What Businesses Must Know about Contract Consideration
A business lives and dies based on its contracts.
Understanding contracts, particularly as a small business, is absolutely vital to ensuring the health and longevity of your business. Ensuring your contracts are binding, and protecting yourself when the are formed, is key. Too many small businesses have paid the price of trying to enforce a contract, only to find that a defect makes the contract unenforceable.
This article aims to provide small businesses and other readers with a general overview on a few of the basic tenets of contract law. Primarily, the lesser-understood concept of “consideration.” While consideration can be a tricky topic, it is absolutely vital to understand as your business crafts contracts moving forward. The general information given here is a great start – for formal legal advice and guidance in your own dealings, contact an experienced business litigation attorney at Suncoast Civil Law.
What is a Contract?
Many business disputes revolve around contract issues. What was required? What does the contract stipulate? If everyone truly understood how a contract was built and what was required, many business suits would never even occur.
In its most essential form, a contract is simply a formalized agreement that is struck between two or more parties that involve the exchange of goods or services. For a contract to be binding (enforceable by law) both parties to the agreement must exchange something of value, in exchange for something else of value. Whether it is goods or services, one “benefit” for another “benefit.”
This bartering, or exchange, is referred to as “consideration.”
Consideration
“Consideration” can be, quite literally, just about anything. (But don’t go trying to exchange illegal goods or services. That will not count)
The fact that an item of “consideration” cannot be easily, definitely defined is freeing to those creating contracts. Most contracts will entail the exchange of goods or services in exchange for money. In those instances, one party exchanges a good/service (benefit) in exchange for money (benefit.) Thereby, both sides provide a benefit (consideration) for the other side.
However, that is not to say that money is the only possible thing that could act as consideration. Indeed, it has been said that the benefit can be “as small as a single peppercorn.” What is considered to be a benefit by one party IS consideration.
While it is true that consideration can be very small – it is imperative to understand that it still must exist. The courts recognize a difference between an enforceable contract and a gift.
Gifts
A gift lacks consideration. If an agreement lacks any kind of consideration, the court may very well decide that there was no contractual agreement. A gift or a promise of a gift will not be able to be enforced the same way that a contractual agreement is enforced.
This means it is quite important, when drafting a contract, to make the consideration clear.
Consideration Sample Scenario
One sample scenario illustrating the difference and ramifications for an enforceable contract vs a gift could be as follows:
- Bride (sister) and photographer (her brother) sign a contract for the brother the photograph Bride’s wedding. Photographer will provide photos of the day in exchange for $90.
Simply looking at these facts: the contract is likely binding. The photographer is clearly not charging what a professional would normally charge in their line of business – but $90 does serve a benefit to the photographer and would likely be seen as consideration.
Now let’s consider:
- Bride (sister) and photographer (brother) agree that the brother will photograph the bride and groom free of charge as a gift. The brother later changes his mind and says he won’t photograph the couple unless he is paid.
This scenario is more complex. The original agreement had the bride receiving the benefit of services – but it does not appear that the brother received consideration. On the surface, these facts look like the brother offered a gift that he then rescinded. While this might be problematic in its own way, it would likely be difficult to enforce his original offer in a breach of contract suit. You cannot enforce the offer to give a gift the same way you can enforce a binding contract.
Contact Suncoast Civil Law
Avoiding the fallout from future suits often requires contract drafters to take the right steps at the very beginning. Whether your small business is dealing with contract breach issues, or any other type of business litigation, the experienced Sarasota business litigation attorneys at Suncoast Civil Law can help.
Source:
dos.fl.gov/library-archives/business/