In a previous blog post, I indicated the ‘importance’ of vaguenesses in contracts. The most obvious example of vagueness is the word reasonable. This vague term is what this blog post is about.
The vague term reasonable introduces an objective standard in the contract. The term reasonable places a limit on discretionary power or the effect of overly strict obligations. Where it limits the exercise of discretionary power, it requires that a party is able to explain its performance (or failure to perform as expected). Where the term reasonable is included with the aim of reducing the ‘harshness’ of strict contract clause, it introduces a common sense approach to the interpretation of what may normally be expected from a party’s performance. The standard of ‘reasonableness’ is one that is usually determined by reference to a well-informed third party with the same expertise acting under the same circumstances.
Party’s discretion. The opposite of reasonable would be the phrase at a party’s discretion or otherwise strict (and strictly enforced) criteria, although no performance and no exercise of power under a contract should be ‘unreasonable’ if it adversely affects the other party’s proper interests.
A typical manifestation of reasonableness is where a party would be provided the right to exercise its discretion in making a decision under a contract provision. The party who has the right to make a decision will want to be able to make it at its sole discretion. This way, whatever the party decides cannot be disputed by the other party. The other party will push for a standard of reasonableness, as it would give it the right to get an explanation and to discuss the other party’s decision.
DCFR. The Common Frame of Reference (a preliminary but official draft for preparing a future European Civil Code)[1] defines reasonable as:
a concept “to be objectively ascertained, having regard to the nature and purpose of what is being done, to the circumstances of the case and to any relevant usages and practices.”
Qualify the term? There is no need to provide for a qualification of reasonableness if a European law would be applicable. All European legal systems impose some standard of reasonableness on the contracting parties exercising their contractual rights. Nevertheless, contracting parties appreciate that a standard of reasonableness be introduced explicitly. This is also prudent in modern common law systems where the general principle of freedom of contract retains considerable support[2]. An example:
Customer shall reimburse Service Provider’s reasonable out-of-pocket expenses incurred in connection with the Services.
The term reasonable clarifies that there is a limit on reimbursable out-of-pocket expenses. It gives the Customer a point of departure for addressing excessive declarations. The Service Provider should be able to explain why the invoiced expenses were made and the explanation should somehow be understandable or reasonable. The explanation should fit in the parties’ and contractual subjective contexts and the actual circumstances. Because the Service Provider is dependent on the Principal’s decision, in hindsight, of its invoice, the Service Provider will be careful in incurring the expenses.
[1] The term is defined in Annex I of the CFR, and referred to in Art. I-1:103.
[2] Joseph Chitty, Chitty on Contracts, Thomson Reuters (legal) limited, 2008, 30th ed.
