Let’s Be Reasonable – part 1

by Steven Carr

The happiness of your life depends upon the quality of your thoughts: therefore, guard accordingly, and take care that you entertain no notions unsuitable to virtue and reasonable nature. —Marcus Aurelius

Lawyers often use and encounter the words “reasonable” and “reasonably” in their drafts of contracts and in their arguments whether a party’s conduct or behavior met the standard of reasonableness under the circumstances, in matters of civil wrongdoing or criminal misconduct.  But what does it mean to be reasonable, or to act reasonably?

Years ago, when I proposed to use the word “reasonable” in a contract clause, a client accused me that this was just a lawyer’s meaningless “weasel” word, intended to be purposefully vague or indefinite, and to put off to a later day and to a later negotiation what the parties to a contract should discuss and decide to resolve a potential issue or problem.  The client was partly right.  If “weasel words” are a colloquial term for words or phrases used to avoid being forthright, or words that are inconclusive or vague, then I assured my client that the word is not a weasel word, and that I never intend to include words in contracts that are vague, unclear, or dishonest.  But, it is perfectly appropriate to use the word “reasonable” as a standard and a basis for future negotiations to resolve a problem that may arise, or a problem that the parties agree that they cannot resolve when they first come to a meeting of the minds on other contract terms and conditions, and they choose to discuss and resolve that problem later.

I sometimes borrow the joke, as I am reading other drafters’ words, that certain contract provisions “may be sufficiently vague as to be theologically significant.” Lacking formal seminary education, I don’t strive for theological significance or soul salvation in my contract drafting or negotiation efforts.  Instead, I seek clarity and choose plain, ordinary and simple words to achieve the client’s legal objectives, to clearly state contract duties and benefits, and to unambiguously allocate contract risks and responsibilities.

I rely on my learned pastor for theology, religious instruction, and often for new insights gained from her skillful use of words.  In one of her recent sermons, she noted that “to be reasonable is to be logically consistent.” That rings true. But what does “logically consistent” mean?  Logic is defined as a branch of philosophy concerned with analyzing the patterns of reasoning by which a conclusion is properly drawn from a set of premises, or a system or principles of argument or reasoning.  The word derives from the Greek logikos, concerning speech or reasoning.  The root of logikos is logos, the Greek word for “word” and, in theological uses the word logos, as used in the first chapter of the Gospel of John describes the divine word – or reason incarnate.  An online dictionary reports that the word is akin to legein – to choose, gather, recount, tell over, or speak.    Thus, to be reasonable is to choose words carefully and to draw good conclusions from an agreed upon set of facts or premises.

And “to reason” means “to think logically” and “to draw logical conclusions from facts or premises” and “to urge or seek to persuade by reasoning.”

So, why is “reasonable” a good and clear word to choose, and use, in contracts? In North Carolina, the legal standards for contracts include the exercise of discretion “in a reasonable manner based upon good faith and fair play.”  All contracts in North Carolina contain “an implied covenant of good faith and fair dealing that neither party will do anything [that] injures the right of the other to receive the benefits of the agreement.”  And, this requirement:  “[A] party who enters into an enforceable contract is required to act in good faith and to make reasonable efforts to perform his obligations under the agreement.”  Banyan GW, LLC v. Wayne Preparatory Academy Preparatory School, Inc., 822 S.E. 2d 791 (Table) (N.C. App. 2019) (citations omitted).

These legal standards hint at what reasonable means, but do not define it, except by reference to “good faith and fair dealing.”  “Good faith” is defined in the Uniform Commercial Code as “honesty in fact.” So, reasonable is generally understood to be action or conduct that is guided by honesty, fairness and the facts and circumstances of the particular situation.  In the Banyan case, the Court of Appeals was asked to analyze and determine what the parties meant by their use of the term “reasonable efforts” and whether the parties had made a “reasonable estimate of damages that would likely result from a default” if those efforts failed.  In Banyan, the Court noted that whether a liquidated damages amount agreed upon by the parties is a reasonable estimate of damages resulting from a default is a question of fact, and a party who seeks to invalidate a liquidated damages provision bears the burden of showing that the provision is unenforceable and unreasonable – because it is instead a penalty.

The Court of Appeals, following a “modern trend” enunciated by the North Carolina Supreme Court, and a long-standing fundamental principle of the freedom of contract in North Carolina jurisprudence, upheld the lower court’s summary judgment and an award to the plaintiff service provider of $500,000, the agreed liquidated damages amount stated in the contract.  The Court majority wrote, citing a 1917 decision:  “[T]he parties [to a contract], being informed as to the facts and circumstances, are better able than any one else to determine what would be a fair and reasonable compensation for a breach[.]”  The majority further noted:

[T]his Court does not possess the authority to save a party from a contract that — in hindsight — may seem ill-advised. Indeed, it is axiomatic that courts may not “relieve one who can read and write from liability upon a written contract, upon the ground that he did not understand the purport of the writing, or that he has made an improvident contract, when he could inform himself and has not done so.” . . . Parties are equally free to enter into agreements both wise and unwise. Courts have the power to declare contracts unenforceable only in rare circumstances — none of which exist in the present case.

One judge dissented on the liquidated damages holding, contending that the defendants had made a sufficient showing of facts and argument to show a finder of fact (the jury) that the stipulated damage clause was a penalty because the estimate of damages would not have been difficult to calculate because of indefiniteness or uncertainty.    The dissenter cited to pattern jury instructions:

First, that the damages which the plaintiff and the defendant might reasonably anticipate from a breach of their (name contract) were, at the time they entered into (name contract), difficult to ascertain because of their indefiniteness or uncertainty.

Second, that the amount of damages stipulated by the plaintiff and the defendant was either a reasonable estimate of the damages which probably would be caused by a breach or is reasonably proportionate to the damages which have actually been caused by the breach.

N.C.P.I. – Civ. 503.94 (footnote omitted). (Emphasis added.)

The judge wrote:  “The second question involves a ‘reasonableness’ determination. In my view, when credible conflicts in documentary evidence in the written contract is [sic] adduced at the summary judgment stage, it is sufficient to raise a material question of fact, and then summary judgment is inappropriate. I would reverse and remand this matter to the trial court for a jury determination on both the availability of liquidated damages and the amount, if any.”  (Emphasis added.)

Note that this dissenter is making the argument that the case should have been decided by a jury, and not by the court, after a reasonableness determination about the damages that the majority had concluded had already been made and agreed upon by the parties to the contract, because the parties are better able to determine for themselves what is fair and – well, reasonable.  And, note that this determination is one based on what the parties might “reasonably anticipate” and “reasonabl[y] estimate” as damages which are “reasonably proportionate.”  And, note that all of this thinking is done without a clear statement or definition of what “reasonable” or “reasonably” mean.  Just some hints that all involved – the parties, the court and the jury – should examine the facts, think logically, and make a judgment call.

And, the Banyan dissenter proves the old adage that “reasonable minds may differ.”  Sometimes, Court of Appeals judges also declare that the parties can’t decide for themselves what is reasonable in their contract provisions, and that those decisions are made by the judges, as a matter of law.  We will talk more about that in part 2.