Consideration Clause: Meaning, Examples and Legal Requirements

For a business agreement to be legally enforceable, courts generally require a clearly written consideration clause. Poorly constructed ones remain a major cause of expensive disputes, delayed projects and damaged business relationships.

What is consideration?

"Consideration" refers to the specific benefit each party is entitled to following execution of a contract. It can be money, physical goods, services, or several other forms:

• A pledge to act: Promising to perform something, like transferring property ownership
• A pledge not to act: Agreeing to refrain from an activity, like a non-compete
• Intangible property: Exchanging things like IP rights or stock

Note: "Consideration clause" also appears in insurance contracts, where it refers to the section describing the policyholder's premium payment obligations. That's a related but distinct use of the term from contract law consideration, which is the focus of this guide.

Executory vs. executed consideration

Executory consideration means an obligation remains to be fulfilled in the future. If you agree to share confidential information and the other party promises to keep it secret, both promises remain executory until fulfilled.

Executed consideration means one party has already fulfilled its obligation. Paying for something at checkout is executed consideration. The store now owes you the goods in return.

Many contracts involve both. Paying a consultant a retainer is executed consideration for their executory future work.

What is a consideration clause?

A consideration clause is a provision that explicitly describes what one party promises to give or do in return for something from the other party. A strong one helps prevent disputes, supports enforceability in court, mitigates risk by anticipating issues like delays or defects, and gives both sides confidence that the exchange is clearly documented.

Examples of consideration clauses

Purchase agreement: "In consideration of $5,000, Seller agrees to transfer ownership of the tractor to Buyer. In consideration of the tractor, Buyer agrees to pay Seller $5,000."

Service contract: "In consideration of Client's payment of $18,000, Consultant agrees to provide the services outlined in this agreement. In consideration of Consultant's services, Client agrees to pay the agreed fees."

Non-compete agreement: "In consideration of Employee's access to confidential information, Employee agrees to refrain from competing with Employer for one year following termination. In consideration of this agreement, Employer agrees to provide severance pay."

IP licensing agreement: "In consideration of Licensee's payment of royalties, Licensor grants Licensee a non-exclusive license to the intellectual property described in this agreement." See our guide on IP licensing agreements for the fuller structure.

Legal requirements for a valid consideration clause

Must have value. It doesn't need to be equal for both sides or involve money, but it can't be entirely one-sided.

Must result from negotiation. A bargained-for exchange is required. Consideration offered unilaterally without expectation of return, or extracted under duress, may not hold up.

Cannot comprise a pre-existing duty. Agreeing to do something you're already legally obligated to do doesn't count.

Cannot promote illegality. A contract to do something unlawful is unenforceable regardless of how the consideration clause is worded.

Best practices for drafting a consideration clause

Define the exchange upfront. Know exactly what each party is bringing before you start drafting.

Be specific. Avoid generic terms like "goods" or "services." Define quality standards, quantities and delivery terms explicitly.

Plan for contingencies. Address what happens if milestones aren't met or a force majeure event occurs. Our guide on contract risk management covers how to think through these scenarios.

Use technology to speed up drafting. Contract templates with pre-approved language cut through the tedious brainstorming that comes with drafting from scratch, while a central repository preserves a full audit trail if the clause's validity is ever challenged.

Review regularly. Laws and business strategies shift. Set a regular review schedule and keep a record of when and why a clause changed.

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