What is a reasonableness standard?
The term “reasonableness standard” has several applications in finance and law. In general, the standard relates to the requirement that expectations placed on a party are considered reasonable.
A fiduciary relationshipfor example, is a professional standard between a client and a service provider that puts the interests of the client first and also provides reasonable advice or performance.
Key points to remember
- A standard of reasonableness calls for a person or business to reasonably engage with others, especially customers.
- In court cases, reasonableness standards define whether a step was taken reasonably or unreasonably, which will affect the outcome of the case.
- People often use reasonable heuristic standards in everyday life; for example, doing due diligence and researching a major investment or purchase.
Understanding Reasonableness Standards
Reasonableness standards apply in many contexts and the best way to understand the concept is to use illustrative examples:
A good rule to use when evaluating the early termination of any vehicle to rent out is to compare the blue book value of the car at that time to the total of payments made under the lease up to the date of return. Under the Consumer Leasing Act, you have the right to an independent appraisal by someone approved by you and the leasing company.
With the business judgment rule, a reasonableness standard forms the backbone of many corporate-related court cases and their decisions. The business judgment rule is a legal principle that grants directors, officers, and agents of a corporation immunity from lawsuits relating to business transactions if they are found to have acted in good faith. The rule assumes that a company’s executives act in the best interests of the company when making decisions.
Courts must determine whether a particular decision is made arbitrarily or whether it is designed to solve a defined problem or risk. One of the major factors influencing a court’s decision is whether a party’s actions affect “the health, happiness and enjoyment of life” and that a party’s actions do not affect the others disproportionately.
Special cases of a standard of reasonableness
A standard of reasonableness is invoked as a requirement of the Consumer Leasing Act which offers the lessee a termination of a rental agreement if certain criteria are met. It takes into consideration the situation of individuals according to the extent of the harm suffered by the lessor if they terminate prematurely, make late payments or stop making payments.
The standard of reasonableness deals with delinquency, default, or early termination based on the anticipated or actual harm caused by such breach, default or early termination; difficulties in proving the loss; and finally the inconvenience of finding a solution.
A reasonableness standard is often a reference used in court when reviewing decisions made by a particular party. The standard of reasonableness is a test that asks whether the decisions made were legitimate and designed to remedy a certain problem in the circumstances at the time. Courts using this standard look at both the final decision and the process by which a party made that decision.
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