Long-term commercial contracts often contain complex audit clauses. These audit clauses can require the disclosing firm to maintain extensive records on contract performance over a lengthy period of time and can impose burdensome access and production obligations.
The 2012 case of Transport for Greater Manchester v Thales Transport Security Limited illustrates how the UK legal system interprets a broadly worded audit clause and the wide audit rights conveyed in such a clause.
Transport for Greater Manchester v Thales Transport Security Limited [2012]
Transport for Greater Manchester (TGM) hired Thales as a transport and security contractor for a Metrolink expansion project with a fee of £22 million. After a significant delay, Thales requested an extension and an additional £42 million, prompting TGM to exercise its audit rights. Thales did not fully comply, and TGM sought specific performance of the contract.
The ensuing litigation focused on construing the audit clauses in the contract, which broadly provided TGM audit rights of records, documents, and information related to the contract for up to 12 years. Notably, because the contract involved public funds, TGM was justified in seeking audits given the significant delay, and any firm working with a public entity may likely expect enforcement of broader auditing rights than in purely private commercial transactions.
Interpretation of “Audit” in Commercial Contracts
In the context of a commercial contract, “audit” is interpreted in a far broader context than in a traditional accounting sense and conveys the right to vet or check compliance with contract terms, including financial and performance records. Thus any audit clause should describe disclosable documents and access rights in the narrowest possible terms; terms that are too vague to provide specific notice of audit requirements to the disclosing firm will not be enforced.
In the TGM case the court confirmed the long-standing rule that privileged legal documents are still excludable from audit, although a firm may have to demonstrate that the requested documents are, in fact, protected by legal privilege. While a court will likely not support a fishing expedition with no foundational basis in the contracted project, related issues affecting performance may be deemed auditable, such as board meeting minutes.
A private company may redact commercially sensitive information under the Data Protection Act; however, if an audit clause grants wide rights, there is a potential for a heavy document production demand of even tangentially related information, with allowable redactions of unrelated and commercially sensitive material, in the event of a contractual breach or in accordance with other allowable audits.
Comment
In conclusion, firms engaged in long-term commercial contracts should carefully review any audit clauses to ensure they are sufficiently limited in scope and content, including the option to redact irrelevant but otherwise auditable documents. This review and careful wording can help protect a disclosing firm from undue temporal and financial burdens in the future. For more information please contact James Crichton via e-mail jcrichton@rollingsons.co.uk or by telephone on 0207 611 4848.
