Reasonableness Standard: What it is, How it Works, Examples

What Is a Reasonableness Standard?

The term "reasonableness standard" has several applications in finance and law. In general, the standard is related to the requirement that expectations placed upon a party are considered reasonable.

A fiduciary relationship, for example, is a professional standard between a client and service provider that both puts the client's interests first and also provides reasonable advice or execution.

Understanding Reasonableness Standards

Reasonableness standards apply in many contexts and the best way to understand the concept is by way of illustrative examples:

A good rule to use in evaluating the early termination of any vehicle lease is to compare the blue book value of the car at the time to the total payments made under the lease up to the surrender date. Under the Consumer Leasing Act, you have the right to get an independent appraisal by someone agreed to by you and the leasing company.

Along with the business judgment rule, a reasonableness standard makes up the backbone of many business-related court cases and their rulings. The business judgment rule is a legal principle which grants directors, officers, and agents of a company immunity from lawsuits relating to corporate transactions if it is found that they have acted in good faith. The rule assumes that a company’s officers act in the best interest of the company when making decisions.

Courts must determine whether or not a particular decision is arbitrarily made, or if it is designed to address a defined issue or risk. One of the major factors influencing a court's decision is whether a party's actions affect "health, happiness, and enjoyment of life," and that a party's actions do not disproportionately affect others.

Particular Instances of a Reasonableness Standard

A reasonableness standard is invoked as a requirement of the Consumer Leasing Act that provides the lessee an exit from a lease agreement if certain criteria are met. It takes into consideration the individuals' circumstances according to the amount of harm experienced by the lessor if they early terminate, make late payments, or cease to make payments.

The reasonableness standard looks at delinquency, default, or early termination based on the anticipated or actual harm caused by such delinquency, default, or early termination; the difficulties in proving the loss; and finally the inconvenience in finding a solution.

A reasonableness standard is often a benchmark used in court when reviewing the decisions made by a particular party. The reasonableness standard is a test that asks whether the decisions made were legitimate and designed to remedy a certain issue under the circumstances at the time. Courts using this standard look at both the ultimate decision, and the process by which a party went about making that decision.