Say that I am writing a grant application to be submitted to a funding agency. The application is not a public document and so it will be only accessible to the review panel, the collaborators involved, and administrative staff both at my institution and at the funding agency.
Now imagine I want to make a point, in particular regarding the wider interest of my proposed research topic, for which a figure that appears in Nice Paper by Reputed Author is a perfect fit. Unless Nice Paper has been published under some Creative Commons-type license (assume it hasn't) copyright in principle prevents me from freely using this figure in my proposal.
However, one could argue that if 1) I credit Reputed Author for the figure and reference Nice Paper in my proposal, and 2) given that I am not using the figure for commercial purposes and that only a very limited amount of people can access this document, then 3) it is reasonable (and it constitutes fair use) for me to reproduce the figure without seeking explicit permission. Getting explicit permission could potentially be a tiresome process since it's probably the journal that published Nice Paper that holds the copyright.
Am I right to assume that reproduction of copyrighted material on a research proposal with the characteristics described above constitutes fair use?