They want it all….and they’re probably entitled

Audit clauses are commonly included in a variety of contracts, such as contracts with local or central government bodies or those that are considered “costs plus” contracts. The object of the audit clause is to place a contractual obligation upon the supplier/contractor under the contract to maintain records relating to its performance and to provide the customer/employer with copies of those records or, in the alternative, provide the customer/employer with access to those records.

This blog serves as a reminder of the broad interpretation that such clauses have been given by the courts. In Transport for Greater Manchester v Thales Transport & Security Limited [2012] EWHC 3717 (TCC), the claimant (TGM) entered into a contract with the defendant (TTS) for the supply and installation of tram monitoring and communication equipment. A dispute arose between the parties and TGM brought a Part 8 claim for specific performance in relation to TTS purported failure to deliver up documentation under the audit clauses within the contract. In brief the clauses in the contract required TTS to:

• keep Records (as defined) relating to performance of its obligations under the contract for a period of 12 years;
• to deliver up such Records to TGM or its representatives or agents on reasonable notice; and,
• in addition, to deliver up such other records or documents in TTS’ possession (or the possession of its auditors/sub-contractors) relating to TTS’ performance of its contractual obligations.

 TTS argued for a narrow interpretation of the audit clauses, whereas TGM argued for a much broader interpretation. The court found largely in favour of TGM and ordered the vast majority of documents requested by TGM to be delivered up. In particular the court held that:

• the obligation to deliver up Records and other documents “relating to performance” included documents detailing TTS’ failure to perform under the contract;
• despite the contract being a “fixed price” contract, documents relating to labour costs, material costs etc. were also related to performance and needed to be disclosed; and
• commercially sensitive documents and those containing personal or confidential information were also caught by the audit clause and were required to be disclosed (including in this case the board minutes of Thales UK Limited (the parent company of TTS)).

In addition to the above, the court also considered the meaning of the word “audit” and interpreted it widely to mean the “vetting” or “checking” of documents rather than the verification of financial records, which is the narrower interpretation given to the word “audit” in an accountancy context.

It is important to note that the court, in considering its interpretation of the audit clauses, had regard for the fact that the contract between the parties was part of a much larger infrastructure project worth approximately £1 billion and that TGM was a public body with certain statutory obligations.

Although the decision was made against such a backdrop, one would suggest that suppliers/contractors need to carefully consider the contents of any audit clause prior to entering into a contract and, if necessary, seek to limit the scope of the clause such that it only relates to certain information and can only be used to request information for certain purposes. If the audit clause/s are widely drafted a supplier/contractor may find that it is under a contractual obligation to disclose a whole range of documents way before it is obliged to in any legal proceedings, which could well lead to various adverse consequences.