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Audit clauses: judgment confirms that drafting clarity is key

A recent summary judgment by the High Court in 118 Data Resource Ltd v IDS Data Services Ltd and others [2014] EWHC 3629 (Ch) serves to highlight the role an audit clause plays when a licensor’s desire to police the use of its intellectual property conflicts with the licensee’s interest in preserving its own confidential information. The judgment gives a useful indicator to Suppliers of the importance of the drafting of any audit clause they intend to rely upon, and shows Customers how they might protect their business from Suppliers who may be intending to use information obtained for ulterior motives.

118 Data Resource Ltd v IDS Data Services Ltd and others [2014]

In this case 118 had licensed its database of business contact details to a competitor, IDS.  Under the terms of the database licence, IDS was authorised to grant sub-licences of the database provided that certain restrictions were met. The agreement contained various provisions to facilitate 118 to ensure that such licence restrictions and other specific obligations were being complied with by IDS.

118 alleged that IDS had breached the agreement in various ways, including by granting sub-licences of the data to a competitor of 118, and failing to submit the terms of its standard sub-licence to 118 for prior approval.

118 applied for summary judgment for an injunction requiring IDS to give it access under the audit clause of the agreement, which stated that IDS will:

“…permit any duly authorised representative of [118] 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 parties disagreed whether the clause permitted 118 to see commercially sensitive material of IDS.

The judge dismissed the application holding that, even though he recognised that IDS had committed a breach of contract, the meaning of the audit clause was not sufficiently clear to justify an order for specific performance. The judge’s view was that, given that 118 and IDS were competitors, it was important not to allow either company to have access to more information about the other than was properly contemplated by the agreement, and not to grant an injunction where the position was not sufficiently clear.

Drafting tips

Although only a summary judgment, we can take guidance from how the decision turned on the actual drafting of the audit clause. The judge was satisfied that 118 had the right to enter IDS’s office, but was not satisfied that it was sufficiently clear that 118 was entitled to enter for the purposes for which it wished to enter, nor as to what 118 was allowed to do once it had entered.

The practical tips we can take from this case is that each aspect of the audit clause needs to be able to hold up against scrutiny and must be justified. Each stage of the audit clause must include enough detail so that it is clear what the intention is without the need for a court to imply provisions which go beyond the actual wording of the clause, and, in particular, the following questions need to be fully addressed:

  • Who is to be given access?
  • Which premises are meant?
  • Why should a party be given access?
  • What can the accessing party do once it has gained access to the premises?

If the drafting is insufficiently clear then not only does the court appear to willing to imply the parties’ intentions but the party seeking to rely on the audit clause may also run the risk of the clause being unenforceable.

We have seen the court take this pragmatic and common sense approach in other cases; one being Dominion Corporate Trustees Limited v Debenhams Properties Limited [2010] EWHC 1193 where the High Court determined that a clause stating that a party may terminate an agreement upon the failure by the other party to “observe or perform any of the provisions of this Agreement” could not accord with business common sense as there had to be an element of materiality in respect of the breached provision, and so such an intention could not be imputed to the parties.

Following this reasoning, licensors seeking to rely on audit clauses that allow wide inspection rights for them to audit their licensees need to be careful as the courts appear unwilling to allow, especially in a competitive situation, any snooping of the confidential information of the licensees. 

For more information, please contact Lee Rubin.