Legal Definitions - inadequate consideration

In contract law, consideration refers to something of value—a promise, an act, or a forbearance—that each party to an agreement exchanges with the other. It's the 'bargained-for exchange' that makes a contract legally binding.

Inadequate consideration occurs when the value exchanged by one party is so disproportionately small or trivial compared to what they receive from the other party that it raises serious questions about the fairness, genuineness, or true intent behind the agreement. While courts generally do not assess whether the amount of consideration is equal (meaning they don't usually second-guess a 'bad deal' simply because one party got a better bargain), they may scrutinize consideration for adequacy if there are suspicions of fraud, duress, undue influence, or if the transaction appears to be a disguised gift rather than a true contractual exchange. It's not about perfect equality, but about whether the value is so nominal or shockingly low that it suggests the agreement might not be a true, voluntary bargain.

Here are some examples illustrating inadequate consideration:

• Example 1: Sale of Valuable Property at a Fraction of its Worth

  An elderly individual, suffering from cognitive decline, sells their family home, valued at $400,000, to a distant relative for a mere $15,000. The relative had recently started assisting the elderly person with daily tasks and managing their finances.

  Explanation: In this scenario, the $15,000 paid is clearly inadequate consideration for a property worth $400,000. While some money was exchanged, the value is so disproportionately low that a court would likely investigate whether the elderly individual was subjected to undue influence, lacked the mental capacity to understand the transaction, or was defrauded. This significant imbalance suggests the agreement was not a fair, voluntary exchange.

• Example 2: Business Asset Transfer for Nominal Sum

  A company's CEO agrees to sell a highly profitable subsidiary, which generates millions in annual revenue, to a newly formed company owned by his spouse for $100.

  Explanation: Here, the $100 is nominal consideration for a subsidiary with substantial value and earning potential. This extreme disparity would almost certainly be deemed inadequate consideration. It strongly suggests that the transaction is not a legitimate business deal but rather a disguised transfer of assets, potentially to avoid taxes, hide assets from creditors, or benefit a related party at the expense of the company's shareholders.

• Example 3: Loan Agreement with Exploitative Collateral

  An individual desperate for a small loan of $500 is required by a lender to sign over the title to their fully paid-off car, valued at $10,000, as collateral, with repayment terms that are nearly impossible to meet.

  Explanation: While the $500 loan is technically consideration, the requirement to pledge an asset worth twenty times the loan amount, coupled with predatory repayment terms, could be viewed as inadequate consideration for the lender's promise. This situation often arises in predatory lending, where the true intent might be to seize the valuable collateral rather than to facilitate a fair loan, indicating an unconscionable contract due to the grossly unfair exchange and unequal bargaining power.