Do you really have the right to audit?
5th February, 2015
In a world where terms and conditions need to be squeezed on to the back of an order form, licensors can be forgiven for reducing word count where they can.
However, the recent case of 118 Data Resource Ltd v IDS Data Services Ltd and others [2014] EWHC 3629 (Ch) warns licensors not to let it be your ‘right to audit’ clause that takes the hit.
A licence between competitors
In the case, 118 Data Resource licensed to IDS Services, a competitor, its intellectual property rights in a database of business contact details that permitted IDS to use and sublicense these rights.
In order to ensure the database was used within the narrow parameters of the licence, 118 included the following clause:
“[IDS] undertakes and agrees with [118] that it 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.”
When 118 became suspicious that IDS was not using the database in accordance with the terms of the licence, 118 sought to impose its right to audit, issuing an interim application for specific performance.
Lacking in fundamental detail
Deputy Judge Halpern QC accepted that the parties had intended to enable 118 to police the agreement by inspection but noted that it was not clear what kind of access was permitted or the restrictions of such an inspection, particularly in terms of access to commercially sensitive information.
DJ Halpern stated: “In my judgment the task of filling the gaps… would involve re-writing the agreement” and, as such, held that an order for specific performance could not be granted based on the audit clause.
What does this case mean for me?
The case highlights the need to go back to basics when drafting ‘right to audit’ clauses.
In the event you needed to rely on the clause, what would be the likely circumstances and your requirements? Consider not only the nature of the data which would be the subject of audit but also how that data may be used, who would be conducting the audit, at which locations and for what purpose(s).
How can Ward Hadaway help?
We can review your licence agreements to ensure these contain audit rights that you can rely on.
For more details, please get in touch.
Please note that this briefing is designed to be informative, not advisory and represents our understanding of English law and practice as at the date indicated. We would always recommend that you should seek specific guidance on any particular legal issue.
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