(a) ‘Reasonable’

The most obvious example of good faith vagueness is the word reasonable. It introduces an objective standard into 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 be 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 clauses, it introduces a common-sense approach to a strict interpretation of what may normally be expected from a party’s performance. The standard of ‘reasonableness’ is usually measured by considering how a well-informed third party with the same expertise would act under the same circumstances.

Party’s discretion. The opposite of reasonable would (therefore) be indicated in the phrase at a party’s discretion or in 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 this is where a party has the right to exercise discretion in making a decision under a contract provision: whether submitted documents satisfy the contractual requirements. The party who has the right to make such 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 (less subjective) standard of reasonableness, as this would give it the right to obtain an explanation and to question the other party’s decision.

DCFR. The Common Frame of Reference[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 qualify the term 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 explicitly introduced. 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 be understandable or reasonable. The explanation should fit the parties’ 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 Common Frame of Reference has been developed under auspices of the European Commission, as a framework for and in anticipation of a possible European Civil Code. The term reasonable is defined in Annex I of the CFR, and referred to in Article I-1:103.

[2]           Chitty, Joseph Chitty on Contracts, Thomson Reuters (legal) limited, 2008, 30th ed.