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Beware the use of unrestricted audit clauses

12 December 2014

In 118 Data Resource Ltd v IDS Data Services Ltd and others [2014] EWHC 3629 (Ch), a database licence contained an audit clause allowing a licensee to “permit any duly authorised representative of [the Licensor] on reasonable prior notice to enter into any of its premises where any copies of [the Database] are used, for the purpose of ascertaining that the provisions of this Agreement are being complied with”.

The licensor and the licensee were competitors. The licensor became aware that, in breach of the licence, the licensee had been granting sub-licences of its rights under the licence.

The licensor sought access to the licensee’s premises under the audit clause, with a view to determining the extent of the breach.

The licensee refused to allow access, and the licensor applied for summary judgment for an injunction requiring that access be given.

Decision

The High Court accepted that there had been a breach of contract, but turned down the request for specific performance of the audit obligation.

The court concluded that the parties could not have intended to allow the licensor to access commercially sensitive information; the fact that the parties were competitors being of particular relevance.

The court found that the audit clause lacked detail, containing nothing as to what the licensor was permitted to do once it had gained access.

The court concluded that there had to be some restriction to ensure the licensor did not search for commercially sensitive or legally privileged information.

However, as the clause did not contain a mechanism to deal with these issues, the court would have had to re-write the agreement to fill in the gaps, which it was not prepared to do for the purposes of a court order.

Comment

In addition to the lack of detail in the clause, the decision of the court focussed on three matters.

Firstly, the companies were competitors, making the court hesitant to allow full access.

Secondly, the application concerned was for summary judgment and formed part of substantial litigation; the information would probably have to be disclosed at a later date in any event.

Thirdly, a company associated with the licensor had used the fact of litigation to try to poach a customer from the licensee, leading the judge to conclude that it was vitally important to prevent the licensor from accessing sensitive information of the licensee.

With that in mind, this case may be distinguished in the future.

However, when drafting audit clauses it is prudent to include as much detail as possible as to how the audit will be conducted, for what purpose and in what manner, including any limitations imposed on the auditing party.

If the auditing party requires access to confidential or sensitive information (or, at least, does not want to be prevented from accessing it if required) then it would be wise to include a specific reference to this.

This is particularly true in agreements between competing entities, although in practice any attempt to include specific wording to that effect is likely to be resisted.

This article was written Christopher Evans.

For more information please contact Chris on +44 (0)20 7203 8958 or christopher.evans@crsblaw.com.