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Acting Reasonably - Real life versus contracts

The question of reasonableness raises its head in the vast majority of commercial contracts we are involved with.  It’s a deceptively simple concept; we all understand what someone means when they ask us to be reasonable, don’t we?  Instinctively, we can tell if someone is being reasonable in everyday life and most commercial relationships are built on the idea that the parties will generally behave reasonably towards one another.  If a plumber quotes you for some work on your house, you probably know straight away if their quote is reasonable or not.

Yet the legal meaning of reasonableness is far from straightforward.  It has been discussed at length in numerous court judgments.  Some statutes give a very specific meaning to it.  And the nuances – depending on its context – are almost infinite.  There are times when it doesn’t even need to be referred to in a contract, but the law will nevertheless imply it.  We will look at a few examples which may help to illustrate what a potential minefield this area can be. 

If you have a right to terminate a contract, is there any obligation on the party exercising that right of termination to act reasonably?  In most cases, the answer is no.  Provided the terminating party complies with the process set out in the contract (giving proper notice etc.) then it usually does not make any difference if the act of termination is grossly unreasonable or even done in bad faith.  If this could become an issue then it is possible for the parties to agree at the outset that any such right will only be exercised in good faith.  But that agreement would need to be included as an express term in the contract.  While not impossible, the courts are very reluctant to imply any obligation of good faith into a contract. 

There is a difference between the exercise of an absolute contractual right such as the termination right mentioned above and the exercise of a contractual discretion.  Where a contract allows one party to take decisions which will affect both parties then the courts have held that discretion should not be exercised “arbitrarily, capriciously or irrationally”.   Does that mean it must not be exercised unreasonably though?  Perhaps strangely, the answer is no.  But to understand why not we have to look at a long established test known as “Wednesbury reasonableness” after the local authority case in which the test was first described in the context of judicial review.  That test says that a decision is only unreasonable if the decision maker has not taken the correct matters into account or, having done so, has made a decision so unreasonable that no reasonable person acting reasonably could have made it.  Notice that variations of the word reasonable appears no fewer than four times in the test! You might understand why law students emit a collective shudder when exam papers include questions on the Wednesbury reasonableness test! 

The Unfair Contract terms Act 1977 (“UCTA”) is one of the statutes which sets out its own, specific meaning of reasonableness.  For example, where there is a clause limiting a party’s liability under their standard terms of business in a B2B relationship, that clause will only be valid if it satisfies the UCTA test of reasonableness. That test (set out in Section 11 of UCTA) is whether it was fair and reasonable to include the term in the contract, considering everything the parties knew or should reasonably have contemplated when they made the contract.  The test applies only at the time the contract is entered into. It is not a continuing test through the life of the contract. 

Making frequent appearances in many contracts are variations on the phrase reasonable endeavours.  Where one party to a contract can’t or won’t commit to an absolute, unqualified obligation to do something, then they might argue that instead they will use their reasonable endeavours.  Surprisingly, there is no straightforward judicial interpretation of this phrase despite it being in such common use.  The courts have said that this phrase will always need to be construed by reference to its terms, the other provisions of the agreement and the surrounding commercial context.  In other words, it’s not simply a matter of relying on a judicial precedent to determine its meaning.  You also need to look at how the commercial context might change over time where a reasonable endeavours obligation is a continuing one throughout the life of the contract.  What might have been reasonable on day one could become far from that five years into a long term agreement.  To mitigate this uncertainty, it can make a lot of sense to define exactly what the parties mean when phrases such as reasonable endeavours, all reasonable endeavours and best endeavours are used in an agreement.  Doing this will significantly limit the scope for argument in the event of a future dispute.  In particular, it might be helpful to be clear whether the party making the commitment should be required to act in any way to its own commercial detriment in meeting a reasonable endeavours obligation.  Is it entitled to protect its own interests and allow that to influence how it behaves?  It could also be useful to state how long it must continue to try to satisfy the obligation and to what extent it is obliged to keep the other party informed of what it is doing. 

We have tried to illustrate with these examples how a seemingly simple concept can become - in legal terms - a very complex issue.  Legal agreements speak in a language which is sometimes wholly different from that we use for everyday communication.  The risk of agreeing to something you simply had not intended is ever present with legal agreements so it’s always worth getting them checked by an expert at the earliest possible opportunity.

Posted on 09/06/2016 by Ortolan

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