Audit clauses in contracts are tools for policing contracting behaviour. While their use is well-established in some sectors, too many businesses (and their lawyers) don't use them at all, or still regard them as 'boilerplate'. But this is changing in the UK, partly because of a series of High Court cases which have brought the clause language vividly to life and illustrated both their practical impact, and also their limitations.
The latest case is called Alfa Finance v Quarzwerke. Quarzwerke purchased from Alfa a majority shareholding in a business based in Bulgaria, with subsidiaries elsewhere in Europe. The business was in industrial materials processing. But the lessons learnt could apply in any industry area.
Quarzwerke and the acquired subsidiaries were obliged under the sale agreement to retain the books and records of the business for ten years – in effect, to retain the corporate memory - and use 'best endeavours' to grant Alfa 'reasonable access' to the documents, and to enable Alfa to copy documentation at its own expense.
Eighteen months after the purchase, Alfa invoked the audit clause. When Quarzwerke refused to comply, Alfa sought a court order for so-called 'specific performance' in order to access the documents. Quarzwerke not only argued that the clause was not suitable for specific performance, but also argued that the clause entitled Alfa to only reasonableaccess. This meant that Alfa must show that its request was reasonable, and indeed justify it.
Why did they believe that justification was necessary? At the time, a commercial dispute was underway between the parties, which had been submitted to arbitration. Arrangements to disclose documents had already been put in place under the arbitration. Quarzwerke argued that Alfa was seeking to circumvent the disclosure process under the arbitration, by means of the audit request. This was not, in its view, reasonable. It was therefore entitled to refuse to comply with Alfa's request.
The High Court, however, disagreed. It held that Quarzwerke must comply with Alfa's request. Not only were the provisions clear enough to be enforced but Alfa did not have to justify why it wanted access. Alfa were entitled to access based on a 'clear contractual right'. In the Court's view, the phrase 'reasonable access' simply referred to thepracticalities of access – namely access at a reasonable time, and by process which it would be reasonable and practicable to meet – eg it would not be reasonable for Alfa to demand excessive copies, nor demand access in an unreasonably short timeframe.
Firstly, the case is a reminder that audit clauses can be enforced under English law by means of a court order of specific performance, ie a type of mandatory instruction. Secondly, while every contract must be interpreted in its context, and in light of general principles, this dispute illustrates how much can rest on the use and interpretation of 'routine' language in an audit clause.
If you do enforce an audit clause it can provide a very powerful mechanism for policing contracts, or extracting value from a transaction. The use of varied audit mechanisms in contracts is set to increase with the growing focus on 'commercial excellence' as a post-signature objective under contracts of all types.