The ‘good’ and the ‘reasonable’ in contract law

Renata Grossi, University of Technology, Sydney

In my recent article in the Journal of Law and Society‘What can contract law learn from MeToo?’ (Vol 49, Issue 2, 2022) I suggest that while theoretically on the face of it, freedom to contract and one of its offshoots- consent theory, can be seen as an embodiment of a morality that centralises individual agency, in reality consent in contract law shares some of the same inadequacies of consent that have been exposed by the #MeToo movement in the area of sexual relationships.

In my article I illustrate that consent as a concept is not capable of giving the assurance some of us want from contracts – that its agreements are ethical, fair and just. I say that consent by itself does not answer a number of important ethical questions, such as who can consent and under what circumstances. I argue that if we want ‘good’ contracts we need to ask why everyday people ‘freely’ enter into contracts to pay rents that are too high, do work for wages that are too low, pay for services they don’t need, and so on.

Furthermore, I suggest that contract law should aim to go beyond formal doctrinal rules of formation, construction and interpretation and instead work towards achieving contracts that are ‘good ‘ – that fulfil normative, social, political and cultural goals. This is a challenging idea for an area of the law which is more typically associated with economic and commercial goals rather than rights and justice. I would argue, however, that contract law has always engaged with social norms, as it should. It’s philosophical foundation in liberal philosophy of individual freedom and agency clearly evidences that. But more than this, within the infrastructure of common law contract doctrine, and even leaving aside equitable principles, a possible avenue for thinking about how it does this, is via the concept of objectivity. As I quote in my article, Randy E. Barnett states as a given that an objective standard in contract law defines the boundaries of the freedom to contract and governs ‘cooperative interpersonal activity.’ But what I don’t discuss in the article, that is worth doing is whether the existence of an objective standard can achieve such goals.

In Australian law, many doctrinal questions around formation, terms and termination are determined objectively, according to what a reasonable person in the position of the parties would believe and interpret the relevant facts to mean. An early statement of this can be found in Smith v Hughes, where Justice Blackburn said:

If, whatever a man’s real intention may be, he so conducts himself that a reasonable man would believe that the was assenting to the terms proposed by the other party, and that other party upon that belief enters into the contract with him, the man thus conducting himself would be equally bound as if he had intended to agree to the other party’s terms ((1971) LR 6 QB 597 at 607). 

This then leads us to ask who is the ‘reasonable’ person, in contract law? To begin with it needs to be said that a reasonable person standard is not a prima facie guarantee of ethical and just behaviour. The reasonable person is not necessarily right, just, or even socially acceptable (John Gardiner, 2015). The concept is not necessarily capable of fulfilling any egalitarian goals (Mayo Moran, 2003). Benjamin C. Zipursky has described the concept as a de-facto power allocation tool that simply reflects back into our laws whatever justifications are considered ‘reasonable’ by existing power structures in our respective societies. Nevertheless, it can be a measure of what we consider as ‘unreasonable’, and therefore it may act to curb excesses (Zipursky, 2015). Reasonableness as opposed to rationality requires taking seriously into account other people’s needs and expectations. It is as a way by which we recognise we are all equally bound by obligations and reciprocity (Peter Benson, 2020).

But to try to understand what ‘reasonable’ means in more detail in the contract context Gardiner suggests that the term needs to be joined by more specialised ‘personalities’. In other words, we need to consider what is reasonable according to more context-specific ideas. English and Australian case law suggests that the reasonable person should be read in the context of ‘business like’ and ‘commercial like’ norms. In substance these standards refer us to a centralising of the express terms and to the surrounding circumstances of the contract. They suggest a hands-off and hard-line interpretation approach. They also speak to the promotion of the commercial goals of the parties, ensuring efficacy of contract, and of promoting uniformity in the market. 

This then leads to questions of what role exists for subjective intentions in determining objective readings of agreement? This can become a convoluted conversation. Australian and English courts have considered as relevant the specific position of the parties, the context of the contract and can generally be said to engage in a process of interpretation that is an ‘amalgam of the objective and the subjective’ (Shogun Finance Ltd v Hudson [2004] 1 AC 919 964 [123]).

Further guidance for determining a reasonable standard can be found in the implied term of good faith. Indeed, good faith is often equated with reasonableness (Burger King Corporation v Hungry Jack’s Pty Ltd[2001] NSWCA 187). In broad terms good faith means that parties have a duty to co-operate with each other to achieve the object of the contract and conduct themselves honestly (Anthony Mason, 2000). In substance many questions remain about the details of the duty and in which contracts it applies. 

While it can be fruitful to consider what is objectively reasonable within these more specific concepts the idea of reasonableness remains illusive. As such it is doubtful whether it can provide the norms and standards Barnett thinks it can. Deciding what is reasonable is ultimately a question of fact residing in a ‘legally deregulated zone’ (Gardiner), and therefore incapable of giving rise to general legal standards with normative force. 

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