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"Consideration" is essential to a legally binding contract

Businesses enter into contracts every day. Some contracts involve goods, while others involve services. Contracts are not limited to the manufacturing industry, sales industry or any other industry for that matter. Any business in Denver will likely find itself one day needing to draft a contract. Therefore, it is important to have a basic understanding of how a contract is formed.

To enter into a contract that is legally enforceable, there must be an offer, consideration and acceptance. Consideration constitutes what is being exchanged in the contract -- that is, what it is of value that each party receiving from the agreement. Without consideration, the contract may not be binding.

Consideration essentially can be boiled down to how each party's position has been altered because of the contract. While, consideration can be something straightforward, such as an exchange of a promise to pay money for a promise to deliver widgets, it can also be more intangible. For example, one party could promise to stop doing something they legally have the right to do, which could be something of value for the other party.

There are certain types of exchanges that cannot constitute compensation. For example, compensation cannot be something that is illegal or impossible. In addition, if the offer is made in exchange for an act that has already been completed, then nothing has been bargained for, and therefore, the past act cannot count as consideration.

Similarly, if one side to the contract promises to do something they were already obligated to do, then nothing was bargained for and there is no consideration. Finally, if something is given as a gift, there has been no exchange that benefits each party and the gift or even a promise to give a gift is does not constitute consideration.

The topic of consideration is essential to the formation of a contract, but as this post shows, what can constitute consideration can be complex. Since most business owners will want to ensure that their contracts, whether they are sales contracts, employment contracts or other contracts, are legally binding and enforceable, they will want to make sure there is an exchange of proper consideration. This post only provides a brief overview of this topic, so those who want more information about their specific circumstances will want to take the steps necessary to better understand how the law will apply to them.

Source: FindLaw.com, "What is 'Consideration' and How Much is Required?," accessed on May 13, 2018

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