When is "reasonable" not implied in a contract?

Question

Note: The question is related to UK law, but I'm also curious if there's a "more general" rule here.

Somewhat related to my other question, the answer provided states that it's implicit in every contract that parties should act reasonably (which, honestly, makes a lot of sense).

However, I was reading the Guidance on unfair terms in tenancy agreements and this grabbed my attention (clause 4.6, page 49):

Where a precise amount cannot be stated, it should be clear how it will be set. On occasion, it may be enough to say that it will be reasonable. This applies only where the basis of the charge is fairly obvious to the tenant, for instance where there are identifiable and verifiable costs that have to be covered, but they should not be exceeded.

If I understand this correctly, there are cases where just stating that the amount will be reasonable is considered fair - this strikes me as odd since I'd assume "reasonable" would be implied anyway.

I understand explicit is always better than implicit, but I was just curious how would a clause that doesn't imply the amount will be reasonable look like?

Answer 1

When the contract is prescriptive, that is, when there is no exercise of discretion available to the parties.

For example, in a contract I have on hand there is the following clause about pricing variations:

36.4 Pricing

The Subcontract Superintendent shall, as soon as possible, price each variation using the following order of precedence:

(a) prior agreement;

(b) where the Subcontract Superintendent has issued a notice pursuant to clause 36.5 in accordance with the procedure at clause 36.5(c);

(c) not used;

(d) the actual cost for the work (which is performed by a secondary subcontractor shall be the cost payable to that subcontractor under its subcontract) provided such cost is reasonable plus the Fixed Margin to such costs but not for overheads; and

(e) as daywork to be valued in accordance with clause 36.5,

and any deductions shall include the Fixed Margin applicable to the costs deducted.

Breaking this down:

1. It must be done as soon as possible, even if that would be unreasonable.

2. The order of precedence must be followed, even if the price so derived is unreasonable.

3. If a value has been agreed it must be used even if the Subcontract Superintendent thinks its unreasonable.

4. If a notice under clause 36.5 (an instruction for daywork) has been issued then the procedure in clause 36.5(c) must be used and if one hasn't then it cannot be used under this subclause, however, see below.

5. If (d) applies then the Fixed Margin must be applied to the costs even if that margin is unreasonable

6. If the costs under (d) are deemed unreasonable by the Subcontract Superintendent, they cannot use reasonable rates – they must fall through to (e) and value the work using clause 36.5.

Answer 2

There are some words that contracts can use that indicate an intent to disavow a reasonableness standard:

One of them is "in my sole and absolute discretion". For example, "Buyer may cease to purchase additional goods at any time under this contract in his sole and absolute discretion."

Another is "time is of the essence", which means that strict compliance with the deadlines in a contract must be observed even if it would seem to be unreasonable to insist upon them.

Another would be to have a term that states something like: "Due to the fact that it could pose an extreme danger to end users of this product if it does not exactly meet every specification set forth in this contract, strict compliance with every specification of this contract shall be required and manufacturer shall not be entitled to any compensation under this contract if the Widgets produced hereunder have even slight or accidental defects even if the manufacturer has substantially performed the work under this contract."

The ability to waive an implied reasonableness term usually goes hand in hand with the contract doctrine that holds "penalties" in contracts to be void as against public policy, but upholds "liquidated damages" clauses.

What this means in the context of reasonableness is that if the consequences of not requiring someone to be reasonable in a contract leads the other party to forfeit a right to benefit under the contract that is grossly disproportionate to the foreseeable harm caused if a reasonableness term is implied in law, then the waiver of a reasonableness requirement is probably not valid because it is a de facto penalty and not merely compensation for the harm caused by the de minimis breach of the contract, perhaps due to the unreasonableness of the other party.

But, if the exact harm to the other party from impairing their absolute discretion or ignoring a strict reading of the contract and instead allowing an implied reasonableness term to color the meaning of the contract is material but is hard to quantify, and the consequences to the breaching party are crudely proportionate to that hard to quantify harm, then a waiver of the implied duty to be reasonable will usually be upheld as valid, as the consequences of not allowing reasonableness do not extend beyond the compensatory relief normally allowed in a contract.