It goes with saying you should make certain that your contracts with principals are as clear as possible. Should a dispute end up in court, your contract will be reviewed by a judge who is more familiar with legal concepts than with your business, much less how you and your principal actually dealt with each other. Your contract dispute may turn on how the judge applies what the law calls rules of construction.

You should know what these rules are.  You should consider them when you are negotiating a contract with a principal, considering a contract amendment or dealing with the typical issues and disputes that inevitably arise in any type of relationship. Of course, an attorney may be helpful to you in each of these situations.

Judges are required to apply rules of construction to contract disputes and the contract you have with your principal is no exception. Generally, these rules are similar in most jurisdictions.  Let me touch on a couple of these rules.

Upholding Intent

The purpose of contract construction is to discover and uphold the intent of the parties when they entered into their contract.  It has nothing to do with what is fair or who took advantage of whom.

The first rule is the plain language rule. It presumes that the best evidence of what the parties intended by their contract is found in the words of the contract.  When the language of a written contract is clear, the court may not look further than the words of the contract to find the intent of the parties and may not construe the contract in a way other than what its plain language provides. In doing so, the judge will ignore matters outside the contract, such as how the disputed matter was previously handled by you and your principal or what the regional manager, who was later fired, promised you before you signed the contract.

To apply this rule, the judge uses a simple test. He decides if the language of the contract can only reasonably support your position or your principal’s position.  If he finds that only one reasonable interpretation is possible, the judge declares the winner based solely on the plain language of the contract.  No one gets their day in court because the judge says that a reasonable jury could only come to the same conclusion he did.

However, if the judge decides that the plain language of the contract could reasonably support either of your positions because its language is unclear and ambiguous, then your case will go to trial (at some point), and the issue is passed on to the jury, who will decide which one of you is right based upon more than just the contract language.

Extrinsic Evidence

The second rule is the extrinsic evidence rule. It is critical to deciding which party is right when the meaning of contractual language is unclear and its construction depends upon other facts outside of what is written in the contract to determine the parties’ contractual intent.  Such extrinsic evidence may include what each of the parties said, wrote and did.

Even if you think your contract is clear and that your rights are plainly spelled out in it, you should assume that everything you say, write and do may be reviewed one day and used to determine your rights in court.  As part of this process, you must carefully consider how to respond to any number of common situations like these:

• Your principal breaches the contract by taking away territory or a customer and assigning it to an employee salesman.
• Your principal changes the terms of the contract by unilaterally reducing your commission rate or calculating commission in a new way, either with or without the prior notice or amendment required under the contract.
• The contract incorrectly describes how a matter, such as crediting sales to you or splitting commissions, is, in fact, handled.
• Your principal appears ready to terminate you, after a new account or large piece of business is delivered,  and the post-termination commission provision in your contract  uses terms that are undefined and does not account, one way or the other, for all of the sales that will result after termination based upon the pre-termination commitments and orders you secured.
• Your principal is sold to another company and no one has proposed an amendment to your old contract or given you a new contract to reflect the “new reality.”

You must carefully consider how to respond to these (and other) situations.  Your responses may become decisive at some time in the future if you have a dispute with your principal.  In one sense, your response is like “writing” an addendum to your contract, where you are supplying definitions for unclear terms. Of course, what you “write” may be harmful or helpful. Years later, after the relationship has deteriorated, your principal may attempt to use your responses (or lack of responses) against you, and the judge may permit him to do so. However, if you have been careful in what you say, write and do, your responses may help you to protect the commissions and other contractual benefits you earned.