consideration
A token consideration or payment is something given in exchange for something of greater value.
A “token consideration” represents something of little value exchanged by the parties in a contract, agreement, deed or transaction.
The actual value of the token consideration is not relevant for a court to determine if a contract is legally binding and enforceable.
The courts do not consider the value of the token consideration
What’s important is that the parties agreed to a consideration of some kind when entering into the contract.
A nominal consideration bears the same meaning as a token consideration as they both represent a consideration having little or no proportionality with the actual value of the agreement, object, service or transaction.
Nominal consideration example
To give you an idea of how nominal consideration can be used in real-life situations, the best way is to look at some examples.
Example 1: Hide contract value
Some contracts may be published in public records.
The parties may not want to have the actual value of their contract published and will define a nominal consideration instead.
This can happen in real estate transactions where the parties do not indicate the real value of the consideration for the sale or purchase of the real estate property but may put something like $100 or $1.
Example 2: Service contracts
Another example of nominal consideration is when a person is hired to perform services for a nominal consideration.
Some wealthy individuals may decide to work for the government or charitable agencies for an annual salary of $1
This is considered a nominal consideration as the employee is essentially waiving his or her right to get paid for a good cause.
Example 3: Guarantee contract
Option contracts or guarantee contracts are designed by their very nature to facilitate a bargain and have a valid commercial purpose.
Mary agrees to a nominal consideration of a $1 in exchange to guarantee her sister’s loan for $50,000 in case she does not pay the bank
This is a perfectly valid and legally binding contract and enforceable in court.
Example 4: Promise
Even the promise of a person can be considered as a valid consideration.
Mary agrees to pay Marc $1,000 in exchange for his promise not to solicit her clients for a period of at least 1 year
In this example, even though Mary is paying $1,000 and getting Marc’s promise in exchange, the courts will have no problem enforcing this contract in the event of a violation.
Nominal consideration FAQ
Is nominal consideration sufficient?
From a contract law perspective, the moment you have “consideration”, it is sufficient for a contract to be legally formed.
When the essential elements for the formation of a contract are materialized, you have a legally binding contract.
The elements of a contract are the offer, acceptance, consideration, capacity and legality.
In most cases, the law does not distinguish between a nominal consideration, adequate consideration or inadequate decision.
The quality or value of the consideration is something a contracting party is responsible to assess before accepting to enter into a contract or making a legally binding offer.
Will nominal consideration render a contract void?
A nominal consideration does not automatically render a contract void.
However, a contract based on a nominal consideration may be voided or be voidable.
Mary and Suzane enter into a contract where Mary agrees to sell her $25,000 car for a consideration of $10.
Even though the actual value of the car is $25,000 and Mary does not truly intend to sell her car for $10, the parties agree to put $10 on paper as a “nominal consideration”.
The risk here is that in the event of a dispute, Suzane may demand the enforcement of the contract based on a $10 consideration.
There may be a possibility that the courts enforce the contract even though there is a significant disproportion between the actual value of the car and the nominal consideration.
Will the court enforce a deed having a $1 nominal consideration?
A party signing a contract must be prepared that the court may enforce the contract or deed as legally binding.
A deed providing for a $1 transaction is a valid contract unless there are legal grounds presented to the court demonstrating that the contract must be voided because it violates the law or it is voidable there was no effective consideration.
Every case will be evaluated on its own merits.
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