What information should be disclosed under an audit clause?
Contracts often contain a clause granting one party the right to access information held by the other party in relation to the agreement between them (audit clause). The right to access the information usually arises in specific circumstances prescribed by the contract, for example to establish the basis on which a supplier's costs have been calculated or to check compliance with the terms of the contract. The High Court has recently considered what information must be disclosed where one party exercises its rights under an audit clause, and what may be withheld.
Transport for Greater Manchester v Thales Transport & Security Ltd
Thales agreed to supply a new tram system under a contract with Transport for Greater Manchester (TGM). The price of the system was fixed under the agreement but, as the project progressed, Thales claimed for increased costs. The contract allowed TGM to request information and documentation from Thales to verify Thales' compliance with the contract. TGM did so in an effort to ascertain the basis of Thales' claims. Thales refused to provide a lot of the information requested and, having broken it down into a number of categories, TGM asked the court to compel Thales to disclose it (by a process known as 'specific performance').
The court largely agreed with TGM and required Thales to disclose most of the categories of information TGM had identified. The court found that TGM had requested the information for a purpose allowed by the contract and that the categories of information asked for broadly corresponded to those that were covered by the audit clause. The decision meant that Thales had to disclose a broad range of information, some of which was commercially sensitive. It therefore serves as a reminder that audit clauses should be given careful consideration when drafting or agreeing to them.
What does this mean in practice?
A court's approach to determining what information should be disclosed in these circumstances will always be influenced by the context and the wording of the audit clause in question. Nevertheless, the case provides a fair amount of useful general guidance.
When drafting or negotiating an audit clause, you should:
- set out the circumstances in which disclosure of information may be requested
- specify the categories of information the other party is entitled to request. If the right to 'audit' information is to be restricted to specific categories of information, that should be expressly set out in the clause. If more general wording is used, that could lead a court to order disclosure of an unexpectedly wide range of material
- specifically exclude information you would not want to disclose if a request for information is made, for example information about costs or information received from third parties. One way of doing so might be to limit the disclosure obligation by reference to time or project milestones
- decide whether, and in what circumstances, information may be redacted before it is disclosed
Parties to an agreement that contains an audit clause should bear in mind that:
- any request for information should set out precisely the material that is required and the reasons for making the request. Both the information requested and the reasons given must correspond with the terms of the relevant audit clause and be sufficiently clear. If the categories of information requested are too imprecise, or you are simply 'fishing' for information, a court is unlikely to order disclosure
- whilst the word 'audit' may have financial connotations, information that must be disclosed under an audit clause is likely to go far beyond documentation containing financial information or financial accounts
- the fact that information is 'confidential' or 'commercially sensitive', or the fact that it contains 'personal data' (as defined by the Data Protection Act 1998), will not necessarily be legitimate reasons for failing to disclose it under an audit clause.